Copenhagen, Denmark : Danske Bank (DANSKE.CO) Chief Executive Thomas Borgen resigned on Wednesday as the bank published results of a year-long investigation into how its operation in the Baltic former Soviet Republic turned into a hub for illicit flows out of Russia and other ex-Soviet states into the West.
The scope of an already massive Russia-linked money laundering case swelled Wednesday when Denmark’s largest bank Danske Bank said $234 billion in transactions flowed through its tiny Estonian branch, a larger amount than previously reported.
The Danish bank detailed compliance and control failings amid growing calls for a new European Union watchdog to crack down on financial crime after a series of money laundering scandals which have attracted the attention of U.S. authorities.
“Even though I was personally cleared from a legal point of view, I hold the ultimate responsibility. There is no doubt that we as an organization have failed in this situation and did not live up to expectations,” Borgen, who will stay on until a new CEO is appointed, told a press conference.
Borgen, 54, was in charge of Danske Bank’s international operations, including Estonia, between 2009 and 2012.
Danske Bank said in a summary of a report covering around 15,000 customers and 9.5 million payments between 2007 and 2015 that Borgen, Chairman Ole Andersen and the board “did not breach their legal obligations”.
Andersen said the bank had made an assessment of whether it violated U.S. laws, a key concern for shareholders, but declined to share its conclusion when asked at a press conference.
The Estonian non-resident portfolio included customers from Russia, Azerbaijan, Ukraine and other ex-Soviet states, the investigation, which began a year ago after the Berlingske newspaper revealed alleged misconduct at the branch, found.
Danske Bank, whose already battered shares fell by nearly 8 percent during morning trading, said some 6,200 customers had been examined so far and it expected “a significant part of the payments to be suspicious”.
Shares in Danske Bank had doubled in value from when Borgen took over as CEO in 2013 until July 2017, but have since lost more than a third as allegations of suspicious transactions increased and Denmark and Estonia began criminal investigations.
The bank said it had taken action including “warnings, dismissals, loss of bonus payments and reporting to the authorities” against current and former staff, as well as overhauling the systems which had contributed to the lapses.
In an indication of the potential costs such failings can have on a bank, Dutch bank ING (INGA.AS) agreed to pay 775 million euros ($900 million) this month after admitting criminals had been able to launder money through its accounts.
And earlier this year U.S. authorities accused Latvia’s ABLV of covering up money laundering, leading to the bank being denied U.S. dollar funding and its swift collapse.
While Danske does not have a banking license in the United States, banning U.S. correspondent banks from dealing with it would amount to shutting it out of the global financial network.
The report found that Danske Bank failed to take proper action in 2007 when it was criticized by the Estonian regulator and received information from its Danish counterpart that pointed to “criminal activity in its pure form, including money laundering” estimated at “billions of roubles monthly”.
And when a whistleblower raised problems at the Estonian branch in early 2014 the allegations were not properly investigated and were not shared with the board, Danske said, adding that measures to get its business there under control had been insufficient.
Danske Bank also said the Estonian branch did not employ its anti-money laundering procedures because it had decided not to migrate its Baltic banking activities onto the bank’s IT platform, because it would have been too expensive.
“The report describes serious shortcomings in the organization of Danske Bank, where risk-appetite and risk control were not in balance,” the head of Estonia’s FSA financial regulator Kilvar Kessler said in a statement.
Danske Bank, which cut its forecast for annual net profit to 16-17 billion Danish crowns, from a previous 18-20 billion, has successfully overcome previous traumas.
The government had to step in and ensure it could pay its short-term dollar debt when international markets froze in 2008 and in 2012 it was criticized for an advertising campaign that sought to improve its image, borrowing symbols linked to the anti-establishment movement Occupy Wall Street.
Prior to the money laundering scandal, Borgen had managed to improve the bank’s image and earnings in part by cutting costs, shifting its focus to wealthier clients and expanding in Sweden and Norway to rival the Nordic region’s biggest bank, Nordea (NDA.ST).
Estonia’s Financial Supervision Authority (FSA) said it was now examining the findings of Danske’s internal investigation.
“The report describes serious shortcomings in the organisation of Danske Bank, where risk-appetite and risk control were not in balance,” said the Estonian FSA’s chairman, Kilvar Kessler.
The watchdog and Denmark’s financial supervision authority will now consider taking action.
The FSA said that it had carried out thorough inspections of Danske Bank’s Estonian branch in 2014.
The following year the FSA said it ordered the bank to rectify flaws in its risk control organisation. That resulted in Danske’s Estonian branch no longer serving customers who did not live in the country.
The branch’s handling of Russian and former Soviet money has also been the focus of an inquiry in Estonia itself.
International financier Bill Browder is one of Russian President Vladimir Putin’s most public critics.
He has long alleged that Danske’s Estonian branch was “one of the main conduits related to the fraud”.
In July 2017, he gave evidence to the US Senate Judiciary Committee pertaining to allegations that Russia interfered with the 2016 US presidential elections.
Mr Browder set up and ran Russia’s most successful hedge fund, Hermitage Capital Management, from 1995 to 2005.
In 2005, he claims that the Russian government took over his firm and used it to claim a $230m tax refund.
Mr Browder was refused entry into the country for “national security” reasons, so he moved to London and asked his staff to move with him.
Mr Browder said his lawyer, Sergei Magnitsky, refused to leave as he wanted to investigate evidence of what he said was a massive tax scam by Russian government officials. Mr Magnitsky died in 2009 while in Russian custody.
After Mr Magnitsky’s death, Mr Browder embarked on a worldwide campaign asking governments to pass legislation to freeze the assets involved and deny visas to human rights abusers.
In the US, this law was passed in 2012 and is known as the Magnitsky Act. The UK passed a similar bill in February 2017, updating its existing Proceeds of Crime Act.
In 2013, Mr Browder was tried in absentia in Russia and sentenced to nine years in prison for tax fraud.
Russia asked Interpol to arrest Mr Browder, but the international policing agency rejected the claim.
In May, Mr Browder was arrested and detained for two hours in Spain. He was released after Interpol announced that the arrest warrant was politically motivated.