BREACHING the defences
EUROPE ROCKED BY DANSKE BANK’S €200 BILLION MONEY LAUNDERING SCANDAL
Danske Bank has found itself at the centre of a storm over findings that its Estonian branch acted as the hub of a money laundering scheme involving Russian and Eastern European customers. As criminal inquiries gather pace, the bank’s head office, Estonian subsidiary and the regulator should all take some blame for the scandal.
Since March 2017, Denmark’s Danske Bank has been embroiled in scandal over its reported failures to prevent money laundering at its Estonian branch between 2007 and 2015. Allegations made by Danish daily Berlingske, as part of a wider body of international media reporting into money laundering by European banks, have culminated in criminal inquiries into Danske Bank led by Danish, Estonian, UK, and US authorities. The case may do irreversible damage to Danske Bank’s reputation, despite the relative insignificance of its Estonian branch to the bank as a whole – as at 2011, the branch accounted for only 0.5% of Danske Bank’s assets.
The case against Danske Bank centres on allegations that the bank facilitated the flow of €200 billion of non-resident money through its Estonian arm. The majority of these funds are suspected to have been the proceeds of criminal activity and tax evasion committed in the former Soviet Union, most prominently Russia and Azerbaijan. Danske Bank’s Estonian branch is accused of failing to identify these suspicious flows despite signs of illegal activity.
In the wake of these criminal investigations, Danske Bank’s CEO Thomas Borgen resigned in September 2018. Chairman Ole Andersen has since also announced his intention to resign. The bank’s share price also dropped 6 percent in September 2018 alone and it is likely to face fines in the billions of US dollars.
While media reports generally hold the Estonian branch’s management responsible for these lapses, investigations launched by EU and US authorities have suggested that the reality is more complex. Evidence increasingly indicates that while Danske Bank’s central management failed in its duty to prevent money laundering, Estonian and Danish financial regulators could have intervened sooner and much more forcefully.
A defective Baltic banking sector
Since the mid-2000s, Estonia and the other Baltic States have positioned themselves as a private banking centre, effectively serving as a go-between for money from the former Soviet Union seeking to head West. Their offering has, however, differed from that of the traditional private banking sector through its greater focus on expediting transactions, often at the expense of KYC procedures.
One of the most infamous examples of the Baltic banking sector acting as a financial ‘Wild West’ to the benefit of money launderers is the so-called ‘Russian Laundromat’, a money laundering scheme through which an estimated $20 billion to $80 billion was moved from Russia to Europe between 2010 and 2014. Investigations into the Laundromat pointed the finger at a number of financial institutions, most notably the use of Latvia’s Trasta Komercbanka in the large-scale laundering of Russian money, and the lack of scrutiny they applied to the source of capital flows.
In a similar fashion, Danske Bank’s Estonian branch has been accused of facilitating large-scale money laundering activities. An independent investigation commissioned by Danske Bank, which was carried out by Danish law firm Bruun & Hjejle after the publication of Berlingske’s findings, determined that “branch management was more concerned with procedures than with identifying actual risk”.
Yet the Estonian branch’s management did not only deliberately fail to identify risky customers; it actively encouraged them. 50 current and former employees of Danske Bank’s Estonian branch are suspected of having colluded with clients to circumvent AML requirements, and 26 employees, including the branch’s CEO, are under investigation by the Estonian authorities for facilitating the laundering of alleged proceeds of crime originating in Russia.
A failure of integration
It is a little too simplistic, though, to leave the blame there. Although the Bruun & Hjejle report cleared Danske Bank’s management of legal wrongdoing, there are suggestions that it was ultimately the Danish bank’s failure to integrate its Estonian branch fully that precipitated the alleged money laundering activities.
Danske Bank has been accused of doing little to ensure staff at its newly acquired Estonian branch adopted its culture and, especially, its attitude to AML. The bank’s Estonian branch mainly maintained KYC documents in Estonian or Russian, and Danske Bank, instead of insisting that these documents be translated into Danish or English to increase its oversight of the branch, simply assumed that its Estonian branch was following appropriate AML procedures.
Further, in 2008, Danske Bank took active steps towards limiting its oversight of its Estonian branch by deciding against extending the use of its more rigorous compliance software to the branch. Given its failure to fully integrate a newly acquired branch, exacerbated by the fact that for most of 2013 it did not even have a specifically-appointed central AML officer, Danske Bank’s head office has a lot to answer for.
