Scandal in Denmark Can Bring Down Baltic Banks

Money laundering scandal with Danish Danske Bank is another blow to banks in Baltic States that can ruin entire banking system

Danish newspaper Berlingske reported that at least $8 billion (DKr53 billion) were laundered through the Estonian branch of Danske Bank.

Denmark’s Business Minister Rasmus Jarlov said the “gravely serious” case was getting worse. “It casts a shadow of mistrust over our entire banking system, and nobody gains from that,” he wrote on Twitter.

The minister is being cunning. That something was wrong with Danske Bank had been apparent long ago. According to the report published by the Copenhagen Financial Supervision Service in 2013 the profit of the bank’s branch in Estonia from operations with non-residents exceeded 400%.

In May the Danish authorities reprimanded Danske Bank for inadequate measures to prevent money laundering which could lead to "criminal activities involving vast sums of money".

The regulator ordered the bank to set aside DKr5 billion for compliance but did not find concrete evidence to initiate criminal proceedings.

According to the Danish authorities if the accusations are confirmed the criminal money will be confiscated.

There is also a risk of sanctions from the US. Yet it remains possible that this will not happen since the bank does not work in the US, does not have an American banking license or access to the dollar clearing system.

The scandal will hit the hardest the banking system of the Baltic States for whom the operations with companies and citizens from the former Soviet Union is the main source of income.

In May 2018 the Estonian police announced that 13 billion euros were laundered through banks in Estonia between 2011 and 2016. This is a very significant amount given that Estonia's budget is 10 billion euros.

No evidence was found and no criminal case was opened. Still, the government asked banks to scrutinise their client base or face millions in fines and even forced liquidation.

In February 2018, the US Treasury Department issued a report accusing the largest Latvian bank ABLV of money laundering. Within a week about 600 million euros were wiped out from the bank and the credit institution entered into liquidation.

This led to a massive outflow of customers from the former Soviet Union. Only this year about 19,000 non-resident accounts were closed.

On March 26 the authorities closed Versobank, which was owned by citizens of Ukraine. According to the Estonian regulator, the bank violated the law on combating money laundering and financing of terrorism. Out of five thousand clients of the bank, two thousand were residents of Estonia.

This indicates the probable fate of other small banks. Their liquidation would simplify control over compliance and is one of the few ways the government still has to prop up larger banks and the entire banking system.

Published: July 8, 2018