The Danske Bank money laundering scandal continues to reveal its many permutations and confirm its status as the largest money laundering case in history. We summarize here certain events since November 2018, since we last have blogged about ther case (see here, here, and here). Proving that no one is immune from the potential taint, notable events include an investigation announced by the Estonian financial regulator; an investigation into that same Estonian regulator itself; the commencement of the inevitable investor lawsuit; and scrutiny of what some have described as the “cleanest” bank in the world, Swedbank, one of the most important banks in Northern Europe.

The Background

Prosecutors began investigating Danske Bank after whistleblower U.K. citizen Howard Wilkinson flagged issues at its Estonia branch. In May 2018, the Danish Financial Supervisory Authority released a report assessing the role of Danske Bank’s management and senior employees in the suspicious transactions at the Estonian branch. The Danish FSA’s stated that that Russian and other non-Baltic customers accounted for a notably high percentage of Danske Bank’s Estonia business. Specifically, the report noted that in 2012 Russian customers made up 8% of the branch’s customer base but generated 35% of the branch’s profits. Since then, events have occurred at a rapid pace:

• In September 2018, the Danish law firm Brunn & Hjejle’s report released its internal investigation report (“Report”) into the allegations. The Report found that Danske Bank processed approximately 200 billion Euros, or $234 billion, in suspicious transactions by thousands of non-resident customers, mainly from Russia and former Soviet states. According the Report, the success of the laundering was due to the near-total failure of the Estonian Danske Bank branch to implement adequate anti-money laundering (“AML”) procedures and the parent Danske Bank Group’s failure to recognize and act upon numerous red flags that should have alerted it to the Estonian branch’s issues. However, while finding that the Estonian branch violated numerous legal obligations in failing to have and implement adequate AML processes and procedures, the Report stopped short of accusing Danske’s board of directors, chairman, audit committee, Chief Executive Officer or any executive of violating their legal obligations in regard to these failures. Nonetheless, former CEO Thomas Borgan resigned the same day the report was released.
• In November 19, 2018, Wilkinson testified before both the Danish Parliament and the European Parliament’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance. According to Wilkinson’s testimony, Danske Bank non-citizen clients including British limited partnerships, limited liability partnerships, and shell companies in Russia and the former Soviet Union with ties to Russian authorities channeled funds through four Russian banks and into Danske Bank’s Estonia branch. From there, the funds were transferred to three different correspondent banks “large U.S. bank 1,” “large U.S. bank 2,” and the United States subsidiary of a major European bank (“European Bank 1”), which cleansed the funds reinserting them into the global financial system.
• On November 28, 2018, Danish prosecutors filed preliminary charges against Danske Bank for violations of the Danish Anti-Money Laundering Act alleging that the bank failed to provide adequate IT systems or human resources to perform sufficient transaction monitoring, and failed to obtain adequate information regarding the beneficial ownership of the accounts at issue. German, French, U.K. and Swedish authorities have also announced formal investigations into the money laundering scandal.
• The United States Department of Justice reportedly has opened a criminal investigation and the U.S. Securities and Exchange Commission has also opened an investigation into the scandal. Danske Bank has stated that it is cooperating with authorities.

Estonia Investigates

In December 2018, the economic crime bureau of Estonia’s Central Criminal Police detained ten former employees of the Estonian branch, including a former division head and client relationship managers who allegedly helped clients transfer suspicious funds through the bank. The Estonian courts have seized more than $1.14 million in asset allegedly tied to the former employees’ conduct. Estonian prosecutors have indicated that the number of suspects may increase.

On February 19, 2019, Danske Bank was ordered by the Estonia Financial Supervision Authority (“FSA”) to shut down its operations in Estonia within eight months. Kilvar Kessler, chairman of the FSA, said that Danske Bank’s alleged money laundering violations have “dealt a serious blow to the transparency, credibility and reputation of the Estonian financial market.” In response, Danske Bank announced that it would close operations in Estonia, Latvia, Lithuania, and Russia.

The European Banking Authority Investigates Estonian and Danish Regulators

The European Banking Authority (“EBA”), the European Union’s head AML watchdog, recently announced that its investigation into the scandal is focusing on the possible regulatory failures that allowed the Danske Bank transactions to occur for nearly a decade without facing scrutiny. In a statement earlier this month, the EBA stated that it launched a formal investigation into the actions of Estonia’s FSA and the Danish Financial Services Authority. The EBA states that it will determine if the Danish and Estonian regulators breached EU AML laws in their dealings with Danske Bank.

The Inevitable Investor Lawsuit

As we have blogged, shareholder derivative suits increasingly base their claims on alleged AML violations by the defendant company. Not surprisingly, Dankse Bank and several former top executives have been sued in the Southern District of New York for supposedly defrauding investors and inflating stock values by allegedly not stopping and then hiding the bank’s Estonia branch laundering scheme. Presumably, more such lawsuits are forthcoming against Danske Bank.

Swedbank Drawn Into the Scandal  

Swedbank, based in Stockholm, Sweden is the largest bank operating in Estonia. In the most significant recent development in this scandal, Swedish public television reported on February 21, 2019 that Swedbank allegedly helped transfer $4.3 billion in illicit funds from Danske Bank between 2007 and 2015.

Following the reports, regulators in Estonia and Sweden have indicated that the money-laundering report was very serious. The financial supervisory authorities of Sweden, Estonia and Denmark announced that they were opening investigations into Swedbank. The regulators will be working with authorities in Lithuania, Latvia and Estonia in efforts to trace the Danske Bank transactions.

In a recent telephone conference, Swedbank’s chief executive, Birgitte Bonnesen, acknowledged that some suspicious transactions could have passed through Swedbank – but he said that Swedbank was comfortable with its money laundering safeguards. On February 26, Swedbank announced that it hired Forensic Risk Alliance (FRA) as new external forensic auditors to investigate the allegations. FRA is expected to report the results of its investigation to its Bonnesen and Swedbank’s board of directors before the bank’s next annual general meeting on March 28.

The Investigations March On

International regulators and law enforcement continue to investigate the transactions run through the Danske Bank’s Estonian branch. Inevitably, more institutions will be drawn into the investigations as more details are uncovered and made public. Despite the general perception of Northern European institutions as a bulwark against corruption, this scandal suggests no current end in sight.