Denmark’s biggest bank may have let its “efficient machinery” blind it to years of warning signals that something was seriously wrong, according to the head of the country’s financial regulator.
Berg, whose agency just published a scathing report after spending more than half a year digging into the details of anti-money laundering breaches at Danske’s Estonian branch, said the evidence he saw pointed to an environment in which employees weren’t comfortable bringing bad news to their superiors.
“Obviously that reveals a problem in terms of culture: It shows a very efficient machinery in terms of execution -- problems are dealt with -- but they’re not escalated,” Berg said.
An ‘Unforgivable’ Scandal
Danske Chief Executive Officer Thomas Borgen has apologized for failing to stop the bank from becoming a laundromat for alleged criminals who, according to the Berlingske newspaper reports that triggered the FSA’s probe, channeled billions of dollars from Russia, Azerbaijan and Moldova through its Estonian branch between 2010 and 2014.
The Danish government has called Danske’s role in the scandal “unforgivable.” The central bank says the case has put the whole country’s reputation at risk.
The regulator stopped short of taking actions against current Danske executives, but said that may change should new evidence emerge.
Danske, which has delivered record profits in recent years, has acknowledged it fell short in risk management. Borgen says measures have been put in place to ensure anti-laundering rules aren’t breached again. One Danske executive has left as a consequence of an ongoing internal investigation and, since last month, the compliance department has had to report directly to the CEO.
Borgen, who was in charge of international banking operations at Danske while much of the alleged laundering took place, won’t be asked to step down by a board that the FSA says was partly to blame for the laundering scandal. Berg points to a 2014 case in which warnings about Estonia from a Danske employee weren’t given enough attention at the board level.
“You have a situation in which a key staff member says this is the worst report he’s ever seen,” Berg said. “And then, shortly after, at a meeting of the board of directors, somebody says there’s no need to panic.”
“That exemplifies that something went wrong. I mean, how can somebody on the one hand be that alarmed and somebody else send that signal?”
Berg says Danske’s culture meant that the message had been watered down by the time it made it to the very highest levels of the board, which was a “mitigating factor.”
“They’re not completely excused, but they’re somewhat excused because the information that was escalated up became less and less candid in relation to the truth.”
The Scandinavian Way
Danske has until June 30 to live up to the FSA’s list of orders, including creating a better compliance function and holding about $800 million more in capital. The bank’s also been ordered to be more upfront with the regulator.
“Clearly it’s somewhat unusual for us to order them to make sure that what they report to us is actually correct,” Berg said. “That’s not something we have to do normally.”
Ultimately, what happened at Danske is an aberration from the kind of culture that tends to dominate Scandinavian organizations, Berg said. The bank would do well to adopt an approach more in fitting with the norms of the region in which it operates, he said.
“Having a culture in which people do challenge and bring bad decisions up the chain can be a challenge if you want to run a mean and lean organization,” Berg said. “However, I think the traditional Scandinavian approach of frank discussions and reaching a consensus before deciding on something has advantages in relation to better avoiding cases like this one.”
Danske could still face charges in Estonia. A spokeswoman at that country’s regulator said the agency was not in a position to comment on “further possible actions” given the ongoing review.