According to Reuters yesterday, the Danish Prime Minister said that he is “shocked” to discover that Danske Bank was engaged in money laundering on a staggering scale through a tiny Estonian branch. “Shocked” must translate differently in Danish or perhaps the prime minister would have chosen another word to avoid sounding as duplicitous as Claude Rains when handed his winnings in the midst of his shut-down of gambling at Rick’s Place in Casablanca. If the Russian central bank – of all money-laundering authorities – indeed told Danish authorities in 2007 that Danske was money laundering, then the scale must have been so astounding even then that the usually-nonchalant Russians were worried. That the amounts involved exceeded not only Estonian, but also Danish national totals might have been a bit of a clue, as indeed they should also have been at a Latvian bank which, along with its regulator, is in long-delayed disgrace for its own astonishing money-laundering operations. The scale here is so large as to suggest that these banks were money launderers, not banks. They and all too many others like them pose two fundamental AML-policy questions. First, can there really be an effective global enforcement network based on cooperative information sharing and home-country authority? And, even if there’s still some hope for this – which I doubt – can vigilant, compliance-oriented banks really “de-risk” without putting themselves and financial-market integrity at still greater risk?
First to the reality of AML enforcement versus all the high-minded commitments as recently as the last G20 finance ministerial. So far, the EU has been unable to deal effectively with the well-known money laundering operations in all too many member nations. Dithering in the EU so frustrated the U.S. that it decided simply to block the Latvian bank from dollar-clearing, thus ensuring its demise. If the Danske Bank falls into this same abyss of ongoing negotiation and senior tut-tutting, then I expect the U.S. to also sanction Danske Bank.
Demark is bigger and strategic questions are more important, but Treasury is reluctant to hammer AML and sanctions standards hard at U.S. banks and tolerate them abroad. U.S. regulators came under harsh criticism in 2012 when they allowed Standard Chartered to retain its U.S. charter despite egregious money-laundering and sanctions violations. Thus, even if Treasury stays its hand, federal and state authorities won’t, with Danske Bank’s U.S. charter at risk even if it’s allowed to continue dollar-clearing on a global basis.
The solution to these host-country enforcement actions would be home-country intervention. Denmark not-so-coincidentally hiked its AML penalties after the Danske Bank case came to light, but its credibility is so marred that even this is likely to do little to stay U.S. hands. That so huge a violation could occur at a nation so famed for transparency and honesty also suggests that Financial Action Task Force and G20 initiatives to limit AML and sanctions violations will take even more years and end at least as indecisively as progress to date suggests. Denmark isn’t the only well-meaning country with significant AML weakness – the U.S. is no paradigm given its inability to deal with shell companies to ensure accurate knowledge of real beneficial owners.
Which brings me back to “de-risking.” In the wake of recent enforcement actions, banks in AML-vigilant regimes have sharply reduced their exposure to foreign correspondents and customers that pose AML or sanctions risk. Notably, JPMorgan apparently pulled its ties to Danske Bank’s Estonian branch in 2013, action that should have been an alert to Danish regulators even if they for some reason discounted the Russian warning five years earlier. As de-risking continues, global regulators have become increasingly worried that emerging-market economies will be isolated from global finance at great cost to growth.
But, in the absence of an effective regulator, what choice have scrupulous banks? Signal problems to regulators as immune to them as those in Latvia and Denmark, going on to continue business with dubious correspondents? De-risk from nations and financial institutions with no AML risk obvious to all but the home-country enforcement agency (if any there be)? Do right by emerging-market growth and run the risk of billions in penalties and years of reputation risk?
Banks will clearly continue to de-risk. Denmark and far too many other nations give them no choice. If heads of state, the IMF, the EU, and other global agencies really want to stop de-risking, they’ll have to stop AML risk where it starts: decades of negligence dealing with known risks and abundant political self-interests that keep it this way.