Just as we anticipated, the massive $150 billion money laundering scandal unfolding in the Estonian branch of Danske Bank has finally attracted the scrutiny of international regulators, who have seized on the opportunity to tighten the noose around the neck of criminals and corrupt oligarchs operating in the Commonwealth of Independent States.
According to the Wall Street Journal, the Justice Department, Treasury Department and Securities and Exchange Commission are each examining Danske Bank following a whistleblower complaint made two years ago. It's unclear for how long the investigations have been ongoing, though the conduct being investigated took place through 2015. The complaint also named Deutsche Bank and Citigroup as potentially complicit in the fraud, with DB acting as a correspondent bank on some of the transactions while some of the funds were run through Citigroup's Moscow branch.
Shares are plunging on the news that a heavy-hitting international regulator is looking into the scandal, which has already spurred investigations in Denmark (where Danske is based) and Estonia (which is looking into the conduct of several Danske employees). Danske shares were down 5% in recent trading as fears of a potential "death blow sanction" - where a bank is excluded from handling dollars by the Treasury Department - intensified. Danske last year said it had initiated an internal investigation into the conduct. The money that flowed through its Estonian branch is several times larger than the annual flows through the Estonian banking system.
Meanwhile, CDS soared as investors rushed to protect themselves from a potential collapse.
...And this is why:
U.S. involvement in the case greatly raises the stakes for Danske Bank. It is already facing investigations in Denmark and Estonia over the allegations.
Per WSJ, the scandal may have been one reason for a recent trip that the Treasury assistant secretary for terrorist financing made to Estonia. It's also notable that scrutiny appears to be intensifying as US lawmakers are searching for more excuses to justifying ramping up US sanctions against Russia.
Treasury Assistant Secretary for Terrorist Financing Marshall Billingslea visited Estonia in May. Russian illicit transactions into Europe were a particular concern, according to people aware of those discussions. Danske was mentioned only in passing. Mr. Billingslea and other top administration officials have jetted around Europe, pressing regulators to more aggressively police financial flows out of Russia. He visited Denmark in August.
"It is critical that they shore up their anti-money laundering regimes and that they clamp down and tighten down on how they regulate money coming out of Russia," Mr. Billingslea told a Senate panel last month.
"There’s an enormous amount of money that is still being exfiltrated from Russia by both organized crime and cronies surrounding Putin," he told senators, many of whom are seeking to levy new sanctions against Moscow.
While it's extremely rare, the Treasury Department could theoretically opt to restrict the flow of dollars to Danske Bank. This so-called "death blow sanction" is extremely rare because it would typically send a lender spiraling into collapse (and given the fragility of the European banking system, deliberately knocking over such a significant domino could be risky). However, the US did recently prompt the collapse of Latvian lender ABLV using this cudgel (though, to be sure, ABLV pales in systemic importance when compared with Danske).