April 24, 2019

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Why Scandinavian Banks’ Clean Reputations Are Threatened by Dirty Money

Why Scandinavian Banks’ Clean Reputations Are Threatened by Dirty Money
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It was virgin territory — with millions of customers who previously had little or no access to credit — and the Western European banks carved up business along geographical and historical lines. The Scandinavian banks took the Baltics while Austrian banks worked territory in Hungary, Slovakia, Romania and other places that had once been ruled by the Hapsburg dynasty.

At the same time, Russia evolved into a crony capitalist economy, breeding oligarchs and officials who wanted to move money to havens outside the country. A logical place for them to go was Estonia, which has a large Russian-speaking population. Tallinn, the capital, is less than six hours by car from St. Petersburg.

Danske Bank became a major force in Estonia in 2007 by acquiring the Finnish bank Sampo, which had a large foothold in the country. Sampo’s Estonian subsidiary was already a destination for foreign money. More than one quarter of its deposits in Estonia belonged to nonresidents, and the proportion continued to grow after Danske took over.

But Danske’s oversight of the Estonian subsidiary was weak. Many of the transactions by foreign clients were obviously fishy, the bank’s own investigation found.

Some customers were known criminals, or the money came from banks notorious for money laundering. Large numbers of customers had the same address or phone number, an indication they could be fronts. Some clients would transfer money to Estonia, then immediately transfer it again, often to an offshore account. That was a sign that lenders were being used to obscure the money’s origin.

Further complicating matters, Danske allowed its Estonian operation to maintain a separate information technology system. Many documents were written in Estonian or Russian, making it difficult for compliance officers in Denmark to know what was going on.

Now, operations that once seemed like lucrative outposts on the frontiers of capitalism have turned into liabilities for the Scandinavian banks.

Danske pulled out of the Baltics earlier this year. Swedbank has said it remains committed to Estonia, Latvia and Lithuania.

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