Nicola Sharp 15 Apr 2019 04:42pm

How money-laundering is hurting banks

The dismissal of Swedbank’s president and chief executive officer, Birgitte Bonnesen, in relation to a money laundering investigation is big news. But it may be far from the full picture

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Caption: Her sacking is a reflection of the money laundering challenges faced by banks

Her sacking came a day after the bank’s headquarters was raided as part of an investigation into the money laundering scandal involving Danske Bank’s Estonian operation – a scandal that saw Danske’s CEO Thomas Borgen forced out. Swedish bank SEB’s fund management arm has reduced its stake in Swedbank by more than 50% due to the scandal and Swedbank has also seen its chairman resign in the wake of the allegations.

Just as the scandal and the resulting fall-out did not end at Danske, it is surely unlikely to finish at Swedbank and the dismissal of Bonnesen. It would be a huge surprise if we did not see a very large and potentially very damaging ripple effect. Just what impact that would have on international banking is at this stage difficult to estimate. But it could be sizeable.

Many banks other than Swedbank will have had dealings with Danske. The extent of those dealings and the exact nature of them will determine whether any more banks are raided and whether any more senior figures are either sacked or forced to fall on their sword. But an educated guess would lead many observers to expect more financial institutions to face official scrutiny in relation to Danske.

For some, this could raise the issue of corporate versus individual liability. Or to put it in layman’s terms, can the whole bank be blamed for the laundering? Or should the blame be put on one person or a group of people within the bank?

In the UK, a bank could only be held to be liable if it can be proved that an individual involved in the laundering was senior enough – usually around board-level seniority – to be considered the controlling mind and will of the company. And this can be difficult, especially if the bank’s management structure is far from straightforward.

So, as yet, it remains to be seen if any other banks join Danske and Swedbank in coming under scrutiny for what happened in Estonia – and whether those banks and / or individuals within them will face the full force of justice.

Danske is facing preliminary charges relating to violations of Denmark’s anti-money laundering legislation. These charges relate to a lack of customer checks, staff training and risk management. More significantly, it is being investigated by the US Department of Justice and has seen ten former employees arrested in Estonia. But the fate of the bank and the individuals within it is, as yet, undecided. It is a difficult situation – and one that a number of banks that traded with Danske may currently be worried about facing.

For such banks, it is too late to talk of the need to ensure they are legally compliant or of meeting their money laundering obligations. Their immediate need is to seek relevant legal experts who can investigate the bank’s activities to determine what, if any, wrongdoing has been committed and then identify the most appropriate course of action to ensure the least damaging outcome possible. Until there is a strict liability offence of failure to prevent money laundering on the statute books, there is scope to mount a strong defence to laundering allegations.

Last September, the European Parliament approved a proposal for the European Union’s sixth anti-money laundering directive (6MLD). Under Article 7 of 6MLD, any company operating in an EU member state would be held criminally liable for failing to prevent money laundering.

This is a significant extension of current EU law. If and when it comes into law – although the possibility of this in a post-Brexit UK is unclear - it will make it far easier for the authorities to prosecute money laundering. But for now, as the Danske saga indicates, that is far from the case.

Nicola Sharp is a senior associate solicitor at Rahman Ravelli