Whitewashing a $10 Billion Money Laundering Scandal

In just two days in February, Sweden’s oldest bank saw more than one fifth of its market value wiped out. Allegations that Swedbank AB had facilitated money laundering spooked investors who hadn’t viewed the lender’s leading market position in the Baltics as big a risk. The bank’s response to a scandal that has now engulfed a large part of Europe’s financial industry has been inadequate. Its effort to contain the damage and protect senior management is in danger of backfiring.

Amid allegations that clients moved 95 billion kronor ($10.3 billion) of suspect funds through the bank, Swedbank published a hastily commissioned review by the Forensic Risk Alliance into 50 clients that may have been responsible for about 40 billion kronor of transactions. It was improbable that the investigation would reveal much in just a few weeks. The forensic accounting group wasn’t even the bank’s first choice: it stepped in to replace EY, which Swedbank had to drop because of the accounting firm’s links with $230 billion of suspect transactions at Danske Bank A/S.

The FRA report – a thinly filled, heavily redacted 24 pages – shows the suspect client accounts were terminated as of May 2017. The bank said it will now move to a second phase of analysis, digging deeper into the 50 relationships to outline their corporate structures and draw up organizational charts. That information won’t be made public, and the bank doesn’t plan to share anything else with the wider world, neither on the extent of the potential flows beyond those 50 accounts, nor on how it dealt with them.

That would be a mistake. If Swedbank and its peers are to show they are serious about mapping out how dirty money flows around Europe and that they really are doing all they can to combat future crime, they will need to share considerably more information.

Consider what FRA’s report didn’t address:

  • What was the sum that flowed through the bank?
  • How quickly did Swedbank suspend suspect activities that were flagged?
  • Who terminated the relationships? The bank or the client?
  • Were Swedbank’s systems and controls fit for purpose?

On a call with analysts, Swedbank’s head of investor relations said there is no need “for a deeper or broader, a wider investigation to be presented to the market,” because the report confirms “the bank is taking actions and have taken actions throughout the year.”

But all of these are crucial details if outsiders are to assess if the bank is equipped to prevent increasingly more complex and sophisticated money laundering frauds. In fact, systems and processes weren’t even the scope of the FRA review. For now, we only have management’s word for those being up to scratch. The same team is also being investigated for potentially breaching insider information rules after giving the company’s biggest investors advance warning of the allegations when they were first reported by a Swedish broadcaster.

It’s no surprise the report was met by a chorus of disappointment. From shareholders to Bill Browder, the U.S. investor who has made combating Russia money laundering a life cause, there were calls for more transparency.

Europe is only just starting to piece together the puzzle of how Russians were able to move billions of their money illicitly out of their home country via banks in the Baltic region and their correspondent lenders. Even Swedbank admitted that its “understanding and the knowledge of this topic is quite low.”

The region’s deeply fragmented regulatory and police effort to prevent money laundering has been a proved a boon for criminals. It’s time for banks to do their bit by being thorough in their own learning and showing exactly what went wrong at their end.