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Taking stock of 2018’s money laundering scandals: When is enough enough? (Part 2)


The first half of this two-part blog focused on the role that some of the world’s largest financial institutions played in facilitating illicit financial flows in 2018. Most of those cases centered on inadequacies in their anti-money laundering (AML) controls that resulted in record-breaking fines. The second half of this blog will look at the worst offenders of last year. In some cases, the banks had to be shut down for blatant links to criminal activity and sanctions breaches. In others, several ongoing criminal investigations looking at hundreds of billions of illicit money have set new records in the world of financial crime for the wrong reasons.

5. ABLV Bank Latvia
In February 2018, the US Department of the Treasury accused Latvia’s third largest bank of institutionalized money laundering, having facilitated illicit transactions for sanctioned entities in North Korea, Azerbaijan, Russia and Ukraine. The Treasury’s Financial Crime Enforcement Network (FinCEN) named ABLV as an institution of primary money laundering concern and invoked Section 311 of the USA PATRIOT ACT, which prevented the bank from opening or maintaining a correspondent account in the United States. The enforcement action by the US resulted in an exodus of non-resident deposits from ABLV–estimated at $600 million within the space of a week–and the inability of the bank to obtain emergency liquidity, ultimately leading to the bank’s closure.
4. Pilatus Bank
In November 2018, the European Central Bank (ECB) withdrew the license of Malta’s Pilatus Bank following allegations of sanctions evasion, money laundering, and other criminal activity. The ECB’s decision came after US authorities charged the Iranian-born owner of the now-defunct bank, Seyed Ali Sadr Hasheminejad, with organizing a scheme to evade US sanctions against Iran by illegally funneling more than US$115 million from Venezuela to Iranian-controlled companies.

Pilatus Bank was also reported to have been linked to the murder of Maltese journalist Daphne Caruana Galizia, who had been reporting on allegations of government corruption and money laundering in the months before she was assassinated in a car bombing in October 2017.
3. 1MDB and Goldman Sachs
The 1MDB scandal that first emerged in 2015 has continued to splatter big banks with fresh allegations. In December 2018, Goldman Sachs became the latest victim of the blockbuster money laundering scandal surrounding the looting of the state-owned Malaysian Development Fund (1MDB), estimated to be in the range of US$4.5 billion. Former Malaysian Prime Minister Najib Razak is said to have personally pocketed US$681 million and used the funds to buy everything from yachts and artwork to funding the production of Hollywood films including The Wolf of Wall Street.

Malaysian authorities filed criminal charges against the American bank and two of its employees for reportedly helping to misappropriate US$2.7 billion, bribing officials, and giving false statements when helping to issue bonds that would raise US$6.5 billion for the state development fund 1MDB–for which Goldman earned US$600 million in fees.

Other banks, such as Falcon Private Bank, BSI SA, Credit Suisse, UBS, Standard Chartered, Coutts & Co., and DBS Group have also faced regulatory actions due to their involvement in 1MDB, for which they have been individually fined between US$700,000 and US$5.2 million. In the case of Godman Sachs however, the Malaysian government is currently seeking US$7.5 billion in damages from Goldman Sachs and jail time of up to ten years for Tim Leissner and Roger Ng Chong Hwa, two former Goldman bankers who were at the center of the scandal
2. Deutsche Bank
Bloomberg estimates that Deutsche Bank has spent more than US$18 billion over the past decade in fines to settle legal disputes related to financial crimes. Despite this, the German bank cannot seem to escape its reputation as a major enabler of IFFs. As a key facilitator in the Danske Bank scandal (see below), Deutsche Bank is reported to have processed and managed more than four-fifths of the US$235 billion of suspected dirty money through a US subsidiary, with the remaining amounts handled by Bank of America.

