It could be difficult for U.S. authorities to fine Danske Bank A/S for its involvement in a multibillion-dollar money-laundering scandal in the Baltics, according to legal experts speaking to S&P Global Market Intelligence.
In previous money-laundering cases, U.S. authorities have issued penalties under regulation that only covers U.S.-licensed banks, making it impossible to compare them to a case against Danske, which has no U.S. license, said a former U.S. Justice Department attorney, who spoke on condition of anonymity.
"Everyone is talking about this big U.S. fine. I don't see it," he said.
Although previous estimates put the potential fine against Danske at as much as $9 billion, some equity analysts think it could be significantly lower, with one predicting that it will likely be limited to $600 million from Danish authorities only.
In one of the biggest money-laundering scandals in history, up to €200 billion of non-resident money flowed through Danske Bank's Estonian branch from 2007 to 2015 as part of the so-called Global Laundromat scheme. Danske, which is Denmark's largest bank by assets, has admitted that a "significant" number of these payments were suspicious.
Read more: Shareholder lawsuits pile up against Danske Bank amid money laundering scandal
While criminal investigations are underway in Denmark and Estonia, investors are particularly concerned about potential financial penalties from the U.S., which has issued billions of dollars in fines to banks over money laundering and sanctions violations.
Both the U.S. Department of Justice and the U.S. Securities and Exchange Commission are investigating the bank in connection with the scandal.
Little information has been released about the probes. Danske Bank said it "cannot comment on the scope or focus of the investigations," while the DoJ and SEC declined to comment.
Bank Secrecy Act
Lawyers specializing in money laundering, meanwhile, say it is not clear how U.S. authorities will fine Danske.
In past money-laundering cases, banks have been penalized for breaching the U.S. Bank Secrecy Act, which requires them to have an appropriate anti-money laundering program. Banks are not charged with the offense of money laundering itself, but rather for lacking anti-money laundering controls.
U.K.-based HSBC Holdings PLC, for example, paid a $1.92 billion penalty in 2012 after the DoJ found that the bank's U.S. branch "violated the Bank Secrecy Act by failing to maintain an effective anti-money laundering program."
When Deutsche Bank AG in 2017 received a $425 million fine from the New York Department of Financial Services for its involvement in the Global Laundromat, it was because the German bank fell afoul of the same act.
Affirmative money laundering
But the Bank Secrecy Act only covers U.S.-licensed banks. This does not include Danske.
Instead, U.S. regulators would have to bring a case against Danske under U.S. criminal money-laundering control statutes known as 18 U.S.C. sections 1956 and 1957, which prohibits engagement in money laundering, said Terence Gilroy, a partner at Baker McKenzie's compliance and investigations practice and previously the Americas head of financial crime legal at Barclays.
Danske is covered by these rules due to the illegal transactions that were cleared by U.S. correspondent banks — lenders that provide services on behalf of Danske.
Based on account statements, Danish newspaper Berlingske estimates that 70% to 80% of the suspicious transactions were in U.S. dollars.
Pursuing such a money-laundering case is "generally more difficult," said Gilroy, because it requires evidence of intent to promote the underlying criminal activity as well as knowledge that funds were derived from unlawful activity. This evidence is not needed under the Bank Secrecy Act.
"I have not seen an affirmative money laundering case against a major international bank, ever," said S&P Global Market Intelligence's ex-DoJ source, an attorney specializing in money laundering.
"Affirmative money laundering is not easy to prove. You have to show that the money was from a specified unlawful activity and that that particular money went through a correspondent bank," he said.
While it is not impossible for U.S. authorities to run a case against Danske under this regulation, he said it would require "a lot of forensic accounting" along with access to evidence that can confirm there was intent and knowledge about the dirty transactions, for example through an insider.
Read more: Money-laundering scandal to continue to hamper Danske Bank P&L in 2020
Alternatively, the U.S. could charge Danske with sanctions breaches. Such cases do not have the same evidentiary hurdles as a money-laundering case, as they generally require only proof that a bank's clients were U.S. sanctions targets or otherwise engaged in activities that are restricted under U.S. sanctions regulations, Gilroy said.
Sanctions breaches have led to some of the highest bank fines from U.S. authorities. In 2015, French bank BNP Paribas SA was fined a record $8.9 billion after violating U.S. sanctions against Sudan, Iran and Cuba.
But Gilroy said there is no indication in the public record that the Danske case is about sanctions. The bank itself has said there is no evidence that U.S. sanctions were breached.
Despite the challenge in proving that Danske knowingly laundered money, the bank may still decide to engage in settlement negotiations with the U.S. in order to end investigations, said the ex-DoJ source.
Public companies frequently choose this route, he said.
"A public company can't afford to take a massive case to trial; it takes too long and the stock price can't take the uncertainty," he said.
On Aug. 7, 2012, U.K.-based Standard Chartered PLC's share price fell 16% in just one day, after the New York State Department of Financial Services said it would hold a formal hearing on the bank's operating license over Iran transactions. On Aug. 14, 2012, a $340 million settlement was agreed and the share price began to recover.
Danske's share price has already dropped more than 55% since the beginning of 2018.
Gilroy said Danske will likely attempt to negotiate a so-called "global settlement," resolving the case with all regulators investigating the bank at once, in order to avoid "paying twice for the same offense."
He said a final resolution is unlikely to happen in 2020, and it could even extend past 2021.
Danske, meanwhile, said in an email: "We continue to cooperate with the authorities and make ourselves — and the knowledge we have — available to the investigations, but we are not able to estimate when the authorities will complete their investigations or speculate on the outcome."
Jyske Bank analyst Anders Vollesen estimates that Danske will have to pay a total of 13.5 billion Danish kroner, approximately $2 billion, to various authorities investigating the bank. The amount is a probability-weighted estimate, assuming a low likelihood of U.S. sanctions breaches.
Mads Thinggaard, an equity analyst at ABG Sundal Collier, estimates that Danske will make a 4 billion kroner, roughly $600 million, settlement with the Danish authorities only. This is based on the assumption that no U.S. sanctions were breached.
He said this corresponds to a settlement similar to that of ING Groep NV in 2018, where U.S. authorities closed investigations into a money-laundering case without enforcement, after the Dutch bank paid €775 million to settle the case with Dutch authorities.
As of Jan. 28, US$1 was equivalent to 6.79 Danish kroner.