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Nordic banks face more scrutiny over Baltic ties: anti-money laundering expert

After Estonia revealed huge sums flowed through its banks over an eight-period, a leading financial crime analyst who helped reveal the scale of wrongdoing at Danske Bank A/S said suspicions of money laundering would taint the wider Nordic banking system.

Scandinavian banks dominate the banking systems of the Baltic countries with a 95% share of banking sector assets in Estonia, 80% in Lithuania and more than 50% in Latvia. The main operators in the Baltic region are Swedbank AB (publ), Skandinaviska Enskilda Banken AB and Luminor Group ABowned by Nordea Bank AB (publ) and DNB Bank ASA until last month when private equity firm Blackstone Group LP paid €1 billion for their 60% share of Luminor while the two banks retain a 20% stake each. Danske sold its retail operations in Latvia and Lithuania to Swedbank.

Graham Barrow, a U.K.-based bank adviser on anti-money laundering measures most recently at Deutsche Bank, said the Estonian central bank's revelation that more than $1 trillion flowed through banks operating in the country in the nine years to 2017 was significant. Barrow examined accounts at Danske on behalf of Danish newspaper Berlingske which revealed the scale of the money laundering at the bank's Estonian branch where it has admitted a "large" part of $234 billion which flowed through its account is suspicious.

"Given the criminal investigation by the U.S. of Danske and the high likelihood that there is more to come in respect of other Nordic banks I think they are in for a torrid time," he said.

Systemically important

"Their survival will depend on how much they are regarded as systemically important to the Nordic financial system and I suspect they will survive largely because the entire Nordic banking system is in jeopardy [due to scale of potentially suspicious transactions]."

Barrow was brought in by Danish newspaper Berlingske to examine leaked accounts which earlier this year showed $8.3 billion was allegedly laundered through Danske's Estonian branch between 2007 and 2015.

The Estonian central bank has released information showing that its banks handled $1.27 trillion in cross border flows between 2008 and 2017. The EU member has a population of just 1.3 million and a GDP of $25.92 billion.

The bank released the figures without commenting on whether the sum was suspicious. It includes amounts for residents and non-residents. Bloomberg News reported that about $900 billion of the sum was made up of non-resident cross border transactions. Though the central bank later said the sum related to all flows including imports and exports and securities buying, Estonia's exports during the period amounted to $232 billion. In May this year Estonia's own Financial Intelligence Unit said more than $13 billion had been laundered through the country's banks from 2012 to 2016.

The Baltic region has seen a number of extremely damaging scandals affect its banking sector. In February, Latvia's third largest bank ABLV Bank AS was closed after the U.S. Treasury accused it of "institutionalized money laundering" including helping finance North Korea's nuclear program. The U.S. told Latvia in March that its banks were still involved in money laundering.

Latvia's central bank governor, Ilmars Rimsevics, who was a member of the European Central Bank's governing council and governor of the Bank of Latvia for the past 16 years, has been arrested and is facing prosecution for bribery. The Council of Europe this summer identified serious shortcomings in Latvia's anti-money laundering regime.

Nordic banks

The figures released by the Estonian central bank sent shares in Nordic banks lower but both Nordea and Swedbank issued statements stating that, as far as they were aware, they were not under investigation for money laundering.

Swedbank also pointed out that its non-resident portfolio of customer accounts — a key pointer to money laundering in previous cases including Danske's — represents just 1.5% of all Swedbank's customers in the Baltic region. It said that residency is a vital part of its know your customer processes. It also provided accounts to customers with clear local business ties.

Blackstone's purchase of the majority stake in Luminor was also a vote of confidence in the region, according to the private equity firm's senior manager, Nadim El Gabbani, who told the Financial Times the Baltic market was structurally attractive, disciplined and rational and noted the countries were growing faster than the rest of Europe.

DNB, which is planning to retain its minority stake in the business for time being, said the bank was well-placed to benefit from further growth in the Baltics.

Latvia's Prime Minister, Maris Kucinskis, has backed suggestions from the EU that the European Banking Authority take more responsibility for financial crime, with anti-money laundering measures currently the responsibility of individual states.