New information has come to light on a number of named clients with the Estonia branch of Danske Bank, raising suspicion that Denmark’s largest bank aided criminal instigators in smuggling fortunes out of Russia – in breach of international sanctions and legislation in several countries.
According to information obtained by Berlingske, four clients with the Estonia branch engaged in complex equity transactions using so-called mirror trading. Both experts and authorities say this method is commonly used for money-laundering and transferring money across borders under the radar of authorities.
The very same clients – four UK and Russia-registered companies with hidden owners – also engaged in similar shady transactions through another major bank, Germany’s Deutsche Bank, which was fined massively earlier this year in a case reported by US media. Regulators found that the bank breached money-laundering laws by not confirming the identities of clients nor checking their transactions for signs of money-laundering.
As early as 2014, Danske Bank’s own internal auditors warned in a letter to the bank’s top management in Copenhagen that there were suspicious trades. According to this letter, the clients behind these transactions appeared so suspicious that Dansk Bank was acting “in breach of money-laundering laws” – not least by not having verified the identities of the clients.
In their letter, the auditors did not specifically name clients engaged in these transactions, but Berlingske has information indicating that the clients include the four companies involved in the Deutsche Bank case.
According to Robert Kim, legal editor at Bloomberg BNA, the information shows “that Danske Bank may have been engaged in similar activity as Deutsche Bank, which received huge fines earlier this year.”
Jakob Dedenroth Bernhoft, an expert on money-laundering laws and head of the advisory firm Revisorjura.dk, says that “the overall picture clearly looks suspicious”.
“Everything here indicates that Danske Bank was rudely exploited by criminals wanting to get roubles out of Russia without the authorities knowing. And the bank helped establish a well-functioning money-laundering machine which would have been stopped immediately, had Danske Bank complied with money-laundering rules.”
Over the past year, Berlingske has revealed how suspicious money flows were channelled from the former Soviet republics of Moldova and Azerbaijan through accounts with Danske Bank Estonia, with no money-laundering checks performed by Danske Bank on these clients or their transactions. Recently, Berlingske has also described how staff at the Estonia branch actively hid suspicious clients from authorities.
The latest information, indicating a link to the Deutsche Bank case, raises concern among analysts and experts.
"I am concerned that Danske Bank will face heavy fines, as we have seen with other banks who have violated AML legislation. If Danske Bank has been involved in similar transactions as Deutsche, the risk of a fine of course increases,” says Andreas Hakansson, an analyst from the French investment bank Exane BNP Paribas.
In January this year, Deutsche Bank was fined more than 630 million dollars by UK and US authorities for “serious deficiencies” in relation to anti-money laundering controls and for having “missed several key opportunities to identify and interdict” the scheme, as the New York Department of Financial Services stated in its findings, where Deutsche Bank was fined 425 million dollar. In Britain, the fine was 163 million British pounds.
“If funds from these transactions reached the US financial system, either through further transfers from Danske Bank to US financial institutions or through clearing of US dollar denominated transactions through a US bank, it would be of interest to the US authorities, who have the power under US anti-money laundering laws to impose significant fines on banks,” says Robert Kim, legal editor at Bloomberg BNA and former manager of the AML regulatory enforcement program of the Financial Crimes Enforcement Network (FinCEN), part of the U.S. Department of the Treasury.
In October, Danske Bank launched an investigation into the situation at Danske Bank Estonia following Berlingske’s revelations of money-laundering issues. The latest information will be included in this investigation, says Danske Bank CEO Thomas Borgen in a written response:
“It’s too soon to draw any conclusions at the present time, but if irregular bond and currency trades have taken place in the Estonian portfolio of foreign clients, these will be uncovered by our investigation, and they will have consequences,” he states.
Mirror trades indicate criminal activity
Mirror trading in itself is not necessarily illegal, but authorities see it as “highly suggestive of financial crime” for purposes such as “capital flight, tax evasion, or other potentially illegal objectives”, as stated by the New York Department of Financial Services in January.
Simply put, the method used in the Deutsche Bank case involved the original instigators buying rouble-denominated Russian shares through intermediaries and shell companies running these transactions through Deutsche Bank in Moscow. The shares were immediately sold on through other companies using the Deutsche Bank London branch, with payment in dollars. In other words, this was the mirror trade.
This made it possible to channel otherwise largely immoveable fortunes out of Russia by converting them to dollars which are easily used across the globe – while the money trail was kept hidden from authorities. Both the bank and the intermediaries made a profit from each trade.
In Danske Bank, the mode of operation was practically the same, according to the letter sent by the bank’s internal auditors to the top management. Though this time, the trades primarily involved Russian government bonds which were deposited in Danske Bank’s account with the Moscow branch of US major Citibank, and then sold on through Danske Bank’s Estonian branch. According to L. Burke Files, a partner with the US firm Financial Examinations and Evaluations and an expert on financial investigations, both methods are considered types of mirror trading.
”The mirror trading could be laundering money from criminal origins or it can be simply flight capital – money and assets fleeing Russia. But even if it is money from legitimate sources – the mirror trading is a way of circumventing Russian law on converting rubles to other currencies. The bank is willfully aiding and abetting potential criminal behavior,” he says.
