Behind Danske Bank’s money-laundering scandal was a pervasive culture of silence that flourished despite the fact that many people knew or suspected for years that the bank’s Estonian branch was laundering billions of dollars.
It took a whistleblower who is a former Danske official to spark serious investigations into the tiny Estonian unit, which handled more than $235 billion in non-resident transactions from 2007 to 2015 – including an untold amount that was due to money laundering.
The Danske case shows the top-to-bottom failure of management, internal auditors and regulators to detect and stop the laundering of billions of dollars in criminal proceeds from Russia and other former Soviet states, while also demonstrating the impact that a whistleblower can have by speaking up.
“A lot of money was made in a tiny Estonian branch, which posted a huge profit margin and quick, large transfers in and out of the branch, which looked off,” Denmark’s Business Minister Rasmus Jarlov said.
“It’s the sort of thing that I would assume would catch the interest of both management and auditors.”
But it didn’t.
Red flags were repeatedly ignored, possibly because the Estonian branch was a bright, financial spot for the struggling bank.
According to media reports, the whistleblower – identified as Howard Wilkinson, a former head of trading for the bank in the Baltics – sent a number of emails to Danske’s top management in 2013 and 2014 expressing his concerns about suspicious transactions at the Danske Bank in Estonia.
The bank launched an internal audit that confirmed Wilkinson’s information, but it apparently took no other actions in response. Wilkinson resigned in April 2014, saying in an email obtained by the Financial Times that
“sad to say, it seems to me that things are totally broken here.”
https://www.ft.com/content/32d47fd8-c18b-11e8-8d55-54197280d3f7
Two years later, Wilkinson reportedly submitted his whistleblower allegations to the US Securities and Exchange Commission.
Although Danske does not have a US banking license, the US has an interest in the money-laundering case because, the whistleblower alleged, Deutsche Bank AG and Citigroup Inc. were involved with suspicious transactions at Danske Bank’s Estonian branch, according to the Wall Street Journal. Both banks fall under US jurisdiction, but Danske apparently does not.
In 2017, following news reports of money laundering by the bank, Danske hired an outside law firm to conduct an investigation into the charges.
The law firm’s 87-page report, released last month, confirmed the whistleblower’s allegations and noted several warning signs that Danske chose to ignore.
Unfortunately, there are no whistleblower programs in Europe as strong as those in the US, making it far less likely that whistleblowers will alert European regulators about financial fraud.
The EU Parliament is considering a directive that would offer confidentiality, but little else, to whistleblowers. Whistleblowers would even be required in many instances to report internally before they turn to regulators and enforcement agencies.
That is the wrong approach.
As is clear from the Danske case, companies can ignore internal complaints and often respond only when enforcement authorities raise questions. In addition, individuals who raise concerns through internal compliance structures frequently are retaliated against. Mandating that whistleblowers report internally, no matter the professional consequences, will discourage individuals from speaking up at all.
US regulators decided against an internal reporting requirement for individuals participating in the SEC and CFTC whistleblower programs, despite intense industry pressure. Importantly, US whistleblower programs also incentivize individuals to report corporate wrongdoing by offering them a financial reward in successful cases.
The results of the US programs are impressive. Over 4,400 whistleblowers reported alleged wrongdoing to the SEC in 2017 alone. Overall, whistleblower information has led the agency to order more than $1.7 billion in monetary sanctions against wrongdoers so far.
If the EU truly wants to protect and encourage whistleblowers, the Danske Bank scandal provides ample reasons why the EU Parliament should revise its approach and carefully consider what it can learn from the US whistleblower programs.
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