Thomas Borgen, the CEO of Danske Bank, has informed the board of directors that he wishes to resign from his position. His decision, in the bank's words, "has been announced in connection with Danske Bank’s presentation today of the conclusions of the investigations into the matters in Estonia." In this article we analyse the accompanying report.

The stricken CEO has said: "It is clear that Danske Bank has failed to live up to its responsibility in the case of possible money laundering in Estonia. I deeply regret this. Even though the investigation conducted by the external law firm concludes that I have lived up to my legal obligations, I believe that it is best for all parties that I resign. As the CEO, I have the management responsibility for the things that take place in the bank, and, of course, I take on this responsibility. It has been clear to me for some time that resigning would be the right thing to do, but I have held off the decision, because I have felt a responsibility for seeing the bank through this difficult period towards presentation of the investigations."

Compliance Matters has been waiting for the Report on the Non-Resident Portfolio at Danske Bank’s Estonian Branch for some time; it has now arrived. The bank uses some of the report's 87 pages to present itself more as a victim of circumstances than anything else, although at other times it is apologetic. The board of directors absolves itself, along with Danske's audit committee, of any blame for flouting its legal obligations in respect of actions or inactions relating to the Estonian branch. In the light of this, it says that it has not found it necessary to make any separate assessments of its own members, other than the sacrificial chairman. The Estonian branch's international and private banking division was closed in 2015 at Christmas and most of Danske's relationships with its customers ended at the same time, according to a compliance officer at Danske in Estonia whose words are recorded in the report.

The non-resident portfolio

Until early 2016, Danske Bank's Estonian branch had a portfolio of thousands of high-net-worth customers who lived outside Estonia - notably in former Soviet states in Eurasia such as Russia, Azerbaijan and the Ukraine - to which it refers throughout the report as "the non-resident portfolio.” This portfolio also contained corporate customers, many of which were vehicles for private individuals (the report makes no distinction between corporate and private in its figures), and always accounted for less than 4% of the branch's total number of customers.

The Estonian branch and the portfolio dropped into Danske's lap when it acquired Finland's Sampo Bank in 2007. The new Estonian branch had its own IT platform, so it was not covered by the same 'customer systems' and transaction and risk monitoring operations as the rest of the Danske Group, whose headquarters are in Copenhagen. The group therefore did not know as much about that branch as it did about others. One passage which the report repeats at least once is revealing, because it juxtaposes two unconnected statements: "Many documents at the Estonian branch, including information about customers, were written in Estonian or Russian. For a long time, it was believed within Group (the authors have developed the annoying habit of referring to the non-Estonian part of the group as 'Group') that the high risk represented by non-resident customers in the Estonian branch was mitigated by appropriate AML procedures." This almost sounds as though the bank thinks that it was vicitimised by its own choice of takeover and was then unfairly called upon to understand its own documents.

Suspicious customers in the non-resident portfolio

Section 7.2 of the report deals with 'suspicious flow' from about 6,200 customers that the bank now suspects of having laundered money, plus some others. The bank took "a transaction-by-transaction approach, and there is no accurate estimate" of their number. In relation to the so-called Russian Laundromat, the bank's 'portfolio investigation' has identified 177 customers that received payments through Moldindconbank and Trasta Komercbanka from 21 'core companies' mentioned by the media which might have been involved. Most of these were limited partnerships or Limited Liability Partnerships (LLPs) incorporated in the UK or in tax havens such as the British Virgin Islands, Hong Kong, Belize and Cyprus. Among the 177 customers were also three Danish limited partnership or K/S entities. The main activity took place in 2013 and 2014. The portfolio investigation, according to section 7.2.2, has only looked at one-third of the customers it was formed to examine for signs of suspicious activity (taken not only from the portfolio but also from a loose agglomeration of about 5,000 not in the portfolio but with some non-resident connections) and therefore has a long way to go.

In relation to the so-called Azerbaijani Laundromat, the investigation has identified 75 customers of the Estonian branch that have made payments 'with' (presumably this means 'to') private individuals and corporate entities outside the Estonian branch that the media says were involved in the débâcle. Two-thirds of the 75 customers were limited partnerships or Limited Liability Partnerships incorporated in the UK. The bank says that they transferred the funds 'rapidly' in the sense that they were credits followed by immediate debits with corresponding amounts. Six customers conducted the vast majority of payments that might relate to the laundromat and all of them were limited partnerships or Limited Liability Partnerships incorporated in the UK.
 
Danske's investigation also weighed up the allegations made by Hermitage Capital Management of alleged tax fraud of US$230 million (€195.6 million) involving high-ranking officials in the Russian Government. The proceeds of the fraud are believed to have been laundered through various countries. Hermitage Capital Management, led by its crusading CEO Bill Browder, is registered as a victim in a criminal investigation in France in which Danske Bank is an assisted witness. It has also reported Danske Bank and employees of Danske Bank’s Estonian branch to the police in Estonia and Denmark.

Only 53 customers of the 15,000 or so customers subject to investigation were incorporated as Danish K/S entities. The bank suspects all of them of laundering money. They all shared addresses (seven in total) in Copenhagen, and the vast majority of the entities also shared the same directors.

The report adds at section 1.4: "So far, approximately 6,200 customers have been examined, and the vast majority of these customers have been deemed suspicious."

Inadequate procedures

The report states that AML procedures at the Estonian branch in relation to the non-resident portfolio were manifestly insufficient and inadequate and in breach of international standards as well as Estonian law. This was so even though the non-resident customers were categorised as highly risky. The Financial Action Task Force demands that all financial institutions should  identify each customer (and ultimate beneficial owners if applicable), verify that identification and find out the purpose and nature of the business relationship. The portfolio managers did not know their customers, did not identify beneficial owners and 'controlling interests.' Unregulated intermediaries who represented unknown customers were listed as the customers themselves. Financial firms are also obliged to monitor transactions and 'screen' them against sanctions/terrorist/other lists. The bank admits to paying insufficient attention to customers' activities, failing to identify the sources and origins of funds used in transactions, not 'screening' any customers against lists of politically exposed persons or PEPs, not 'screening' any incoming payments against sanctions or terrorist lists, and generally failing to 'screen' incoming payments automatically. Suspicious activity reporting was also inadequate. The report has identified other shortcomings such as a lack of independence between the AML function at the Estonian branch and the business, a lack of formal procedures and bad training for the Estonian customer-facing staff.

The €200 billion flow

The report refers to funds that external parties paid to the 10,000 or so customers in the non-resident portfolio that they subsequently transferred to external recipients as 'flow' and excludes book transfers between the customers in that portfolio to avoid duplication. Between 2007 and 2015, there were about 7.5 million incoming and outgoing payments. This, coupled with about 2 million much smaller payments that the bank also investigated, came to approximately €200 billion (US$234 billion). If most customers in the portfolio turn out to be suspicious, as is the case with most of the ones that the 'portfolio investigation' has analysed so far, Danske Bank's Estonian operation must have allowed truly staggering amounts of laundered money through its portals, dwarfing the US$203 million of suspect Russian money that Bill Browder asked the Danish authorities to investigate in July. The actual sum, of course, will never be known.

The geographical distribution of the flow's incoming and outgoing payments was as follows:

Incoming funds            Outgoing funds

Estonia 23%                  Estonia 15%
Russia 23%                   Latvia 14%
Latvia 12%                    China 7%
Cyprus 9%                    Switzerland 6%
UK 4%                           Turkey 6%
Others 29%                  Others 52%

A pattern is evidently emerging, but more research has to be done before the full approximate scale - and a clear territorial distribution - of suspicious financial activity is revealed.