Danske Bank Money Laundering Scandal: The Tip of the Iceberg(s)
Former Bank Employee Testimony Highlights Limited Whistleblower Protections in Europe
In September, the Danish law firm Bruun & Hjejle’s report (“B&H Report”) released its internal investigation report into alleged money laundering conducted through the Estonian branch of Danske Bank (“Danske”). The enormity of the scandal outlined in the report cannot be understated: from 2007 through 2015, at least 200 billion Euros were laundered through Danske. The release of the B&H Report has triggered the predictable cascade of resignations, investigations, hearings, recriminations and stock plunges that have begun playing out over the past eight weeks. These events, in turn, are beginning to illuminate the two principal sides of the scandal: the institutional failures at a large, sophisticated, international bank that allegedly allowed wrongdoing on this scale to go unchecked for eight years; and the efforts countries like Russia will make – and individuals and entities they will exploit – to illegally channel substantial wealth to the West.
As we previously blogged, the B&H Report found that Danske processed 200 billion Euros in suspicious transactions made by thousands of non-resident customers, principally from Russia and former Soviet states. According to the B&H Report, the success of the laundering was due to the near-total failure of the Estonian Danske branch to implement adequate anti-money laundering (“AML”) procedures and the parent Danske Bank Group’s failure to recognize and act upon numerous red flags that should have alerted it to the Estonian branch’s issues. However, while finding that the Estonian branch violated numerous legal obligations in failing to have and implement adequate AML processes and procedures, the B&H Report stopped short of accusing Danske’s Board of Directors, Chairman, Audit Committee, Chief Executive Officer or any executive of violating their legal obligations in regard to these failures.
Recent testimony by former Danske employee turned whistleblower painted a less forgiving picture.
The Whistleblower’s Testimony and the NDA
The genesis of the scandal was a whistleblower report made to senior Danske management in Estonia in 2014 outlining concerns over suspicious transactions. That whistleblower was later revealed to be Howard Wilkinson, a Briton who was head of Danske’s market trading unit in the Baltics from 2007 to 2014. Following the issuance of the B&H Report, both the Danish Parliament and the European Parliament’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance called hearings. Wilkinson testified before both on November 19 and 21, 2018, respectively. Wilkinson’s PowerPoint presentation for his testimony before the European Parliament is here.
Wilkinson’s testimony to both Houses addressed the international scope of the scandal and Danske’s institutional failures to prevent or address it. However, his testimony was limited because European law, unlike American law, lacks some critical whistleblower protections. Unlike under American law, whistleblowers in Europe generally lack special legal status shielding them from retaliation by their employer. Nor are whistleblowers provided significant financial incentives to come forward. The result, according to Wilkinson’s attorney, Stephen Kohn, a partner at the United States firm Kohn, Kohn and Colapinto, is a system that turns whistleblowers like Wilkinson from “informants into martyrs.”
In apparent contrast, the U.S. Securities and Exchange Commission has found that an employee confidentiality agreement which prohibits an employee from disclosing information regarding potential corporate misconduct to the government violates SEC Rule 21F-17, which states that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”
In Wilkinson’s case, this feature or deficiency (depending on your point of view) of European law implicated a non-disclosure agreement (“NDA”) signed by Wilkinson. According to Wilkinson, the NDA itself resulted from his initial complaint to senior management. Wilkinson testified that in January 2014, he made the first of four complaints to senior Danske management concerning suspicious account activity in the Estonia branch but, by April 2014 it became clear that “the bank didn’t intend to do anything.” On April 8, 2014, Wilkinson informed his superiors that “if they didn’t do a proper investigation and make the appropriate report to the police, then I was going to do it myself.” Twenty days later, Danske presented Wilkinson with the NDA.
He testified: “[The NDA] was prepared by a senior lawyer in Denmark. A gentleman flew from Denmark to present the agreement to me and to negotiate it. He was very senior, and his boss was even more senior, and he told me that his boss had personally approved it.” He continued, “The purpose of the NDA was to obstruct any proper investigation of what was going on” by preventing him from providing information to Danish, Estonian, European or American authorizes without a waiver from the bank. While Danske granted a waiver for Wilkinson to testify to the Danish and European Parliaments (and, later, to the United States Department of Justice), he claims the waiver came with threats attached that if he named staff or identified shell companies in the U.K. used to move money or other related entities or participants, he would be liable for criminal prosecution under Danish bank secrecy and European data protection laws.
Notwithstanding this dynamic, Wilkinson shed some light on the scheme and its contours.
The Money Laundering Allegations
According to Wilkinson, Danske clients in Russia and the former Soviet Union channeled funds through four Russian banks and into Danske’s Estonia branch. From there the funds were transferred to three different correspondent banks, which cleansed the funds reinserting them into the global financial system.
The scheme allegedly worked as follows: Danske non-citizen clients included British limited partnerships (“LPs”) and limited liability partnerships (“LLPs”) that, as would be later discovered, had ties to Russian authorities, including Vladimir Putin. These structures have come under increasing scrutiny by British officials due to their consistent use in large-scale money laundering operations. British LPs and LLPs can be set-up essentially anonymously as their registration requires only the identification of its legal owner, not their beneficial owner. Thus, anyone in the world can set up a shell company in England as the legal owner of an LP or LLPs and anonymously channel funds from any source through it. They did so to Danske’s Estonia branch. In January 2014, Wilkinson discovered that the British LP and LLP Danske clients “were all fake. Not just that, they all basically looked the same. And it turned out they all had the same registered office in a suburb in North London.” Of course, the issue of beneficial ownership has been a primary focus of global AML enforcement for years.
He then explained that funds were routed from the Danske Estonian branch through three principal financial institutions “large US bank 1,” “large US bank 2,” and the United States subsidiary of a major European bank (“European Bank 1”). Each of the three banks had correspondent relationships with the Estonian Danske branch allowing them to transfer funds for Danske clients. Potentially importantly for their own liability purposes, under this arrangement, the correspondent bank’s client is Danske, not Danske’s clients.
“Large US bank 1” ended its correspondent relationship with Danske in 2013 over concerns about the non-resident Danske clients. Large US bank 2 was a Danske correspondent bank from 2013 until it ended that relationship in 2015. However, according to Wilkinson, the vast majority of the laundered funds at issue – approximately $150 billion – flowed through European Bank 1, which was a Danske correspondent bank until 2015. Where these funds wound up is anyone’s guess. Wilkinson testified: “No one really knows where this money went. All we know is that the last people to see it was these three large banks in the U.S. They were the last check, and when that failed, the money was into the global financial system.” According to Wilkinson and his attorney, however, Danske’s involvement is merely “the tip of the iceberg.”
The Case Proceeds
Investigators are proceeding apace in the Danske money laundering scandal. On November 28, 2018, Danske announced that it has received preliminary charges from Danish prosecutors for its role in the scandal. Danske faces four charges, each for violation of the Danish Anti-Money Laundering Act: Count 1 – failure to have adequate anti-money laundering controls; Count 2 – failure to properly monitor and process non-resident customers; Count 3 – lacking sufficient knowledge of its non-resident customers; and Count 4 – failure to perform adequate investigations into the business and transactions of its non-resident customers. European and American agencies are continuing their investigations, which will include additional questioning of Wilkinson (thanks to Danske’s limited waiver of his NDA). The situation is so potentially serious that the Danish central bank issued a report on November 30 warning that the money laundering problems at Danske Bank could threaten the financial stability of the entire country.