A failure of regulation
Estonian and Danish financial regulators also need to shoulder significant responsibility for Danske Bank’s current plight. In the first instance, Estonia’s financial regulator criticised Danske Bank for inadequate compliance processes in Estonia in 2007, but failed to insist on improvements to the branch’s processes.
In 2012, the Danish regulator limited its follow-up to AML complaints voiced by its Estonian counterpart to a mere request for information from Danske Bank. Even after the Berlingske investigations were published and the regulator reprimanded Danske Bank for its inadequate compliance procedures in May 2018, no meaningful action was taken. The Danish regulator’s inaction, even after allegations of Danske Bank’s facilitation of money laundering gained media prominence, suggests an institutional absence of will, which could explain why it failed to act on earlier warnings voiced by regulators and whistle-blowers.
Regulators of the world, unite
Prosecutors in several countries have filled the vacuum left by the Estonian and Danish banking regulators by conducting their own criminal investigations. Since 2018 Estonian and Danish prosecutors have launched criminal investigations, swiftly followed by the US Department of Justice and the UK’s National Crime Agency, with the latter examining British shell companies that banked with Danske Bank’s Estonian branch. The EU, meanwhile, has begun examining Denmark’s banking regulator for its poor supervision of Danske Bank.
This all casts the Estonian and Danish national regulators in a poor light. Opportunities were certainly missed by both regulators to insist on improvements to Danske Bank’s compliance procedures, though it is of course impossible to know whether these measures would actually have prevented any impropriety at the bank. Either way, Danske Bank appears set to bear the consequences of its actions, most notably in the form of a hefty fine from the US Department of Justice, estimated to be anywhere between $2.3 billion and $8.3 billion. The outcome of the EU investigation for Denmark’s banking regulator, meanwhile, remains unclear.
Responsibility for combatting money laundering is not limited to individual banks or even individual branches, with national banking regulators also having a duty to be proactive in their supervision of banks and to provide AML guidance. The Danske Bank scandal will go down in history as one of the largest examples of its kind – the scale of the money laundering which is reported to have taken place over 8 years is truly enormous. However, if there is one lesson to take from this case it is perhaps that preventing money laundering requires a number of parties to work closely and diligently with one another, and that European defences against such malfeasance are only as strong as their weakest link.
Just weeks after the UK government disclosed the names of the two Russian men alleged to have poisoned Sergei Skripal and his daughter in Salisbury, an investigative journalism collective claimed to have revealed their ‘true’ identities. Using the kinds of sophisticated open source research techniques deployed across the corporate intelligence sector, the investigators identified the assailants as two operatives of Russia’s military intelligence agency. However, while the investigation has been hailed as a success in the UK, the Russian public still needs convincing.
On 26 September, the Russian Embassy to the Netherlands posted the following on its verified Twitter account:
“Q: How much time does a couple of people thousands of miles away need to disclose a ‘true identity’ of an ‘intelligence officer’? A: Less than a month provided they use Google #TheTruthIsOutThere.”
The derisive Tweet was in response to an open source investigation published earlier that day by Bellingcat, a British investigative journalism collective, revealing the identity of one of the two Russian nationals suspected of the attempted murder of retired double agent Sergei Skripal. By 8 October, their team had uncovered the identity of the second would-be assassin.
Bellingcat’s work, carried out in conjunction with The Insider, a Russian investigative media outlet, illustrates how high-quality open source research, the bedrock of investigative journalism, can unearth what is hiding in plain sight. And contrary to the claims of the Russian embassy’s social media team, there was more to the investigation than speculative ‘googling’. In fact, open source investigators like Bellingcat have developed sophisticated and methodical research processes which now allow them to corroborate reams of publicly available raw data through a series of highly intelligent refined and deductive investigative techniques.
In the wake of Prime Minister Theresa May’s early September announcement that the Skripal poisoning suspects had entered the UK under the names Ruslan Boshirov and Alexander Petrov, Bellingcat’s analysts set to work establishing their potential links to the Russian government. Initial analysis of the Russians’ passport files in leaked official documents and Russian passport databases suggested that the two shared non-civilian status, indicating that they were likely to be agents of Russia’s military intelligence agency, widely known by its former acronym, GRU. Working off this assumption, Bellingcat began the process of unmasking “Boshirov” and “Petrov”, with only their photographs and cover identities to go off.
