How did auditors miss signs of money laundering at Danske Bank?

Denmark’s government wants to know why auditors appear to have missed signs that one of Europe’s biggest money laundering scandals was unfolding

As multiple investigations into Danske Bank A/S get under way, Denmark’s gover nment wants to know why the bank’s auditors appear to have missed signs that one of Europe’s biggest money laundering scandals was unfolding in front of them.

Business Minister Rasmus Jarlov says he finds it surprising that the firms hired to go over Danske’s accounts didn’t react to years of irregular transactions at the bank’s Estonian unit.

“All I can do is give the layman’s perspective that the financial ratios were off,” he said. “A lot of money was made in a tiny Estonian branch, which posted a huge profit margin and quick, large transfers in and out of the branch, which looked off,” Jarlov said, after attending a parliamentary hearing into money laundering in Copenhagen on Tuesday. “It’s the sort of thing that I would assume would catch the interest of both management and auditors.”

Danske has admitted that a large part of about €200 billion, or $235 billion, that flowed through an Estonian unit between 2007 and 2015 may have been laundered. Chief executive Thomas Borgen has resigned in disgrace and Danske now faces hefty fines. Danske changed its auditors several times during the period in question, according to its annual accounts.


Between 2010 and 2014, it switched between Grant Thornton, PwC, KPMG, Deloitte and EY. (During this time, the Danish units of KPMG and EY merged, as did Grant Thornton and PwC). In the bank's annual reports, the auditors all consistently signed off on its numbers, without raising any concerns. The firms generally used the same language, "Our audit has not resulted in any qualification."

At EY, spokesman Michael Basland says the firm can't comment on the specific Danske case. But he notes that "auditing of the operational side and compliance with financial laws is a matter for the internal audit," in a written comment to Bloomberg.

“If the external auditor, while going over the accounts, notices illegal acts that the internal auditor or management aren’t aware of, the auditor needs to react.”

Both Deloitte and PwC referred for comment to FSR, the group in Denmark that represents the auditing industry. Brian Adrian Wessel, a spokesman for FSR, declined to comment on the Danske case.

“In general terms, we can say that an external audit of a report isn’t an audit of whether laundering has taken place, but an audit of whether the accounts give a truthful account of the facts.”

If an external auditor "becomes aware that the internal auditor doesn't have adequate resources, systems or procedures, or discovers key matters that management or the internal auditors aren't aware of, the auditor needs to react and write that in the protocol, which is sent to the board and the Financial Supervisory Authority. " That document isn't available to the public, he said.

The Danish FSA in May published a scathing report, criticizing Danske’s management for its failure to react sooner to signs of suspicious transactions. Since then, the list of allegations has grown.

On Thursday, newspaper Politiken reported that Danske Bank is also linked to the Panama Papers scandal, and that its Luxembourg branch used law firm Mossack Fonseca to help clients avoid taxes in Denmark.

Calls to Danske Bank for comment outside regular office hours weren’t immediately answered. Figures provided by the Danish FSA in May show that returns at Danske’s Estonian unit were eye-poppingly big compared with numbers at the rest of the bank.

In 2013, when suspicious flows peaked, the Estonian business had a return of 402 per cent on allocated capital. By comparison, Danske’s personal banking business made 8.7 per cent, its corporates and institutions unit delivered 10.7 percent, and the whole group made 6.9 per cent that year. Jarlov says it “appears as if incentives to adhere to regulation weren’t strong enough.”

The Danish FSA has already forced Danske to add almost $800 million to its capital burden, and Jarlov said on Tuesday that more may come. Such penalties would be in addition to a fine as high as $630 million that the minister has said Danske may face in Denmark. It's still unclear whether other jurisdictions will weigh in with additional fines. Denmark's political establishment is struggling to come to terms with the scandal, which has put the country's AAA credit rating at risk. Denmark's FSA is itself being investigated by the European Banking Authority, amid concerns the agency didn't do enough to catch the lender's laundering failures. Jarlov said he's seen no indication that Denmark's FSA did anything wrong. Meanwhile, the agency is investigating whether Danske broke the law by providing misleading information relating to its involvement in money laundering, the minister said. – Bloomberg