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Danske Bank's Estonian operations allegedly used to launder US$8.3b

As the laundering allegations balloon, public indignation towards Danske is mounting. The government and central bank say the case risks hurting the reputation of the whole country.


DANSKE Bank A/S's Estonian operations may have been used to launder as much as US$8.3 billion in a case that has rocked Denmark and triggered calls for tougher penalties from the country's political establishment.

The amount, which represents roughly a third of Danske's market value and almost 3 per cent of the Danish GDP, is more than double that previously estimated, according to figures first reported by Berlingske and confirmed by Bloomberg. The alleged illicit transactions span the years 2007 to 2015.

Shares in Denmark's biggest bank opened more than 3 per cent lower in Copenhagen on Wednesday, making Danske the day's worst performer in the Bloomberg index of European financial stocks, which was little changed.

"It's not clear what the consequences might be as the volume of this case is much bigger than anyone could have imagined," said Christian Thatje, an equity dealer at Sydbank A/S. "This case brings a lot of uncertainty and investors don't like that."

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Danske Bank's riskiest euro and dollar bonds also lost ground on Wednesday morning. The 7 per cent dollar contingent convertible bond dropped a cent to 97.1 cents on the dollar, while the 5.76 per cent euro CoCo fell to its lowest level since January 2017.

It is not known who exactly is behind the transactions, but previous leaks showed money made its way from Russia, Moldova and Azerbaijan through Danske's laundromat. The laundering is also thought to have involved funds linked to an illicit scheme exposed by Sergei Magnitsky, an auditor who died in custody in Russia in 2009.

Bill Browder, who was expelled from Russia in 2005 after his firm Hermitage Capital Management released documents it said exposed corporate and government corruption, said he will use the latest allegations against Danske as the basis for an official complaint.

"We are working on a new criminal complaint including these discoveries, which we intend to file with the Danish and Estonian law enforcement authorities shortly," Mr Browder said by e-mail on Wednesday.

Danske Bank expects to release the findings of an internal investigation of the money laundering breaches in September. Before Wednesday, the bank had said that it could not comment fully until the results of that probe are ready.

After the latest allegations, Danske's head of group compliance Anders Meinert Jorgensen said: "It is too soon to draw any conclusions about the extent of the potential money laundering in Estonia ... That is the reason why we have not ourselves published figures or commented on speculations about potential amounts. On several occasions, however, we have said that the extent seems to be somewhat larger than previously estimated," he said by e-mail.

The bank is continuing to cooperate with the authorities and provide material "on an ongoing basis to the extent that this has not already been done", Mr Jorgensen said.

Jesper Nielsen, head of banking in Denmark at Danske and a member of the executive board, said the laundering investigation is taking up a "big chunk of management's time", in an interview conducted before the latest allegations became public.

"Obviously it takes some time and gives us some worries in terms of how we are perceived in the market," Mr Nielsen said. "This impacts the story around Danske Bank."

Denmark's business minister Rasmus Jarlov said this week that the bank's internal probe won't be enough to satisfy the government, and said he was awaiting the findings of other investigations. The government and central bank have said the case risks hurting the reputation of the whole country, which has otherwise been associated with extremely low levels of corruption.

Danske was reprimanded in May by the Financial Supervisory Authority in Copenhagen and ordered to hold an additional five billion kroner (S$1.07 billion) in regulatory capital, among other disciplinary measures.

Chief executive officer Thomas Borgen has publicly apologised for the bank's failure to act sooner. Last month, he revealed that he had even discussed with the board the option of stepping down. But the board concluded he should remain so that the bank could draw on his experience to avoid a repeat.

Denmark is in the process of tightening its laundering laws in response to the Danske scandal, but Mr Jarlov has lamented the fact that it won't be possible to apply the legislation retroactively.

As the size of the laundering allegations balloons, public indignation towards Danske is mounting. Per Hansen, an investment economist at Nordnet, says the latest figures "of course place an increasing amount of pressure on the executive management" at Danske.

Before Wednesday, the stock reaction had been relatively muted. But "investors are responding this time, given the sheer size of the scandal", said Mr Thatje at Sydbank. "It's the biggest known ongoing money laundering case worldwide and that's putting pressure on the management and raises questions about what the consequences will be." BLOOMBERG

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