Unable to identify their targets by scraping Russian telephone directories and running reverse-image searches of their photographs, Bellingcat soon had to employ more creative strategies. With knowledge of their approximate age and border crossing data, its analysts hypothesised that the two agents would have likely graduated from a specialist Russian military school in the early 2000s, and had probably specialised in operations in Western Europe.
With no obvious leads forthcoming, they reached out to their network of regional contacts to find which specialised schools two agents with profiles similar to “Boshirov” and “Petrov” were likely to have attended. Bellingcat then scoured the relevant online yearbooks and reunion photos, identifying several possible matches for “Boshirov”. One such match, in a photograph of graduates of the Far Eastern Military Command Academy deployed in Chechnya, referred to seven graduates bestowed with the “Hero of Russia” award, Russia’s highest state honour. Online searches for “Chechnya”, “Hero of the Russian Federation” and the “Far Eastern Military Command Academy” soon led Bellingcat to “Boshirov”’s true identity. Similarly creative methods were used to identify “Petrov”, who they found previously had resided in a communal apartment in St. Petersburg, which online maps indicated stood just a few steps away from a Russian military medical academy.
By confirming their findings with sources who either had access to real passport data or were familiar with the agents themselves, Bellingcat claimed to have proved beyond reasonable doubt that the subjects of their investigation were in fact undercover GRU officers: “Boshirov” is Colonel Anatoliy Chepiga, a high-ranking military officer, and “Petrov” one Alexander Mishkin, a trained military doctor.
Meanwhile, in Russia…
Faced with an apparent body of clear, logical and factual evidence, Westerners hitherto reserving judgement on the extent of the Russian state’s involvement in Skripal’s attempted murder have largely been convinced. Most Russians, however, remain unpersuaded, or rather unbothered, by the evidence.
This is for several reasons. First, Bellingcat’s work is unlikely to have ever entered the ordinary citizen’s field of vision, at least not in a version faithful to the original. The majority of Russians continue to receive their news from state-controlled or Kremlin-friendly television channels, where reporting often strays significantly from the facts. When re-reported by these broadcasters and the pro-Kremlin press, the conclusions of the investigation have been presented without acknowledgement of Bellingcat’s research process, thus appearing as nothing more than speculation and decontextualized conspiracy theories. Though Russia’s more independent liberal online news outlets have engaged with Bellingcat’s investigations more objectively, their content is unlikely to have reached beyond their limited and often Western-leaning urban readership.
More crucially, however, those in Russia who have heard of the Skripal case or do come across Bellingcat’s findings are simply uninterested. With the Russian government’s recent and widely-protested pension reforms, which have raised the retirement age for Russian men a mere year above their life expectancy, most ordinary Russians have concerns far more pressing than spy stories unfolding in the West. Even the opposition to the Kremlin, gauging the lack of traction of Bellingcat’s findings among the general population, has expended little energy in exploiting the Skripal affair to criticise the government. This is because unlike the pension reforms, the attack is highly unlikely to mobilise the public or jeopardise Putin’s approval rating; Russians do not expect the country’s intelligence and security agencies to have accountability before the Russian public, just as they no longer really expect the Russian government to be accountable to the electorate.
Cancelling out the noise
For the small portion of Russians following the story with interest, there are myriad conflicting narratives to wade through before they reach the facts. In the month that followed Skripal’s poisoning, Russian media outlets published over twenty different explanations for the affair. Many more have since spawned via an array of state-controlled and Kremlin-friendly outlets. Some of the most farfetched of these claim that Theresa May helped orchestrate the attack with CIA director Gina Haspel.
The Russian state has coupled these domestic diversion techniques with a public attack on all other Western narratives. The Russian Foreign Ministry’s response to Bellingcat’s “Boshirov” investigation, which it immediately branded as “fake news”, epitomises the Russian state’s wider strategy of denial, deflection, and dissemination of conflicting narratives through state media and social media trolls. On her personal Facebook profile, spokeswoman Maria Zakharova reiterated that owing to the lack of “evidence” of Russian involvement in the Skripal attack, the UK was clearly keeping up their “information campaign” aimed at diverting attention away from what really happened in Salisbury. In a recent poll undertaken by Levada-Center, a Russian polling organisation, which asked members of the Russian public who they thought was responsible for the Skripal poisining, 56% of respondents believed “it could have been anyone”.
Independent Russian journalist Oleg Kashin has also noted the Russian state’s marshalling of infoshum (literally “info noise”), the spreading of trivial or unimportant stories to “distract the unwary and uncritical” and drown out more controversial or damaging stories, such as the Skripal case findings. This tactic appears to be working; the recent arrest of two Russian footballers on assault charges has now largely supplanted the latest developments in the Skripal case in the Russian news agenda.
