Danske Bank is likely to again become the target of a formal investigation in France.
A Paris court began investigating Danske Bank in October 2017 in relation to transactions of its Estonian branch, between 2008 and 2011, allegedly carried out for money laundering purposes. In January 2018, the court downgraded the bank's status from that of the target of the investigation to that of "assisted witness." However, in a statement dated Jan. 11, 2019, Danske Bank reported that French authorities are reconsidering their decision. Indeed, the bank was summoned to appear before Judge Renaud Van Ruymbeke for an interview. The summoning documents also specify that the scope of the investigation may be expanded to additional transactions, worth around 28 million euros, carried out between 2007 and 2014.
This investigation is one of many that Danske Bank is facing with respect to 200 billion euros of suspicious funds that were channeled through its Estonian branch. Authorities in Denmark, Estonia and Britain are also investigating these money laundering allegations, and the issue has attracted the attention of regulators in the United States. In November 2018, it was reported that the U.S. Department of Justice had sought information relating to Danske Bank funds that were transferred through correspondent bank accounts in the United States held at Deutsche Bank, Bank of America and J.P. Morgan Chase. Last week brought news that the Federal Reserve Bank has also opened an investigation and is seeking information from Deutsche Bank regarding the Danske Bank funds, and that the lead Republican member on the Financial Services Committee of the U.S. House of Representatives has requested that Deutsche Bank provide information concerning its anti-money laundering compliance efforts.
Background of the Danske Bank scandal
According to publicly available information, Danske Bank's Estonian branch carried out a series of transactions involving thousands of customers falling within its nonresident portfolio, i.e., customers residing outside Estonia.
Danske Bank was aware that nonresident customers banking with its Estonian branch included a number of high-risk customers. However, at a central level, it was believed that the risks were mitigated by appropriate anti-money laundering procedures.
In 2014, following a whistleblower report and an internal audit, it became apparent that anti-money laundering procedures at the Estonian branch were insufficient and inadequate to mitigate the risks associated with the branch's activities. According to the report of the law firm Bruun & Hjejle (the Report)1, the branch had insufficient knowledge of its customers, the sources of funds and the ultimate beneficial owners. The screening of customers and payments was mainly performed manually, and there was no screening of customers against lists of politically exposed persons or sanctions. Moreover, no response actions were available in case of reported suspicious customers and transactions.
These deficiencies were exploited by nonresident customers of the Estonian branch to launder money. According to the Report, 23 percent of the incoming payments came from Russia. A significant number of these deposits originated from Latvia and Cyprus, both of which have been associated with laundering Russian money.
In 2015 and 2016, Danske Bank was requested to abide by anti-money laundering legislation both by the Estonian FSA and by the Danish FSA. As a result, the nonresident portfolio was terminated in 2015, and all accounts were closed by 2016.
The European Union's response to the Danske Bank scandal
The Danske Bank case is one of many recent money laundering scandals involving European banks, underlining the European Union's flawed approach to preventing and fighting money laundering.
Despite the European Union's robust legislation against money laundering and terrorist financing, there is little supervision and enforcement, as the responsibility for implementation lies with each member state rather than with a central authority. Quite recently, European Commission Vice President Valdis Dombrovskis admitted that "Europe's Banking Union must be built on the highest standards of integrity. Anti-money laundering supervision has failed all too often in the EU."2
To address these concerns, on Nov. 28, 2018, the Council of the European Union (the Council) published its anti-money laundering action plan3. This plan includes several short-term nonlegislative actions, including the review of recent alleged money laundering cases involving European banks, the establishment of adequate channels for the exchange of information, a reinforced collaboration between the supervisors and the European Central Bank (the ECB), and the identification of key supervision areas that need to be strengthened.
Moreover, in December 2018, the Council agreed to reinforce the supervision of all financial institutions to prevent money laundering by strengthening the powers of the European Banking Authority (the EBA)4. This reform was led by the European Commission, which proposed to entrust the EBA with the role of anti-money laundering supervision authority in the financial sector5. If the reform were to be implemented, the EBA would be responsible for:
- Collecting information from national competent authorities regarding anti-money laundering risks
- Developing common standards and coordinating national supervisory authorities
- Performing risk assessments on national authorities to evaluate their effectiveness in addressing emerging money laundering risks at the EU level
- Facilitating cooperation with non-EU countries on cross-border cases
- Directly addressing decisions to individual banks if national authorities refuse to act
Unfortunately, the current version of the text does not address the broad discretion given to member states in imposing sanctions, and does not create a dedicated agency, as proposed by the ECB.
More recently, the European supervisory authorities approved the content of the "Multilateral Agreement on the practical modalities for exchange of information" between the ECB and all such authorities responsible for supervising compliance of credit and financial institutions with anti-money laundering obligations under Directive No. 2015/8496.
We note that in recent years, law enforcement in the United States has been aggressive in asserting jurisdiction over cases that implicate the financial system in the United States, even where much of the criminal conduct is alleged to have taken place overseas. Given that Danske Bank funds appear to have flowed through correspondent accounts in the United States, we would expect the United States to be similarly aggressive with regard to this scandal, particularly if it perceives as falling short European efforts to investigate and prosecute the case.
1 Bruun & Hjejle, Report on the nonresident portfolio at Danske Bank's Estonian branch, Sept. 19, 2018.
3 Draft Council conclusions on an Anti-Money Laundering Action Plan, Nov. 23, 2018.
5 European Commission, Amended proposal for a Regulation amending Regulation no. 1093/2010 establishing a European Supervisory Authority (European Banking Authority), Sept. 12, 2018, 2017/0230.
6 View the PDF of the Multilateral Agreement on the practical modalities for exchange of information.
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