In the spring of 2013, the EFSA contacted the DFSA based upon a warning received from the Russian Central Bank about a list of Danske’s “Russian customers who were blacklisted.” The DFSA contacted the Bank, and the acting Head of the Legal Department replied that the branch had a special setup in light of the elevated AML risk in the Estonian branch.
On April 7, 2013, Group Compliance & AML contacted branch management, referring to “our blacklisted Russian customers.” They noted that “the Danish FSA is now very worried because they have confirmed to the US authorities that we comply with Danish FSA’s requirements on AML,” and “[i]t is critical for the Bank that we do not get any problems based on this issue. We cannot risk any new orders in the AML area.”
In June 2013, a member of the Executive Board was contacted by one of the correspondent banks used by the Estonian branch to clear USD payments. The correspondent bank expressed concern over AML issues in the branch which led a small group within Business Banking to review the Non-Resident Russian profiles within the branch. Ultimately, and in agreement with the correspondent bank in question, the Estonian branch sent a closure notification terminating the correspondent banking relationship, effective August 1, 2013. Following the termination, another correspondent bank expanded its USD clearing business with the Estonian branch.
The termination of the USD correspondent banking relationship prompted the Executive Board to launch a business review of the Non-Resident Portfolio. As part of this review, Business Banking noted that “over-normal profit is usually a warning sign, superior service or not,” and concern was expressed that “the lack of price-sensitivity with some customers is due to other factors than good service.” For its part, Group Compliance & AML stated that “the business volume (transactions) with non-resident customers in Estonia” was larger than expected. Also, the presence of so-called intermediaries, in the form of “non-regulated entities,” was questioned. Intermediaries constituted a small group of customers in the Non-Resident Portfolio holding accounts for the purpose of facilitating transactions with their own end-customers outside the branch.
The Bank underwent a significant management change while the business review was ongoing. On September 16, 2013, the Board of Directors appointed Thomas Borgen as new Chief Executive Officer, replacing Eivind Kolding, who resigned immediately. Previously, Borgen had been a member of the Executive Board responsible for Corporate & Institutional Banking—which oversaw Baltic banking—and these areas continued to be a part of his responsibilities until a replacement was appointed in November. At the time of Borgen’s promotion, the Chairman of the Board of Directors, Ole Andersen, said:
Thomas F. Borgen is an experienced and customer-oriented banker, who knows how to run a modern bank. The Board of Directors knows Thomas as an open and modern leader with a strong focus on goal-oriented execution in close collaboration with the Board of Directors, the executive management and the employees. Thomas is well positioned to make a significant contribution to a renewal of the Bank’s management culture so that the Bank becomes more open, result-oriented and even more focused on the customers.
On October 16, 2013, both the full presentation on the business review and a summary were forwarded to Business Banking. The presentation stated that intermediaries would be “harvested” and subject to a “[r]un-off,” and that the business segment would follow a strategy to “focus on preserving client quality not on acquiring new clients.” When forwarding the presentation, Baltic Banking noted, among other points, that “[t]he business line is profitable and contributing significantly to Baltic Banking performance,” and that “[t]here are resilient KYC and AML procedures in place” and “no pending discussions on business with regulators.”
Around the time the business review was concluding, employees within the Estonian branch were brainstorming ways to assist non-resident customers with their payment needs. On October 15, a memorandum titled “Solutions in the Non-resident Intermediaries customer segment using bonds” (the “OFZ memo,” OFZ being Russian government bonds) was circulated to the branch’s Executive Committee. The memorandum 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.” It was added that “the solution” was “highly profitable,” but also that “[c]onsistent with our strategy for the segment, we do not add new Intermediary clients and expect the number of clients in the segment to decline over time.” Two main risks were indicated: (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.
This memorandum was shared with two members of the Executive Board but not the CEO. However, the CEO did discuss the Non-Resident Portfolio with three other Executive Board members in late October at a Business Banking Performance Review Meeting. According to the minutes, the “initial take” presented by a member of the Executive Board was “that the size of Danske Bank business undertaken with this category of customer is larger than DB peers, and the proportion of business needed to be reviewed and potentially reduced.” The CEO responded by emphasizing “the need for a middle ground” and that the issue should be discussed “further outside of this forum.” A member of the Executive Board “agreed to hold a meeting when Business Banking had finalised its conclusions.” No such follow-up occurred.
The year ended with an explosive revelation that would prove a crucial turning point in the ongoing AML saga at the Estonian Branch. In December 2013, the Head of the Markets Department in the branch (hereinafter “the whistleblower”) contacted a member of the Executive Board as well as employees from Baltic Banking, Group Compliance & AML and Group Internal Audit about potential money laundering in the Estonian branch’s International Banking Department. The report was titled “Whistleblowing disclosure – knowingly dealing with criminals in Estonia Branch” and it included the following information about a specific customer:
The Estonian branch did not have financial data on the specific customer, and the customer had filed false financial accounts with the UK Companies House.
The Bank knowingly continued to deal with a company that had committed a crime.
After the whistleblower had brought up within the branch the question of false financial accounts, “[a]n employee of the bank cooperated with the company to fix the ‘error’,” whereby new financial accounts had been filed, which were equally false.
The customer remained with the branch, and “[t]he bank continued dealing with the company even after it had committed another crime by submitting amended false accounts.”
In September 2013, it was decided to close all accounts held by the customer in question as well as by “other members of the influence group.” This was decided as a result of suspicious payments, insufficient knowledge of beneficial owners (according to the whistleblower, “apparently it was discovered that they included the Putin family and the FSB,” that is the Russian Federal Security Service), and also due to the beneficial owners having “been involved with several Russian banks that had been closed down in recent years.”
In conclusion, the whistleblower shared their views on “what looks wrong here,” stating that “[t]his should all be seen in the context of the high-risk nature of the international business in Estonia (that is supposed to be well-recognised and addressed by local management), that UK LLPs [Limited Liability Partnerships] are the preferred vehicle for non-resident clients (so should be well understood) and that the control environment is supposed to be ‘comprehensive’.”