The Nordic countries pride themselves on their reputation for honesty and high levels of trust.
But with several of the region’s largest banks mired in money laundering scandals and more facing criticism for lax controls, the shine appears to be coming off the Nordic business model.
Nordic banks were seen as the stars to emulate after the global financial crisis as many of them emerged in better shape than lenders from Germany, the UK or southern Europe. But now their shares are under pressure amid a growing number of allegations.
Shares in Danske Bank, embroiled in one of the largest money laundering scandals ever seen, have fallen by a half since February while those of Nordea, the region’s biggest lender with several compliance issues of its own, are down by a fifth, and others have also fallen. What has gone wrong, and how far could the scandals reach?
“I would be surprised if we didn't find more accounts across Nordic banks getting caught up in this scandal,” said Bill Browder, a prominent critic of the Kremlin who has filed criminal complaints against Danske and Nordea in multiple countries.
Much of the attention is focused on the Baltic region where Nordic banks established dominant positions in the 1990s and 2000s. Danske has said €200bn of non-resident money— from Russia and former Soviet states — flowed through its small Estonian branch between 2007 and 2015 with a large part of that suspicious. Mr Browder has claimed that $409m from an alleged Russian tax fraud passed between two Baltic banks and almost 900 accounts at Nordea, according to several criminal complaints to prosecutors in Sweden, Finland, Denmark and Norway.
“This has to do with banks expanding abroad. Greenfield expansion is incredibly difficult as there’s so much you don’t know about a bank,” said Bo Becker, a professor at the Stockholm School of Economics.
Following other corruption scandals involving Nordic companies, including Swedish telecoms operator Telia in Uzbekistan and Norwegian fertiliser group Yara in India and Libya, he said he developed a loose hypothesis about why things could have gone wrong. “Maybe coming from a low corruption environment makes it hard to operate in high-risk countries,” he said.
Mr Browder agrees. “The fact that these countries have a reputation for being so honest means they probably have a hard time concluding their fellow citizens can be dishonest and give them the benefit of the doubt even when facts show otherwise,” he said.
Nordea is one of the banks caught up in several different financial crime investigations. It is facing a US probe over potential sanctions breaches between 2008 and 2014 and a Danish police investigation into its anti-money laundering practices as well as Mr Browder’s complaints.
In 2015, it received public criticism from Sweden’s financial regulator that there was a high probability that “if people have tried to launder money or finance terrorism, they could have done so without Nordea having been able to detect this”.
Julie Galbo, the bank’s chief risk officer, said this was “a rude awakening” for Nordea, which had since been on a “maturity journey”.
“As you go through that journey, you learn about the flaws in the past and every time we learn about the ways of dealing with financial crime,” said Ms Galbo.
She said the reasons for the past vulnerability of Nordic banks were more complex than simply coming from high-trust, low-risk countries. “EU regulation has been arriving a little later than US legislation,” she said, adding that one big set of anti-money laundering regulations came into force just as the financial crisis hit Nordic banks with much of the worries centred on the Baltics.
As Torbjorn Hallo, an economist at the LO Swedish trade union congress, pointed out, a fall in gross domestic product in Estonia, Latvia and Lithuania caused big problems for the likes of Swedbank. “Ten years ago, the Swedish banking sector was almost collapsing due to their activities in the Baltics,” he said.
Ms Galbo said Nordea was now “in a much more comfortable place”. It has spent more than 100,000 hours this year training staff on anti-money laundering issues and about 5 per cent of its 30,000 employees work on combating financial crime.
She declined to comment on whether Nordea feared more might come, saying the bank’s “mindset is a bit different: we want to collaborate with anybody that helps us combat financial crime”.
The bank has not yet commented on the figures in Mr Browder’s complaint so the size and scale of any fraud allegedly flowing through Nordea’s accounts is unknown at present.
Focus has also centred on other banks’ activities in Estonia after Danske’s woes there. Attention was placed particularly on Swedbank whose share of cross-border payments in Estonia was second only to Danske, causing nervous investors to send its shares down by almost 10 per cent in the past month.
Swedbank told the Financial Times that it had conducted a special investigation looking at its customers and their transactions with Danske and had concluded that none of the names associated with the Danish bank were customers of Swedbank. It said it had a “fundamentally different” business model to the “niche operation” of Danske, because Swedbank is a retail bank in the Baltics, focusing on domestic and not non-resident customers. Unlike Danske, its market share for cross-border payments was less than its share based on its balance sheet size.
Still, Swedbank was criticised by Lithuania’s central bank for “deficiencies in [its] internal control systems”.
Handelsbanken, the only large Nordic bank not to go into the Baltics, received a similar dressing down by UK regulators for “serious weaknesses” in combating financial crime because of failings by senior management.
All Nordic banks have invested significantly in compliance in recent years, while Danske and Nordea are exiting their Baltic business.
Mr Browder has promised to dig into more banks as he follows the trail of transactions from the alleged $230m fraud. What he and others have found have emboldened critics of the lenders.
LO’s Mr Hallo argued that Swedish banks, whose assets dwarf the size of the economy, need to hold considerably more capital to protect taxpayers from their likely mistakes. “Sweden has a big banking sector and it comes with risks. Swedish banks seem to behave in ways that aren’t acceptable,” he said.
Flaws in informal regulatory style
It may not just be the banks. Regulators have also come in for heavy scrutiny over the Nordic money laundering scandals.
The Danish Financial Supervisory Authority, in particular, has attracted criticism for its supervision of Danske Bank after Estonian regulators issued several warnings about the bank. Jesper Berg, head of the Danish FSA, conceded last month that the regulator might have relied too much on what the bank told it rather than looking into the quality of the information itself.
“In hindsight the colleagues at the time might have wished we checked it more . . . There was a lot of information pollution out of the Estonian branch,” he added.
The regulator has now made Danske’s board and chief executive responsible for the information it gives it.
Bo Becker, a professor at the Stockholm School of Economics, said this highlighted a big potential weakness of Nordic regulators and their ability to enforce anti-money laundering rules. “The Scandinavian regulators have a particularly informal style. They rely less on documents and more on a softer approach of talking to people. They feel they have an advantage as they know what is going on, but they can miss some things,” he said.
Bill Browder, who has filed criminal complaints against Danske and Nordea, said another issue was relying on a patchwork of national rules to deal with transnational crimes. “While it’s easy for money launderers to transact through banks in multiple countries in a matter of days, it takes law enforcement authorities years to gather the evidence of those transactions and contributes to their reluctance to initiate investigations,” he said.
Rasmus Jarlov, Denmark’s business minister, said on Thursday that the FSA needed to be reformed. “Obviously, supervision must be strengthened and conducted in a different way than it has been done in the period 2007-2015 when we can see that Europe’s largest money laundering case was not detected,” he wrote on Facebook.
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