Richard Milne in Oslo
When Nordic banks started to flood into the Baltic countries at the turn of the century, it seemed a golden opportunity to establish a lucrative new business in a hyper-competitive industry.
“This was seen as the great new frontier,” says one Nordic banker involved in the expansion. Soon, various lenders including Danske Bank, Swedbank, SEB, Nordea and DNB controlled almost all domestic banking in Estonia, Latvia and Lithuania.
At the same time, the Baltic countries were positioning themselves as financial bridges between Russia and the EU. “It was a market where we would be able to provide some order and help the Russian middle class,” says the banker. “That was the business everybody started building up.”
The very same business, however, has now become a career-ending embarrassment as an extraordinary money laundering scandal involving Russian and other ex-Soviet oligarchs and criminals slowly spills its secrets. Not only are the revelations damaging Nordic banks and their regulators but also hurting the reputations of entire countries.
Swedbank — the Swedish bank that is the largest lender in the Baltics — was last week raided by police, fired its chief executive and faced the revelation that US regulators were probing its conduct .
Any hope that the departure of its chief executive might have bought it some respite was dashed on Friday when Swedbank’s chairman resigned and investors indicated an extraordinary shareholders’ meeting would have to be held — just weeks after the last one — to elect a new board capable of steadying the ship. The bank’s shares have fallen by a third in the past seven weeks.
This followed a similar train of events at Danske Bank, Denmark’s biggest lender, where a €200bn money laundering scandal last year led to the ousting of its chief executive and chairman, a halving of its share price, and criminal investigations against it in the US, Denmark and Estonia.
For the Nordic countries, whose way of life is built on high levels of trust, the impact could be disastrous. “It [the loss of trust] is the most unfortunate outcome of this,” says Louise Brown, chair of Transparency International in Sweden. “People in general don’t feel that banks are functioning properly or that regulators are credible. It will impact how people behave — if at elections or in everyday behaviour.”
The money laundering scandal is not the first time that the Nordic banks have faced problems in the Baltic region. The financial crisis hit Estonia, Latvia, and Lithuania particularly hard with their economies declining by up to a quarter. Swedbank needed government support to survive the impact.
Carl Bildt, Sweden’s former prime minister, says the presence of the country’s banks in the region has been crucial in a geopolitical as well as financial sense. “It’s one of our most significant contributions to the stability of the Baltic states. It has been immensely important for them as well as us,” he adds.
The Baltic economies quickly rebounded after the crisis and the region started providing good business for the Nordic banks. The return on allocated capital for Danske’s non-resident business in Estonia was an eye-watering 402 per cent compared with 7 per cent for the bank as a whole in 2013, the peak year for the alleged money laundering. The boom also turbocharged several careers: the heads of Baltic banking at both Danske and Swedbank were both promoted to group chief executive.
But after Thomas Borgen was ousted at Danske last year and Birgitte Bonnesen at Swedbank last week, questions are being asked about whether the profits the banks made in the Baltics were too good to be true. Danske has pledged to donate the DKr1.5bn ($230m) in profits it made in its Estonian branch to an independent financial-crime foundation — but investors fear fines it could face in the US are likely to dwarf that.
“All you need to say is ‘money laundering’ today and everybody heads for the door,” says a senior Nordic banker.
The Nordic banks have been caught out, he says, by the application of today’s views on doing business with Russia to events that took place 5-10 years ago.
“Every sensible banker would say that prior to 2012, every bank processed things they wouldn’t process today. Everybody was at fault,” he concedes.
What changed was two-fold: new, stricter anti-money laundering rules from around 2013; and Russia’s annexation of Crimea a year later, which changed the tolerance for Russian money in the financial system greatly. It is no coincidence that some regulators and banks appear to have woken up to the risks around 2014 and 2015. That is when Estonia’s regulator started a series of actions that led it to closing first Danske’s non-resident activities and then its entire operation in the country.
Some fear the hand of Russia in the subsequent allegations about Baltic money laundering.“We know there are active Russian disinformation operations to discredit the Baltics and their links to the west. It would surprise me if they didn’t see the opportunity here to pour some oil on the fire,” says Mr Bildt.
Kilvar Kessler, head of Estonia’s financial regulator, says of the potential for Russia to “weaponise” any money laundering: “I see those collateral damage risks. This risk is even greater than the financial information.”
Scandinavian banks control four-fifths of Estonia’s and Lithuania’s banking markets and two-thirds of Latvia’s. Regulators in both Estonia and Latvia have expressed fears that ultimately the scandals could drive the Swedish banks out of the region. “This instability — which is around these legacy issues — from a security perspective, it’s not that comfortable. I don’t like it,” says Mr Kessler. Mr Bildt adds: “There are people who have an interest in driving out the Swedish banks from the Baltics.”
Even after the flurry of revelations, there are still many questions to be resolved. There is little clarity about what actually happened inside the Nordic banks. A leaked report from Swedbank suggests about €135bn of high-risk, non-resident money flowed through its Estonian operations over a decade, according to Swedish public broadcaster SVT. But those figures are for gross transactions — they do not indicate how much was suspicious, let alone actual money laundering, which is notoriously difficult to prove due to the need to establish that the initial cash was illegally obtained.
Some Nordic bankers argue there is a media-led hysteria behind the allegations. “Most of the flows you see is money that is made legitimately. It was capital flight from Russia. This is not all terrorist or drug or criminal money,” says one senior banker. He says banks struggle to counter the allegations: “We don’t really have any way of fixing it. There’s no way you can go back into these transactions and do retroactive KYC [know-your-customer checks].”
Bankers stress their role should be to set up suitable processes that can identify risky customers and transactions but that policing actual money laundering is a matter for law enforcement. “Nobody really understands any of this. We’re getting a lot of concepts mixed up. I barely understand what money laundering is,” says the senior banker.
Some argue that while the spotlight is currently on the Nordic banks, others are arguably more culpable in what appears to be a giant money laundering scheme involving numerous banks and actors in the west. “What you see in Sweden and the Baltic states is peanuts compared with London. Is it criminal money? It’s murky territory. Russia in the 1990s was a big grey zone, and to decide what is good and evil in this is not easy,” says Mr Bildt.
What the scandal has shown, however, is deficiencies throughout the Nordic financial system — from boards and investors to regulators and governments. Both Danske and Swedbank have faced sharp criticism from investors for what is seen as their inept responses to the scandals. Danske spent months downplaying it, before admitting the volume of questionable transactions was more than 20 times higher than it had previously said.
Swedbank rushed out a heavily redacted report from external consultants that gave investors little new information. Investors criticised how the board stood by its chief executive right up until she was fired last week.
Ms Brown says Swedbank’s board and the regulators tried to downplay the scandal. But she also takes aim at shareholders, arguing that they protected themselves and directors at the expense of taking a proper grip of the problem. “There is a lack of accepting responsibility. Hopefully this will shake up how we look at corporate governance,” she adds.
Governments have also been forced to act. Fines for money laundering were often risible — SKr50m ($5.4m) was the maximum in Sweden until recently and still only €32,000 in Estonia, a level Mr Kessler himself calls “crap”.
Investigations by regulators and law enforcement agencies in the US, Nordic and Baltic countries will take years to play out, as will shareholder lawsuits.
Ms Brown says that Sweden needs to seize its chance for reform. “We have been unable to defend our brand and reputation. But we need scandals for things to change,” she says. “This is a good position to improve things.”