How the Biggest Money Laundering in Europe Took Place in a Small Branch of a Large Bank
After authorities in Denmark and Estonia investigated the Estonian branch of Danske Bank (DBE), the largest bank in Denmark is suspected of being a money laundering facility and found more than 8 billion euro or may have been laundered during the period between 2007 and 2015.
Danske Bank’s Chief Executive Officer, Thomas Borgen, resigned on September 19 after the results of the investigation were revealed. Borgen, who served since 2013, admitted to Reuters that although he was personally clean, he would remain responsible for what happened to the bank he led. Then, how could the biggest bank in Denmark which had operated for 147 years get involved in the biggest money-laundering scandal in Europe?
- Ignoring the warnings
Danske Bank acquired Sampo Bank in 2007 and made it DBE. Actually, Danske had received many warnings about the irregularities in transactions in the Estonian branch regarding non-resident customers even before the acquisition took place. One of the reports came from the Russian Central Bank (RCB) in 2007, which stated that there were possible criminal activities, including money laundering at DBE with an estimated value of billions of rubles every month.
Danske Bank ignored these warnings because they believed that these risks were mitigated by the Anti-money Laundering (AML) procedure. Authorities in Estonia and DBE assured Danske Bank that the AML procedure at DBE was compliant. However, in 2013 the Danish FSA investigated DBE related to customers and AML procedures. A legal correspondent from Danske Bank found that many DBE customers were in RCB’s blacklist.
In 2017, Danske Bank was the subject of an official investigation by the French government based on complaints filed by Hermitage Capital Management regarding suspicion of money laundering transactions carried out by Estonian branch customers.
- AML system failure
Danske Bank uses a three-layer defense system. The first layer is the business itself, which must ensure that the business operates correctly, legitimately and profitably. The second defense is the risk management function, which is to identify and mitigate risks and compliance functions, namely to check compliance with the rules. The last layer is the internal audit department that monitors the first and second tier defense.
The AML system should be implemented in all Danske Bank branches. However, DBE failed to implement it. The first layer, the business, does not focus on high-risk customers as evidenced by the discovery of thousands of non-resident customer data that turned out to be blacklisted by RCB. The second layer, DBE, does not include AML risk details in their routine reports to senior management. The last layer, the branch internal audit function, is not entirely integrated with the Danske Bank Internal Audit (GIA) department. As it was considered to be costly, the integrated internal audit function is imperfect.
- Internal fraud
Similar to corruption, money laundering acts through banks are likely to involve internal banks, especially if it has lasted for years, at least, the results of the investigation found 42 staff and agents involved in several suspicious activities.
Conclusion
Owning an AML system does not guarantee the security because its compliant implementation fully relies on the awareness and the integrity of its human resources.
While DBE is a small foreign branch, which may represent only a tiny portion of the Danske Bank operational group, it carries a huge problem to the group because of AML system not being in compliance – ignoring warnings, reporting, and control functions and not being integrated as a whole.
Analysts expect Denmark’s DSA fine to Danske Bank will reach the US $ 800 million. The United States authorities will also investigate Danske Bank. This scandal not only brings disadvantages to Danske Bank financially but also a reputational aspect. As a result, now Danske Bank has lost at least 30% of their market value.
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