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Danske Bank could face fines after fresh Estonian money laundering claims

Danske Bank A/S could be hit with fines following fresh allegations by authorities in Estonia of failures in anti-money laundering controls, according to analysts.

The Estonian regulator, Finantsinspektsioon, said Feb. 27 that it will launch an investigation to find out whether Denmark-based Danske Bank had known about money laundering that took place at its unit in the country in 2013.

The bank had previously shut down 20 customer accounts after a whistleblower warned that its branch in Estonia, a small nation of 1.3 million in northeastern Europe, was being used in potential money laundering activities connected to Russia, The (U.K.) Guardian reported Feb. 26. The accounts were allegedly being used to move funds through British companies by members of Russian President Vladimir Putin's family and the spy agency, the Federal Security Service, or FSB.

"We believe material fines or legal costs could potentially emerge, especially if it turns out that Danske Bank was in fact not fully cooperative with or even misleading authorities," Simon Hagbart Madsen, a bank analyst at Jyske Bank, said in an email.

Another analyst who covers Nordic banks, speaking on condition of anonymity, said in an interview that a fine could not be ruled out, and that the bank's CEO Thomas Borgen could come under pressure to resign if it transpires that Danske Bank failed to respond properly to an internal whistleblower.

When contacted by S&P Global Market Intelligence, Danske Bank, Denmark's largest bank by assets, said it is in "constructive dialogue" with the Estonian authorities but could not comment on the details. Danske Bank did not respond to a request for clarification about the exact timing and nature of its own internal investigations following the closure of the accounts at its Estonian unit.

"We have launched a thorough investigation to get to the bottom of the events at that time in our Estonian branch," the bank's head of group compliance, Anders Meinert Jørgensen, said in an email. "We cannot comment [on] the matter further, until the investigation has finalized."

Money laundering controls

Other global banks have faced hefty penalties in recent years in connection with anti-money laundering processes. In 2017, Deutsche Bank AG was fined a combined $630 million by the U.K. and U.S. authorities for failure to prevent Russian money laundering, and for putting the U.K. in danger of financial crime. In 2012, HSBC Holdings Plc was hit with a $1.92 billion fine by U.S. authorities for failing to prevent money laundering related to Mexican drug money.

Danske Bank's share price dropped on Feb. 27, after news of the Estonian investigation broke, from a closing price of 250.1 Danish kroner on Feb. 26 to a daily low of 240.2 kroner on Feb. 27. The shares closed at 242.5 kroner on March 2.

The probe will not necessarily have undermined shareholders' trust in Danske Bank's management, but it will have "raised eyebrows," Leonhardt Pihl, CEO of the Danish Shareholders' Association, said in an email. He also did not rule out the possibility of Danish shareholders selling Danske Bank shares for ethical reasons over potential complicity in money laundering, but said much will depend on further clarification regarding what actually happened.

Shareholders have been promised "a full explanation" of events in Estonia, and if that is satisfactory, it is unlikely that any grudges will be held against Borgen, Pihl said. Investors have generally been impressed by the CEO's track record, and that of his management team. Borgen was brought in in 2013 after the bank's board ousted his predecessor Eivind Kolding, citing the need for a more experienced banker in the top job.

But if the report leaves too many questions unanswered, more "long-lasting damage" could be expected, Pihl said.

'Major problems'

Some have a more critical view of Danske Bank's behavior. Jakob Dedenroth Bernhoft, an anti-money laundering expert and lawyer at Danish law firm Revisor Jura, said he saw the allegations of money laundering as a sign of "massive management failure" at the bank's Estonian business, and that the parent company seems not to have had sufficient control over the subsidiary.

"What is surprising is that Danske Bank Denmark was warned in 2013 that there were major problems in Danske Bank Estonia — both by the whistleblower [and] the bank's own internal audit," he said in an email, adding that the bank might have "underestimated" the scale of the problems.

French authorities previously placed Danske Bank under investigation in October 2017, relating to alleged money laundering over transfers of €15 million to France by its clients in Estonia between 2008 and 2011. However, the Tribunal de Grande Instance de Paris changed the bank's status in the probe to that of an "assisted witness" in early 2018.

Borgen told analysts during a February earnings call that Danske Bank was continuing with its own internal investigation despite the fact that the French authorities had closed their case, to make sure that it learned all the necessary lessons from the incident.