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Laundered money, Russian influence, and shady British corporate structures: the Danske Bank scandal has rattled Europe's patchy system of financial regulation. Danske's CEO Thomas Borgen was forced to resign in the after-math. How could EUR200bn worth of ex-Soviet and Russian cash finds its way into the Western financial system? Not with much difficulty, apparently.
Danske Bank, Denmark's largest lender, has published the report of its internal investigation which found that over half of the 15000 customers at its Estonian branch were "suspicious". Customers were found funneling ill-gotten money through the bank's 'Non-Resident Portfolio'.
These individuals and entities were largely registered in three main countries; Russia, the UK, and the British Virgin Islands. Despite a whistleblower coming for-ward in 2013, it took the bank almost a year and a half to begin to close down these dodgy accounts. The damning report suggests that this delay was down to the failure of the bank to properly investigate these allegations.
In fact, Danske failed at almost every stage since the establishment of its Estonian branch, following the purchase of Sampo Bank in 2007. A red flag was raised even at this very early stage by the Estonian authorities, who estimated that "billions of roubles" of illegal money were being funneled through Sampo every month.
While the branch closed 597 accounts following the investigation, the following nine years made it evident that the Estonian branch had not learnt its lesson. Partly, this was due to the failure of Danske to ensure proper oversight. Danske deemed it too expensive to migrate the branch onto its shared IT platform.
This catastrophic mistake was a major reason for the discrepancies between the Estonian branch's anti-money laundering procedures and other Danske branches. Danske's incompetence could cost it heavily. If found guilty of enabling money laundering, according to Bloomberg, it could face a fine of $1.2bn. In the most extreme scenario, Danske could be fined a massive $8.3bn. Only recently did Danske face a $2m fine by Denmark's financial regulator for violating anti-money laundering rules in its Lithuanian and Latvian banks.
The scandal forms part of a wider issue of illegal money being funneled from Russia and other Eastern European countries into the European Union. In 2014, a group of investigative journalists exposed the "Russian Laundromat", an extensive scheme to funnel over $20bn out of Russia through a net-work of international banks. In this sophisticated effort, money was transferred to Latvian and Moldovan banks from at least nineteen Russian banks. Danske's report identifies 177 customers who received payments from the key banks involved in this scheme, as well as seventy-five customers in the separate "Azerbaijani Laundromat".
The key strand linking these to-gether is the use of British "limited-liability partnerships" and "Scottish limited partnerships" to handle this money. A Transparency International report stated that there had been an unusual 430 per cent rise in new registrations of SLPs be-tween 2007 and 2016. The murky reason behind this sudden popularity seems to be that LLPs and SLPs are the preferred vehicle for money laundering across the globe. Over 100 SLPs were involved in the "Russian Laundromat" scheme, and a shocking 71 per cent of SLPs in 2016 were controlled by anonymous companies registered in tax havens such as Belize and the Seychelles.
In 2013, over one thousand customers of Danske Estonia were registered in the UK. The popularity of using British shell companies is partly explained by the simplicity of setting up a company. It costs £12 and just 24 hours to set up a company in the UK. LLPs do not even require real people to be partners; therefore they can be held anonymously by two foreign companies, giving them a "UK wrapper".
To compound this, Companies House has limited powers to investigate the companies on its register. If the UK is to "lead the world" on fighting corruption and financial crime, one could argue that it needs to start with a far more rigorous approach to reforming its own current regulations. The British system does much to compound the problem of dirty practices, with dire effects.