Anti-money laundering expert Jakob Dedenroth Bernhoft leaves no doubt that the customers and their transactions should have been reported to authorities by Danske Bank.
“The bank does not know the identity of the clients and the real owners of these companies, and the way that the Danske Bank internal auditors describe the set-up, it makes no financial sense to do these trades, since they often appear to be loss-making. In other words, it is obvious that something suspicious is going on which should have beeen reported immediately.”
Auditors warned top management
The top management at Danske Bank has long had detailed knowledge of suspicious clients and their transactions through the Estonia branch. In their letter to the Copenhagen Head Office, the bank’s internal auditors expressed concern over these transactions which involved “nine intermediaries in Russia” and which were “highly profitable” for the bank.
The bank had “no satisfactory documentation” for the real instigators of the transactions, which was “in breach of money-laundering rules”, the auditors concluded in their letter. Berlingske has had access to this letter and revealed some of its contents two weeks ago.
The letter also indicates that the branch management in Estonia were aware of these irregularities going back to 2012 and had long been “clearly conscious of the risk” involved in these clients.
Four companies and one Russian
The reports from UK and US regulators on the Deutsche Bank matter do not specifically name the company entities used for suspicious trades. Their names have, however, been revealed by US media organisations The New Yorker and Bloomberg which have covered the Deutsche Bank case closely – based partly on numerous anonymous sources.
According to both media organisations, the four companies Cherryfield Management Ltd., Chadborg Trade LLP, Ergoinvest LLP and IC Financial Bridge were behind a large number of the thousands of suspicious trades that were found to have taken place through Deutsche Bank. Both media also indicate that the companies were established by Russian financial intermediaries offering to channel dirty money out of Russia under the radar of regulators.
As Berlingske’s documentation shows, these same four companies also held accounts with Danske Bank Estonia which they used to carry out suspicious mirror trades.
The companies are registered in the UK or Russia through owners in well-known tax shelters such as the Dominican Republic and the British Virgin Islands, and are typically headed by strawmen in order to hide the real identities of the owners.
According to information obtained by Berlingske, Danske Bank chose to hastily shut down some of these clients in 2013. Yet these clients had by then already been customers with the bank for several years. And despite the shut-down, the nine intermediaries actually continued their suspicious trades into 2014, as was found by the bank’s internal auditors following a visit to the Estonia branch in February 2014.
In addition to the four companies, another name involved in the Deutsche Bank matter also had an account with Danske Bank Estonia: a Russian citizen by the name of Alexei Kulikov. He was reported by several media as having been arrested in the spring of 2016 – precisely over his role in the Deutsche Bank case. As reported by Bloomberg in 2016, Kulikov is alleged to have been linked to some of the intermediaries involved in the case and is believed to have offered bribes to Deutsche Bank staff for turning a blind eye to the suspicious trades.
Links to the Russian elite
It remains unclear whether the instigators behind the transactions through Danske Bank and Deutsche Bank are the same.
But according to Bloomberg and The New Yorker, the Deutsche Bank case links to the very top of Russia’s power elite. Several anonymous sources are said to have told both media that the money flows from the mirror trades can be traced back to prominent, wealthy Russians such as Igor Putin, a cousin of the Russian president, and the brothers Arkady and Boris Rotenberg, who own S.G.M., one of Russia’s biggest construction companies, and are allegedly close to President Vladimir Putin.
Since spring 2014 the Rotenberg Brothers have been on the US list of individuals sanctioned in response to Russia’s military intervention in neighbouring Ukraine. The sanctions specifically ban Western banks from allowing these individuals to send money out of Russia.
Danske Bank investigating trades
This new information follows previous revelations of Danske Bank failing to perform sufficient anti-money laundering checks. Just two weeks ago, Berlingske quoted other findings by the internal auditors in their 2014 letter. The letter also indicates that staff at the Estonian branch wilfully covered for suspicious clients to help them avoid being detected by Russian authorities.
Thomas Borgen, CEO of Deutsche Bank, does not wish to comment on the latest information and instead refers to the current investigation into the Estonian branch.
“It is important for me to get to the bottom of this situation, which is why we launched a thorough investigation of all foreign clients and transactions in Estonia from 2007 to 2015. This investigation is being carried out in collaboration with external parties to make sure that all aspects are covered. There is no doubt that we did not live up to our own expectations, or those of society at large, in Estonia in that period, so we need to use the findings of this investigation to make sure that something like this will never happen again,” Thomas Borgen says.
The investigation will run in collaboration with the legal firm Bruun & Hjejle, the consulting firm PwC and Danske Bank’s own newly established Compliance Incident Management team led by Jens Madsen, former head of the Danish financial crime unit SØIK and the police intelligence unit PET.
Thomas Borgen adds that Danske Bank “has not had any dialogue with the US authorities in connection with investigations into so-called mirror trading”.
Citibank has declined commenting on the bank’s role in the mirror trades.
The New York Department of Financial Services, which investigated the Deutsche Bank case, states in a written response to a request for comment that it “is unable to comment at this time”.
(Translation: Bibi Christensen)