The headquarters of Nordea Bank AB stand in Stockholm. (Photographer: Mikael Sjoberg/Bloomberg)

The chaotic transition to capitalism in Russia and its neighbors triggered a flood of hundreds of billions of dollars out of the former Soviet Union. Torrents of cash were often routed through offshore zones with limited controls, making it difficult to tell the difference between legitimate business and illicit flows from criminal activity. Sometimes the suspect money made its way into prominent international banks. The money-laundering scandals now rocking Europe’s lenders and the whack-a-mole quality of enforcement efforts shine a light on regulators’ struggles to keep up with the volumes of cash.

1. How did the scandals come to light?

Reports alleging widespread money laundering, often via Baltic nations, date back years, but they only attracted broader attention after squeaky-clean Denmark took a center role last year. There have been a series of revelations from whistle-blowers, internal investigations and media reports. This week’s disclosures came from a global consortium of investigative journalists called the Organized Crime and Corruption Reporting Project, which obtained the computer records of a failed Lithuanian lender. The group’s report described a vast network, which it dubbed the Troika Laundromat, to launder billions of dollars and highlighted the operations of a prominent Russian investment bank, Troika Dialog, which was taken over in 2012 by state-controlled Sberbank.

2. What do the scandals show?

A picture is forming of mostly Nordic banks that, often via their Baltic units, became hubs for Russian criminals who channeled funds to the West. For example, Helsinki-based Nordea Bank Abp allegedly handled about 700 million euros ($793 million) in potentially dirty money, some of it linked to the death of Russian lawyer Sergei Magnitsky, according to Finnish broadcaster YLE. The scale of the criminal activity is hard to estimate, as launderers work hard to disguise the origin of their money and not every suspicious transaction is necessarily illegitimate. In 2017, economist Thomas Piketty and other researchers estimated that Russians’ offshore wealth amounted to about three-quarters of gross domestic product in 2015, or about $1 trillion.

3. How could this happen in a place like Denmark?

In a literal sense, it didn’t. In the case of Danske Bank A/S, Denmark’s biggest lender, suspicious funds, including money from Russia, were funneled through its branch in Tallinn, Estonia, from 2007 to 2015, the bank has conceded. The head of Denmark’s financial regulator said it appears Danske had a culture of “mean and lean” that departed from the typical Scandinavian approach in which people “challenge and bring bad decisions up the chain” for the sake of “frank discussions and reaching a consensus.”

4. Are the cases connected?

Some of the cases are independent, while others share connections to alleged corrupt dealings in Russia and other former Soviet countries. Allegations of suspicious transfers have widened to include banks in Austria and several Dutch institutions. Investigations are underway in the Baltic nations, the U.S., the U.K. and the Nordic countries. One of the most prominent cases was exposed by U.S.-born investor William Browder and Magnitsky, an auditor who worked for him. Browder alleges $230 million was stolen from the Russian government by corrupt Russian officials and that Magnitsky was jailed as he was trying to expose the fraud. Magnitsky died in a Russian prison in 2009.

5. Who’s William Browder?

Browder ran one of the largest foreign funds investing in Russia in the 1990s and for a time was a vocal defender of President Vladimir Putin. But after his Russian visa was revoked in 2005 on the grounds of national security, Browder became an outspoken critic, accusing the Kremlin of covering up the fraud he exposed and crusading for justice for Magnitsky. Browder successfully campaigned for the Magnitsky Act, a 2012 U.S. law that imposed sanctions on human-rights violators from Russia and other countries, provoking an angry reaction from the Kremlin. In Russia, Browder has been convicted in absentia of fraud and tax evasion, charges he dismisses as politically motivated. He’s continued to crusade in the West for the passage of versions of the Magnitsky Act in other countries and to expose banks that allegedly handled illicit flows.

6. Where were the regulators in all of this?

The scandals have exposed weaknesses in controls, as there’s no centralized European authority tasked with rooting out money laundering. It’s usually left to national regulators and local police, resulting in a patchwork of different laws and standards. Smaller countries such as Latvia say they’re overwhelmed. There have been calls for a joint European authority to track the flow of dirty money. U.S. authorities have levied billions of dollars in fines on European banks for deficiencies in monitoring money laundering. The last wave included penalties paid by Deutsche Bank AG in 2017 for so-called mirror trades that helped clients move money out of Russia.

7. Have bank executives been held to account?

Danske Bank removed its Chief Executive Officer, Thomas Borgen, in October. The bank also increased the number of employees in compliance and now has more than 1,000 assigned to monitor and prevent financial crime. The chief executive of Swedbank AB says she realizes she needs to change her handling of money laundering allegations after backtracking on her handling of the claims made her feel “humble.”

8. Why the focus on the Baltics?

Latvia and its Baltic neighbors Estonia and Lithuania built thriving banking industries in part based on servicing flows out of Russia and the rest of the former Soviet Union after its collapse. Some specialized in the “non-resident portfolio,” opening accounts for people and companies based in other countries of the region. At times, they didn’t ask many questions about where the money came from or who the owners were, according to regulators. Though regulators have steadily tightened scrutiny over the last decade and many banks have stopped doing business with clients perceived to be risky, probes of past businesses have continued to expose new channels.

--With assistance from Nicholas Comfort and Frances Schwartzkopff.

To contact the reporter on this story: Gregory L. White in Moscow at gwhite64@bloomberg.net

To contact the editors responsible for this story: Torrey Clark at tclark8@bloomberg.net, Leah Harrison Singer, Christian Baumgaertel

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