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 shine a light on the whack-a-mole quality of enforcement efforts.

1. 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. In the case of Danske Bank A/S, Denmark’s biggest lender, suspicious funds were funneled through its branch in Tallinn, Estonia, from 2007 to 2015. Allegations also emerged against Swedbank AB, Sweden’s oldest bank. On March 27, Swedish broadcaster SVT reported that the bank misled U.S. investigators about suspicious customers and transactions, and that Paul Manafort, President Donald Trump’s former campaign manager, was among those who received questionable payments. Helsinki-based Nordea Bank Abp also allegedly handled dirty money.

2. How big does this get?

The concern is that allegations snowball over time as more dirty money comes to light and investors lose faith that bank managers can contain the damage as interest from regulators grows. Swedbank shares have tumbled about 25 percent since its scandal first broke in February, while Danske’s stock has lost half of its value since the start of 2018. The scale of criminal activity is hard to estimate, since launderers work hard to disguise the origin of their money and not every suspicious transaction is necessarily illegitimate. Bloomberg Economics estimates about $1 trillion moved out of Russia over the last 25 years. Allegations of suspicious transfers have widened to include banks in Austria and several Dutch institutions.

3. How did all this come to light?

Reports alleging widespread money laundering, often via Baltic nations, date back years but attracted broader attention only after squeaky-clean Denmark took a center role. In March, a global consortium of investigative journalists published a report, based on data obtained from a failed Lithuanian lender, describing a vast money-laundering network, which it dubbed the Troika Laundromat. It highlighted a prominent Russian investment bank, Troika Dialog, which was taken over in 2012 by state-controlled Sberbank. U.S.-born investor William Browder, who ran one of the largest foreign funds investing in Russia in the 1990s, has alleged for years that $230 million was stolen from the Russian government by corrupt Russian officials and that his Russian tax lawyer, Sergei Magnitsky, was jailed while trying to expose the fraud. (Magnitsky died in a Russian prison in 2009.) Browder became an outspoken critic of Vladimir Putin’s government and has been crusading for justice for Magnitsky.

4. Why the focus on the Baltics?

Latvia, 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.

5. 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. Regulators have steadily tightened scrutiny over the last decade, and many banks have stopped doing business with clients perceived to be risky. 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.

6. 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 has said she realizes she needs to change her communication around money-laundering allegations, amid market concerns she may have misled investors. Some of Swedbank’s largest shareholders say the bank still isn’t being transparent enough.

--With assistance from Nicholas Comfort, Frances Schwartzkopff and Niklas Magnusson.

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

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