The revelations pile additional pressure on Deutsche Bank, which has also faced regulatory scrutiny stemming from the Panama Papers this year. In November 2018, 170 German police officers, investigators and prosecutors raided the Frankfurt offices of Deutsche Bank on the suspicion that bank employees helped clients set up offshore companies in tax havens to launder hundreds of millions of euros. In 2016 alone, more than 900 customers are alleged to have transferred some US$351 million to one such company set up in the British Virgin Islands, according to the Frankfurt prosecutor.
1. Danske Bank
The scandal in which Denmark’s largest bank is currently engulfed dominated the headlines in 2018 and is increasingly considered as the biggest money laundering scandal to date. In September 2018, Danske Bank released a report revealing that payments totaling US$235 billion had flowed through its Estonian branch between 2007-2015, largely from suspicious clients in Russia and other former Soviet republics such as Ukraine, Azerbaijan, and Moldova. To put things into perspective, the money handled by the small Estonian branch is reported to have been ten times greater than the entire GDP of Estonia.

Initial claims from Howard Wilkinson–the former head of the Estonia branch turned-whistleblower–suggested that Danske Bank’s non-resident portfolio included the Putin family, the FSB (Russian Federal Security Service), and 15,000 other customers considered in large part as suspicious, which was then publicly confirmed by the bank following an independent investigation. From Estonia, much of the money was invested in London and UK Overseas Territories. Its ultimate destination, however, remains largely unknown because of the use of opaque corporate structures such as Scottish Limited Partnerships and UK Limited Partnerships, which prevented the ultimate beneficial owners from being disclosed.

The bank is facing criminal charges and/or investigations in Denmark, Estonia, and the US which could result in billion-dollar fines and jail time. In Denmark, prosecutors have filed criminal charges alleging that Danske failed to investigate and report suspicious transaction and that its controls and checks on high-risk customers were inadequate. Both Danske’s chief executive officer and chairman have resigned as a result of the scandal, ten former employees have been arrested, and the bank has publicly admitted that the situation is much worse than they could have ever imagined. What’s more–the full extent, magnitude, and consequences of the Danske Bank scandal may have not even hit the bottom of the well yet. The Danske case will likely continue to grab headlines throughout 2019.


A clear picture emerges from the abovementioned cases: a systemic problem persists in banks’ ability and willingness to stop dirty money from flowing through the financial system. But when will it stop, or even diminish?

Concerted regulatory action has led to headline-grabbing penalties, but these continue to be fairly insignificant compared to the gains reaped from managing high-risk transactions and customers. Indeed, law enforcement has obtained mixed results in 2018.

In the case of Danske Bank scandal, law enforcement has a great opportunity to capitalize on the magnitude of the case and send a clear signal to other banks that similar practices won’t be tolerated in the future. The biggest threat comes from US authorities, which could impose fines up to US$8 billion and even designate Danske as “a financial institution of primary money laundering concern”, which would effectively cut it off from the US market. The same action led to the closure ABLV because it depended on access to US dollars for its correspondent banking operations.

The latter outcome is somewhat unlikely for several reasons. Danske’s presence in the US is limited and the bank is considered by Danish regulators as a financial institution of strategic importance for the country; the Estonian branch has already been shut down; and more importantly, the Danish entity’s business model is not entirely based on the creation of non-resident accounts for oligarchs, as was the case with ABLV. However, a tough stance by US law enforcement could increase the political pressure for EU regulators to stop barking and start biting.

While ABLV and Pilatus Banks were closed due to them acting exclusively as a quasi-extension of criminal activity and facilitating sanctions evasion, key doubts need to be raised about the toughness of law enforcement against the other profiled cases–the so-called “too big to fail” banks.

UBS, ING, CBA, Rabobank and US Bancorp were fined a combined total of US$2.4 billion in 2018 for largely similar reasons: systematic deficiencies in their money laundering controls. Their respective fines are microscopic when compared to their annual revenues. For instance, UBS’ fine represented less than a days’ worth of the group’s global revenue for 2017. ING’s fine equated to roughly two weeks of global revenue and the penalties of all other banks ranged from 9 to 10 days’ worth of annual revenue for the year 2017.

Can we seriously expect to dissuade big banks from processing dubious transactions if the cost of doing so is so insignificant? Lucrative illicit flows will continue to pour through the financial system so long as the incentives for doing so outweigh the consequences. Given that the consequences–in most cases–are monetary fines, shouldn’t jail time for individuals be increasingly seen as a viable option?


For part one of this blog, visit Taking Stock of 2018’s money laundering scandals: When is enough enough? (Part 1)