Why Denmark’s banks are easy targets
This week a major investigation showed how Danske Bank in Denmark and its subsidiary in Estonia were used to funnel millions of dollars of money from secret companies, where the real owners of the companies were unknown. The investigation found that the money came from an Azerbaijan slush fund, the alleged purpose of which was to pay bribes to politicians as well as fund the lavish lifestyle of a privileged Azeri elite.
For anyone who took the time to read a recent report from the global anti-money laundering body, the Financial Action Task Force (FATF), this would come as no surprise.
Despite the fact that a variety of sources — including Transparency International — give Denmark good marks for its low levels of perceived public sector corruption, it falls woefully short when it comes to anti-money laundering regulations that could prevent illicit funds from other countries from being laundered through the country’s banks.
The new FATF report shows that Denmark is not fully compliant in 36 out of 40 widely-accepted legal benchmarks for financial safeguards. And it scores a low “partially compliant” on almost half of them (19 out of 40).
Even more concerning are the ratings regarding the practical effectiveness of Denmark’s anti-money laundering systems.
Denmark is not rated as having “high effectiveness” in any of the 11 areas assessed by FATF, while scoring “low” in two critical areas. The first of these concerns the extent to which financial institutions and other potentially high-risk sectors tackle money laundering in practice. The second is the extent to which authorities provide appropriate supervision of these sectors.
The assessment found that implementation of anti-money laundering measures is “weak…in almost all segments of the financial sector”. Financial institutions lack preventive measures such as extra background checks for customers identified as high-risk (this is known as “enhanced due diligence”). Senior management of banks “appear to give a low priority” to anti-money laundering issues.
Unfortunately, despite Denmark being highlighted as part of the Panama Papers scandal last year, little appears to have changed. A report by the Danish authorities earlier this year looking into the role of Danish banks in the Panama Papers stated “the overall impression is that, throughout the years, bank managements have not had enough focus on what is required of them to ensure compliance with money laundering regulations.”
These weaknesses matter, because criminals have already found ways to exploit the multiple vulnerabilities in Danish banks. For instance, the perpetrators of a massive fraud scheme known as the “Russian Laundromat” used two Danish banks to launder 1.1 billion euros between 2011 and 2014. The latest revelations about Azerbaijan are simply following a trend.
A major problem is resources. The Danish authorities lack the funds to provide the oversight needed to make sure banks improve their systems. The Financial Services Authority (the authors of the Panama Papers report just mentioned) for example, has just three full-time staff dedicated to anti-money laundering supervision.
This has consequences on various fronts. One of the key supervisory tools available to authorities is on-site visits — going to a bank in person and asking to review their files and systems and interview key staff. (On-site visits can be compared to inspections by health and safety authorities in restaurants.)
According to data in the FATF report, there has been an average of just 2.6 in four years of these on-site bank inspections between 2012 and 2016. As a result, “the majority of financial institutions did not have an inspection for at least the last four years, and in many cases it appears that there has never been an inspection.”
The inspection situation in other sectors is even more critical. In the real estate sector, the chances of being inspected in 2016 were 0.07%, about the same odds as an applicant to NASA has of becoming an astronaut.
Let’s hope that the new revelations of how soft a touch the Danish banking system is will bring about change. Earlier this year a series of articles in Danish media already highlighted some of these weaknesses. Danish citizens and media should continue to ask tough and persistent questions until authorities take real action. Anti-corruption campaigners including Transparency International certainly will.