This Week in AML
The US Department of Justice and the Securities and Exchange Commission have announced a resolution of charges against Danske Bank. The Bank pled guilty to fraud on US banks and agreed to forfeit $2 billion. It also agreed to settle related claims by the SEC. John and Elliot discuss the details of Danske Bank’s activities, which went on between 2008 to 2016. They also talk about how this case illustrates some of the risks that arise in correspondent banking relationships and the vigilance needed to manage those risks.
Danske Bank – Why Correspondent Banking Can Be High Risk TRANSCRIPT
Elliot Berman: Hi, John. How are you this week?
John Byrne: I'm good, Elliot. Getting ready for the holidays. So even though the weather's cold where you are and where I am, it's a good time to relax and get ready for 2023.
Elliot Berman: True. Yeah, we're getting cold rain here. I know there's a big snowstorm moving across the country, but it's been warm enough here that it's a cold, rainy day instead of a cold, snowy day.
John Byrne: Yeah. So a lot of news in the past couple of weeks. Separately, I was part of the DC chapter of ACAMS, which had an end-of-the-year review. And I did a fireside chat with a house financial services staffer and Danielle Lindholm, who's great. And I'll just say high level; she mentioned that all the legislative directions to FinCEN are challenging because of resource issues, but there are some studies in the pipeline.
She does expect before the end of the year, at least she hopes their study on de-risking, which will be interesting, and obviously, we'll cover that in early 2023. Some of the other items there that didn't make it to the finish line. The Enablers Act, which you and I have talked about some of the provisions there obviously could have added to oversight of areas of gaps that we would argue.
So I think there'll be a lot. I know there'll be a lot going on in 2023, so we will continue to cover all that. But the thing that struck both of us, I know we talked about this earlier today, and that's the guilty plea of Danske Bank, the largest bank in Denmark, to forfeit $2 billion.
Danske Bank has been in the news in the AML News for a couple of years, but a whole host of things in that case that I think we should spend a couple of minutes talking about this.
Elliot Berman: Agreed. So it was a joint investigation by both the US Department of Justice through the US Attorney's Office in the Southern District of New York and where many high-profile cases are worked.
And then also the Securities and Exchange Commission had a piece. And at its core, it had to do, I mean, the claims were Danske Bank committed fraud on US banks. And the activity that came out of Danske Bank had, until 2019, a branch in Estonia, and that branch had a line of business that sought non-resident customers, meaning people who were not residents of Estonia, some of whom were in Russia.
And offering to a system in the movement of large sums of money, including through the US banking system, with little or no oversight. Yeah. Which would be a lucrative line of business if you could do it legally.
John Byrne: Right. And the FBI was involved in this investigation. As we know, they work with their international peers, colleagues, and partners to do the investigation.
You know, I think some of the key comments from the press release and certainly from the elements of the actual plea is that this is a correspondent bank risk model. This is why our regulators continue, and not just our regulators, but certainly, FATF has made this clear that correspondent banking is a high-risk area, and you need to be comfortable knowing that all throughout the pipeline.
That there is proper due diligence, reporting of suspicious activities, and strong AML programs, none of which occurred here. And, you know, obviously, one of the keys for Danske was to get access to the US financial system. And this makes it very clear and certainly says in the press release from several of the key lawyers there.
If you're gonna use the US financial system, you have to play by the rules. And if you don't, obviously, this is a perfect example of holding them, holding them accountable. I'm not shocked, but I was sort of very surprised by how much in this agreement, Danske Bank clearly knew what was pending and made no effort in some areas in terms of gathering information. There was, I guess, an internal whistleblower that helped provide some of the information. So did the audits that were done and information from regulators there as well. But this just seems to be, you know, them thumbing their nose at over it.
Elliot Berman: Yes. So one of the questions that often gets asked in the US when we see something of this magnitude is, you know, what happened at the senior levels of the institution as this UN investigation unfolded and early in its life when things were coming to life. The then-CEO of Danske Bank resigned.
So his name was Tom Borgen. His name still is Tom Borgen, and he actually left the company in 2018. there were several suits filed against him in Denmark, one of which was investors arguing that he had some personal liability to the company. The courts determined that was a claim that the companies had to bring that individual investor couldn't.
