Pretty soon Baltic banks might find themselves effectively cut off from the global dollar system, regardless of how stringent their money laundering controls or how spotless their compliance records.
Even banks with no exposure or involvement to Danske Bank's Estonian branch - the nexus of an unprecedented global money-laundering scheme that went uninterrupted for years - could face collateral damage from the broadening scandal as international regulators look past Danske's blatant disregard for European anti-money laundering controls and toward the international financial institutions that helped enable them by clearing their transactions: such as US and European megabanks.
International banks like JP Morgan and Deutsche Bank already got burned during the catastrophic banking scandal in Latvia that almost brought down the country's financial system (the correspondent banks embarked on a wave of "de-risking" after staring down threats from regulators). Now, that scenario is playing out again, but on a much larger scale.
According to Bloomberg, the DOJ has contacted Deutsche Bank AG and Bank of America Corp. to request information about transactions they cleared for the Danish lender's Estonia branch - the epicenter of what's believed to be the largest money laundering scandal in European history.
In an internal audit, Danske said that nearly all of $230 billion in non-resident transactions processed by the bank between 2007 and 2015 are suspicious. Amazingly, Russian President Vladimir Putin has appeared in prosecutors' documents, as investigators in the US and Europe believe that some of the money moved through the branch belonged to the Russian leader and members of his inner circle. Danske's CEO and its chairman have been forced out over the scandal. And some investors worry that the fallout could cost Denmark its 'AAA' credit rating.
The investigation is still in its infancy, and there are no signs yet as to whether the banks themselves are targets. But the SEC and DOJ are raising questions about whether the banks applied appropriate AML scrutiny to their correspondent businesses.
JPMorgan stopped providing correspondent services to the Danske Bank branch in 2013. Deutsche Bank and Bank of America continued for another two years, according to the reports and the people familiar with the matter. Deutsche Bank handled the bulk of these transactions during the period under scrutiny, one of the people said.
In the past, correspondent banks have been treated by US authorities as "unwitting dupes." But setting aside the fact that the vast majority of Danske's Estonian clients weren't actually Estonian (the branch catered almost exclusively to non-residents from the CIS), it's difficult to imagine how the massive sums flowing through the tiny branch, which dwarfed the GDP of Estonia, didn't warrant a second look by the banks' compliance staff. The only sensible explanation is that a degree of magical thinking - or willfull ignorance - was involved.
Also, JPM, BofA and Deutsche each decided to terminate their correspondent banking relationship with Danske - but at different times.
In June 2013, according to the Danske Bank internal investigation, a JPMorgan executive told a Danske Bank board member that it planned to terminate services for the Estonia branch because of its high percentage of nonresident clients, a potential sign of money laundering. When it did so two months later, another of Danske Bank’s correspondent banks - Bank of America - agreed to expand its dollar-clearing business with the branch, according to the internal report. It’s unclear whether Bank of America was aware of JPMorgan’s concerns.
Danske Bank conducted an "internal review" after Estonian investigators started investigating the Estonian branch in 2014. But while they noted certain irregularities (like the fact that a staggering 90% of the branch's profits came from non-resident clients) they didn't take any meaningful action to step up their AML controls.
Why? We'll give you one guess: