By: Noah Wortman, Alistair Croft, and Jeremy Marshall of IMF Litigation Funding Services Limited
“This is the biggest scandal, which we have now in Europe, which is also a very unpleasant lesson [showing] the need to be much more vigilant and [for] much more prudent checking [of banks’ activities].” Vĕra Jourová, EU Justice Commissioner
Danske Bank, Denmark’s largest lender, has gone from being one of Europe’s most respected financial institutions to being caught-up in one of the biggest money laundering scandals in history. Indeed, the ripple effects of the over €200 billion in laundered money apparently going through its accounts has been felt across the globe. Other global financial institutions, such as Deutsche Bank, Bank of America and JPMorgan Chase, have also been implicated in this tangled web of non-resident money flowing through Danske Bank’s Estonian branch from 2007 through 2015. Moreover, investigations have been commenced by the authorities in Denmark, Germany, France, Estonia, the UK, and the US.
The Bruun & Hjejle Report (the “B&H Report”) was released on September 19, 2018, summarizing the results of an investigation into money laundering incidents affecting the so-called “Non-Resident Portfolio” (the “Portfolio”) at Danske Bank’s Estonian branch.
The scandal began in 2007, when Danske Bank acquired Finland-based Sampo Bank, which also had an Estonian branch. Over the nine years from 2007 through 2015, at this particular branch, 44 percent of all deposits came from non-residents of Estonia—approximately 10,000 of the branch’s customers. The B&H Report also examined an additional 5,000 accounts. Between 2007 and 2015, these same customers conducted 7.5 million transactions (not including transfers between customers). In total, that flow of money added up to about €200 billion. Of the 6,200 customers the B&H Report had examined as of its publication, it stated the vast majority of these customers had been deemed suspicious and it was therefore expected that a large number of the payments were equally suspicious.
Moreover, in 2007 Danske Bank received specific information from the Russian Central Bank, through the Danish Financial Supervision Authority, which indicated possible “tax and custom payments evasion” and “criminal activity in its pure form, including money laundering”, estimated at “billions of rubles monthly”. In addition, as early as 2007, the Estonian Financial Supervision Authority published a critical report on the bank’s activities.
To make matters worse, according to the B&H Report, 42 employees and eight former employees may have been colluding with criminals to maintain this money laundering activity. The B&H Report states that two of the main perpetrators were the Russian and Azerbaijani “Laundromat” operations.
Despite all of this suspect activity, and although a number of whistleblower reports were received, Danske Bank did nothing. These claims were not properly investigated and faded into the woodwork.
Although the allegations date back to 2014 (and before), Danske Bank had not previously provided any substantial disclosures in relation to money laundering. There was no specific reference to problems in Estonia in Danske Bank’s annual report of 2014 published on February 3, 2015 (although the 2014 Risk Management document published at the same time, clearly refers to a Group Compliance and AML function, operating within Danske Bank). It was not until Danske Bank published its 2017 Annual Report on February 2, 2018 that it made a more focused disclosure. The Annual Report stated:
“During the year, serious questions were raised regarding events that took place in our Estonian branch in the now terminated non-resident portfolio in the period between 2007 and 2015. It appears that our Estonian branch may have been used for money laundering. Both the Board of Directors and the Executive Board take this very seriously. Consequently, in collaboration with independent experts, we have launched thorough investigations into the matter.” (Emphasis added).
“On the basis of suspicions that Danske Bank in Estonia may have been used for money laundering, the Group launched investigations into the non-resident portfolio at our Estonian branch between 2007 and 2015. The conclusion of a root cause analysis was that several deficiencies in the period from 2007 to 2015 led to the Estonian branch not being sufficiently effective in preventing it from potentially being used for money laundering. As a result, the Group chose to expand its investigation to cover all customers and transactions in the non-resident portfolio at the Estonian branch in that period.” (Emphasis added).
As is evident from these statements, Danske Bank was giving the impression that everything was very much “up in the air” and that they didn’t have full knowledge. The B&H Report suggests that the reality was very different.
Danske Bank’s share price has suffered significant falls as the market came to appreciate the magnitude of the problem and non-Danish regulators began to take an interest. In total, since July 2018, Danske Bank’s share price has fallen over 30%. Morgan Stanley estimated that Danske Bank could be fined up to $9 billion, the scandal claimed the scalp of the former CEO, Thomas Borgen, and a major shareholder demanded the head of the Chairman as well who has now since departed.
Shareholders Have Ability to Seek Redress to Recoup Losses
IMF Litigation Funding Services Limited (“IMF”), the European arm of IMF Bentham Limited, is proposing to fund (through its group investment vehicles) a shareholder action on behalf of institutional investor shareholders of Danske Bank (CPSE: DANSKE; ISIN: DK0010274414). The proposed action is open to investors who suffered loss after acquiring ordinary shares in Danske Bank during the period from April 29, 2014 through September 19, 2018, inclusive (the “Relevant Period”). The action will be led by specialist Danish law firm NJORD Law and leading global litigation law firm Quinn Emanuel.
The claim is against Danske Bank, due to the false market that was created as a consequence of its failures to adequately disclose inside information in contravention of the Danish Securities Trading Act (“DSTA”) and applicable EU anti-money laundering regulations, arising from the suspicious, non-resident money transactions which flowed through Danske Bank’s Estonian branch from 2007 until 2015.
Current and former Danske Bank shareholders who acquired shares in Danske Bank in the Relevant Period may be entitled to seek compensation for damages or losses pursuant to DSTA, national tort law and/or other legislation as a result of Danske Bank’s conduct.
For more information please contact the authors at firstname.lastname@example.org or please visit https://www.imf.com.au/danske.
Novel liquidity instruments need of the hour for Islamic financial institutions
This content is by Marmore Mena Intelligence.
Islamic finance is still a relatively small part of the broader financial services industry. Compared to the conventional industry, Islamic finance lacks adequate liquidity instruments as Shariah restrictions limit the number of instruments that could be used for liquidity management. Islamic interbank and money markets also lack the volume and diversification of conventional markets leading to a sectoral disadvantage from the outset.
Review of 2018
Since 2015, there has been a reduction of liquidity in the banking systems in the Middle Eastern region, mainly due to reduced deposit inflows because of low oil prices and a high dependence on deposits from governments and their related entities. This situation has improved in 2018 after oil prices stabilized and governments issued large bonds and injected liquidity locally. However, the dearth of Islamic liquidity management instruments has been a challenge in Islamic banking ever since its inception. The instruments that meet both the industry’s needs and the stakeholders’ expectations are relatively few. The excess liquidity of Islamic banks limit their profitability potential and therefore their long-term viability, it also dampens the effect of monetary policy interventions in the financial markets by central banks.
The onset of Basel III liquidity coverage requirements is likely to exacerbate the problem as Islamic banks will need to maintain high quality short-term liquid assets. As a result, Islamic banks, which are concentrated in the Middle East, hold 8.8% of their assets in cash and equivalents and 9.8% of their assets in placements at other financial institutions. Currently, Islamic banks place liquid funds through short-term instruments such as commodity Murabahah that are non-tradable on secondary markets — Shariah rules prohibit trading on receivables. Moreover, stakeholders typically view these inflexible instruments as artificial replications of interest based transactions. Alternative instruments are gauged against three criteria: whether they are as cost-effective as commodity Murabahah, whether they offer the same or enhanced flexibility and liquidity, and whether they offer sufficient scale to meet the current and anticipated future needs.
Preview of 2019
New strategies to meet the liquidity management needs of Islamic banks and Islamic windows at conventional banks are being developed. These products — including National Bonds’ Sukuk Trading Platform addresses both the operational needs of Islamic banks and preferences of their customers and external stakeholders. In liquidity management, it has the potential to be both flexible and authentic, offering an investment destination for surplus funds or a tool with which financial institutions and central banks can look to as a model for providing liquidity to banks when needed. Islamic banks will shift toward Islamic liquidity management instruments that increase their ability to place more of their surplus liquidity with other banks or with the central bank.
Closer integration may also lead to increasing Sukuk issuance, which could reduce Takaful operators’ exposure to riskier real estate and equities investments or help banks manage their liquidity. Sukuk could also provide investment funds with additional fixed-income revenue, and encourage a shift toward more profit-and-loss sharing instruments. In addition, Islamic banks could start offering Takaful products more systematically if the relevant regulation is in place.
Standalone Islamic banks will have to look to government Islamic T-bills, or other instruments to place most of their surplus liquidity. Some of the remainder will be held on balance sheets as cash in order to manage unexpected shocks because of a smaller set of central bank instruments. A portion of the assets they hold today as cash will be shifted to interbank placements in order to generate yields. However, given the cyclicality of excess liquidity in GCC banks, there will probably be a continued reliance on commodity Murabahah, which amounts to an effective outsourcing of some of the cash management responsibilities at Islamic banks to Islamic windows, which have a deeper set of options and more access to international liquidity management instruments.
Islamic liquidity management instruments are still at their infancy, and the main challenge is in providing liquidity management tools that can compete with conventional ones. Therefore, Islamic financial institutions should invest more in product development. In particular, as Islamic finance grows, the problem of liquidity will grow bigger, as central bank support would become expensive particularly for larger institutions.
Although a variety of approaches have been adopted in different jurisdictions, much work remains to be done to diversify the mix of available options for Islamic banks to manage their short to medium-term liquidity. Further, the divergence in Shariah interpretations across different jurisdictions has so far stifled a truly global approach toward tackling this issue. In this regard, the setting up of organizations providing Shariah standards such as AAOIFI and the IFSB are playing an important role in bridging this gap. Liquidity management continues to remain at the core of the issue that regulators need to address to ensure the healthy growth and development of the Islamic banking sector.
View the full briefing at Marmore Mena Intelligence.
The Month That Was – Equities off to a flying start in 2019
This content is by Marmore Mena Intelligence.
GCC equity markets greeted its investors in celebratory fashion, recording its highest monthly gains in over two years. Investor sentiment was bullish, as the influx of foreign funds, uptick in oil prices and expansionary budget policies are all expected to support corporate earnings growth in 2019. The story was no different in the global markets, as equities continued to be the flavour of the month among investors. The U.S. and Emerging Markets witnessed a reversal in fortunes, putting the misery of 2018 behind them. A recovery in oil prices was also underway, as U.S and China take steps to resolve the trade dispute while Saudi Arabia affirms its commitment to avoid a supply glut.
We see the following three issues as key developments during the month of January:
GCC State Budgets 2019 – Still in expansionary mode: Indications from GCC countries largely seem to suggest that they are gearing up for another year characterized by spending to revive economic growth. Development of non-oil sectors continues to be the common theme among GCC budgets, as GCC economies remain upbeat regarding revenue inflows, with oil prices projected to increase in 2019.
View the full briefing at Marmore Mena Intelligence.
Sustainability in Credit Under the Spotlight
This partner content is by MFS Investment Management.
by Lior Jassur, Director, Fixed Income Research – Europe, and Melissa Haskell, Director, Fixed Income Research – North America
Integrated approach — Incorporating environmental, social and governance (ESG) factors in the fixed income investment process is best done by embedding ESG analysis in the credit analysts’ and portfolio managers’ research process, rather than relying on exclusions or investment decisions based on external providers of ESG ratings.
Materiality and time horizon — The complexity of markets requires that investors determine the potential materiality of ESG risks and opportunities as well as the timeframe within which they are expected to have an impact on borrowers’ credit quality.
Active management — Due to the changing nature of ESG factors and their effect on investee companies, we believe that active managers are well suited to assessing ESG risks and opportunities. Incorporating ESG factors allows for an understanding of borrowers from the viewpoint of various stakeholders and provides a means of engaging with management.
By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.
1 week ago
Norway Sovereign Fund Gets Tougher on Executive Compensation
1 week ago
Norway SWF Scales Back Private Properties, Allows Listed Real Estate
2 weeks ago
Asian AUM: Schroders Buys Thirdrock Group’s Wealth Management Business
2 weeks ago
Japan’s GPIF Has Rough Third Fiscal Quarter 2018
3 weeks ago
China’s One-Belt, One-Road Encounters Rough Waters in Greece
2 weeks ago
QIC and Northeastern University Broker Campus Parking Lot Deal
2 weeks ago
Libyan Investment Authority Chairman Detained, Wealth Fund Supports Chairman
2 weeks ago
Venezuela’s Maduro Sells Gold, as USA Tightens Screws