There was also a criminal case against him, and he was acquitted. So he certainly has had a negative turn in his career, but interestingly enough, you know, not. He isn't taking the kind of hit that the bank is taking.
John Byrne: No. And as you mentioned, a separate action from the Securities Exchange Commission, and this was 400 million to settle those charges, and that's for misleading investors, as you mentioned.
So that was part of it. What jumped out at me in terms of the SEC's release. Is that Danske Bank, as we said, acquired the Estonia branch back in 2007. It should have known the substantial portion of the customers were engaged in, you know, high-risk activity and that its AML and KYC procedures were not being followed and didn't comply.
You know, the SEC also alleged that high-risk customers used the services to transact billions of dollars in suspicious transactions. And other countries generate as much as 99% of the Estonia branch profits, which is pretty phenomenal. And then, the Director of Enforcement commented that corporations that raised money from the public have to disclose that information.
That's material to investors, who then they get to decide what risk they want to take. That's the basics of securities laws. And that's obviously what the SEC complaint charges that they violated the anti-fraud provision provisions of the SEC act. So that's also in addition to the 2 billion.
And this is, again, a joint effort with the FBI and SEC, Southern District, and obviously with their partners overseas. So a lot here, but it does go to the area of correspondent bank issues. And again, I think if you are any US institution, what did you learn, and what questions are you asking in the correspondent bank field?
What sort of documentation is it to show that their AML controls are solid and they're monitoring all those sorts of things. This is a clear example of why you have to think carefully about providing correspondent services, and as we always say with enforcement actions, even if you're a smallish institution, you can learn thematically from these things. And this is a really good example of doing that.
Elliot Berman: Yes. And to the extent that one of the learnings is to the extent that you make an acquisition, your corporate due diligence needs to include a comprehensive review of anti-money laundering compliance programs under a real deep dive into the understanding of service lines and product lines.
There isn't any indication in any of the documents of what this service line at the Estonia branch was like, not that it was hidden somewhere. So you know, in the same way, I mean, obviously, it's a very pedestrian comparison. But in the same way that if a US financial institution is buying another one that has very high overdraft fees, which is much different than what was going on here, of course. But, you know, really tearing that down to the nuts and bolts and figuring out whether they're giving all the proper disclosures and whether they're aligned with the way regulators look at that issue.
That would be really important. Well, so much more so when you take a look at an acquisition and really understand what you're buying in terms of anti-money laundering, compliance risk, and other financial crime.
John Byrne: No, obviously. I agree. So this is our last recording of This Week in AML for 2022. We will give you some archives in the next couple of weeks. I just wanna mention that you can go to our website, and we have had previous podcast interviews with a series of folks in the past year that I think you'll find interesting if you missed it the time around. We've interviewed a few authors, and there has been some focus on a whole host of domestic and international issues, which are readily available on our website. Next, early next year in January, we're going to be doing a webinar on human trafficking-related topics and a whole host of issues after that.
But we have several things in the pipeline plan for you, but I know that we wanna wish everyone a safe holiday season. Thank you for listening. Thank you for your feedback. Also, we're always interested in what people think we should interview or topics we should cover. So let Elliot and I know that as we plan our 2023 programming.
Elliot Berman: Yes. Thanks, John. So the date of that human trafficking-focused webinar is Wednesday, January 20th. It'll be at our regular time, 1:00 PM Eastern and 6:00 PM GMT. And, for those of you who aren't aware, January is Human Trafficking Awareness Month. And so, you know, we urge you to think about how your institution can raise awareness of really challenging problem, which is truly global.
It's local, and it's global, like so many of the most difficult problems. So, we are certainly gonna try to provide the webinar and some of our previous materials as resources, but look for other resources as well and think how your institution can spend a little bit of time raising awareness next month.
So John, I know I will actually talk to you, but happy holidays to you and the family, and we'll do our first live one the first week of January.
John Byrne: Thanks, Elliot. Stay safe and good wishes to your family as well.
Elliot Berman: Take care. Thank you. Bye-bye.