In the immediate aftermath of the publishing of Bruun & Hjejle’s report into the Danske Bank, Estonia money laundering debacle on Wednesday, certain elements tended to grab the headlines.
Given the scale of what was revealed, quotes like “€200bn”, “mostly suspicious” “10,000 accounts” are always likely to be at the top of the agenda for anyone reporting on this as they are, without a doubt, headline grabbing statements.
But look a bit deeper into the report and there are other, possibly even more troubling elements, still to be drawn out. I’m going to try and highlight some I think are still to be discussed and which may, over time, prove to be as interesting (and possibly damaging) as the headline statements above.
Much has been made of the payments and other transactional activity across these accounts (“the flow”) but, according to page six of the report, the Non-Resident portfolio also offered foreign exchange, bond and securities trading. However, the branch took “little or no credit-risks of any significance” which translates, to me, as “our customers were happy to send and receive money through these accounts, buy and sell FX, securities and bonds but never wanted to borrow any money, either through formal loans or the use of overdrafts (hence the lack of credit risk).
It would have been very helpful (possibly too helpful) if the report had contextualised this balance (or rather imbalance) between, on the one hand, “the flow” and, on the other, lending.
Is it typical for a significant non-resident portfolio to make so little use of credit facilities? Was this because they just weren’t offered or never asked for? If it was the latter, why? What is the likelihood of holding 10,000 accounts on behalf of both personal and corporate customers who, between them, apparently hardly ever asked for a loan or overdraft?
And little is made of the bond and securities trading within the report but there are enough mentions which, when coupled with what is already known, raise some interesting queries.
But before I do, there are some statements in the report that need highlighting.
From page 7, Item 9
“In early 2014, following a whistleblower and new reporting from Group Internal Audit, Danske Bank Group realised that there had been a historical misconception.”
I can’t help wondering if “historical” was in fact a typo for “hysterical”!
But come on. Seven years after the laundromat started (and still nearly two years before it was stopped) the group “realised” their had been a misconception? Such a bland statement for seven years and around (by then) €160bn of “flow” through the Estonian accounts.
“It was now realised at Group level that AML procedures at the Estonian branch involving the Non-Resident Portfolio had been manifestly insufficient and inadequate. It was also realised that all control functions (or lines of defence) had failed, both within the branch and at Group level.”
Note the use of the passive tense here. “It was realised…” “It was also realised…” The great thing about the passive tense is that it removes any obvious responsibility from any specific group or individual.
Try that sentence again in the active tense and it reads somewhat different:
“The Group Senior Management now realised that AML procedures at the Estonian branch involving the Non-Resident Portfolio had been manifestly insufficient and inadequate. They also realised that all control functions (or lines of defence) had failed, both within the branch and at Group level.”
Doesn’t that sound like something you should be held accountable for?
The report goes on to say that these failures included:
“…insufficient knowledge of customers, their beneficial owners and controlling interests, and of sources of funds; (ii) screening of customers and payments had mainly been done manually and had been insufficient; and (iii) there had been lack of response to suspicious customers and transactions.”
Or, to translate “failing to carry out any meaningful due diligence.”
It goes on to talk about suspicion and underlines (and I completely understand why) that
“The fact that a customer or a transaction is deemed suspicious does not in itself implicate criminal activity on the part of the customer or other party. When filing SARs, the FIU as recipient has the opportunity to collect further information from other sources and to initiate investigation. Money laundering requires proof that funds transferred are proceeds of a crime. Ascertaining whether this is the case typically requires more information than is possessed by a financial institution.”
Fair enough. But I’ve seen some of the accounts and, in the case of those I’ve seen, suspicion is applied in the same way that, were you to walk into your kitchen and find an almost empty tub of chocolate ice cream on the floor, your three year old child looking a little nauseous and with chocolate covered stains all over its face claiming “I didn’t do anything” your suspicion is likely to be well placed.
Circumstantial evidence can often be as compelling as direct observation.
Key takeaway 14 states that:
“42 employees and agents have been deemed to have been involved in some suspicious activity.”
The bit that interests me the most (if we accept that it would have been difficult for this to continue for eight years without some sort of inside help, whether that was witting or unwitting remains to be seen) is the mention of “agents”.
Who are these “agents”?
The fact is we don’t really know for sure but the report mentions several times the use of non-regulated intermediaries, the “bond loop” the use of Russian Government Bonds (“OFZ”). Even more intriguingly, it specifically states that they presented
“a solution for ten customers in our Non-resident Intermediaries segment using bonds as a faster, cheaper and more reliable way for their end-clients to transfer money overseas than making an international payment through a domestic Russian bank“.
What does that sound like? It sounds awfully like mirror trading to me. And we know from previous reports (for example see: https://www.business.dk/finans/english-version-shady-clients-engaged-in-suspicious-trades-at-danske-bank) that mirror trading was identified at Danske (bizarrely with some of the same clients as were identified at Deutsche Bank who also, coincidentally, discovered around ten (possibly twelve) clients engaging in mirror trading).
We know from previous reporting that Deutsche Bank identified approximately $10bn of mirror trades. What is not clear from the Danske Report is the value of these “OFZ” trades.
Deutsche was fined £163m in the UK and $630m in the US for theirs (amongst other failings which look exactly like the failings identified above in relation Danske’s KYC). There’s no way of knowing, at the moment, the scale of the Danske trades but clearly, if they come to more than the Deutsche trades, the potential for significant fines is there.
In respect of the intermediaries, Bruun and Hjejle’s report noted that a memorandum to the branch Executive Committee in October 2013 stated (inter alia):
(i) “We do not have full knowledge about the end-clients of the Intermediary“, and
(ii) “[t]here is potential reputational risk in being seen to be assisting ’capital flight’ from Russia“.
With regard to the first main risk, an earlier draft had added: “and therefore potentially this solution could be used for money-laundering“, but these words had been left out in the final version at the initiative of a member of branch management.
What!
And again:
“On 29 November and 13 December 2013, Baltic Banking forwarded material on the business review of the Non-Resident Portfolio to three members of the Executive Board, and on 17 December 2013, and supposedly after a meeting, two of these members also received the OFZ memo from October 2013 about the use of intermediaries. We cannot see that this material was shared with the CEO.”
Really? And note the use of the phrase “We cannot see that this material was shared with the CEO.” Not exactly a ringing endorsement of his not knowing is it?
Nevertheless, on 15 February 2014, following the presentation of Group Internal Audit’s (GIA) report to two members of the Executive Board, one member of the board responded (translated from Danish):
“Unfortunately, it looks as if there is reason for concern. I will inform [CEO] and will arrange a review ASAP. Will keep you [name] in the loop.”
A second said:
“At very least, the bond/intermediaries business has to be closed down immediately. Let’s discuss how”.
And even the CEO stated (translation):
“Noted. Here you should consider an immediate stop of all new business and a controlled winding-down of all existing business”.
All of which suggest to me that this was immediately seen as a big problem (unlike “the flow”) and needed closing down fast. Which also suggests that it was a sizeable business and potentially may turn out to be as much, if not more, than the Deutsche Bank mirror trades.
One to watch.
In part two of my analysis, I’m going to turn to the flow business and specifically to the use of LLPs and SLPs.
Hiding in plain sight - my search for money launderers 