The information war
These tactics both form part of a wider weaponised Russian state information strategy, concerned not with persuasion or long-term credibility, but with disrupting Western narratives and confusing the public. The constant bombardment of false information has assaulted the ordinary Russian citizen’s ability to reason critically, and has numbed many into indifference: it is far easier to accept the Russian state’s overarching narrative than to fight against multiple fragments of competing information.
The emerging danger in the last 10 years has been Russia’s growing use of this box of tricks abroad. Fake news, thrust into the spotlight during the 2016 US presidential elections, has irrevocably altered our perception of journalistic truth. RT, the Russian state’s media voice in the West, has long fanned the flames of the growing scepticism we harbour regarding our own media and political class, eroding our confidence in these institutions and incubating sympathy for the view that Russia is the victim of an information war itself.
In this climate of uncertainty and mistrust, transparent and well-sourced investigative work such as Bellingcat’s is an invaluable tool for exposing and combating Russia’s disinformation.With limited resources and primarily open sources to work with, Bellingcat sets an example to the investigative and intelligence community. In spite of Russia’s attempts to divert, distract and deflect, for those able to think creatively and work methodically, the truth often is out there.
Bellingcat’s greatest hits
Prior to its work on the Skripal attack, Bellingcat was arguably best known for its research into the fate of Malaysia Airlines Flight 17, which was shot down over Eastern Ukraine by anti-air missile in 2014. Their team analysed satellite imagery, the digital footprints of combatants in the area and a number of other open data sources to identify and locate the anti-missile system behind the attack. Bellingcat also tracked the transportation of the missile from Russia to the Donbass and identified the commander likely to have given the order to fire on the civilian aircraft.
The collective has also published several investigations into suspected war crimes and terrorist attacks perpetrated in Syria. In particular, the site has sought evidence to counter claims made by the Assad regime that it had not used chemical weapons.
Russia brings S-300s to Syrian soil
On 17 September, a Russian military plane was shot down by a missile attack off the coast of Syria’s government-held Latakia province, killing all 15 crew members on board, and prompting Russia to upgrade the Syrian military’s anti-aircraft capabilities. In this article, Tim Geschwindt assesses Russia’s response to the incident.
At approximately 22h02 local time on 17 September, Syrian Arab Army (SAA) anti-aircraft batteries in Latakia fired several surface-to-air missiles in response to an Israeli air raid which had targeted a joint Iranian-Syrian weapons facility in the region. According to the Russian Ministry of Defence, the S-200 anti-aircraft missiles inadvertently engaged a Russian Ilyushin Il-20 electronic surveillance plane flying off the coast of Syria, due to the aircraft’s larger radar signature and lower travel speed. The incident resulted in the death of all 15 crew on-board the aircraft, and subsequently triggered a diplomatic dispute between Russia, Israel and other participants engaged in proxy conflicts in Syria. Yet while Israel, Syria and Russia have exchanged tit-for-tat accusations over who is ultimately culpable for the attack, the incident is unlikely to disrupt Syrian president Bashar Al Assad’s consolidation of power, and the resulting improved security environment in Syria. Rather, Russia has likely entered into a blame-game with Israel to facilitate a strengthening of Assad’s regime, as well as Russia’s own strategic footprint in the country.
Following the missile attack, Russia was quick to redirect blame away from the SAA, and onto Israel, resulting in a diplomatic scramble between the two countries to allay tensions. President Vladimir Putin initially dialled down accusatory rhetoric, describing the incident as a “chain of tragic accidental circumstances”. In a phone conversation between Putin and Israeli Prime Minister Benjamin Netanyahu on 18 September, both leaders reaffirmed the importance of Israeli-Russian military cooperation to avoid similar tragedies in the future. This reconciliatory atmosphere was extended on 20 September, when Russia received a military delegation from Israel, including the Commander of Israel’s Air Force, to explain the precise timeline of events and defuse tensions between the two countries.
However, on 23 September, the fallout escalated. Russia’s spokesperson for the Ministry of Defence, Major General Igor Konashenkov, doubled-down on accusations against Israel, claiming that Israeli fighter pilots “lacked professionalism” and deeming the incident an act of “criminal negligence”. Adding fuel to the fire, Konashenkov accused Israeli pilots of deliberately using the Russian plane as a “shield” by retreating in a direction that positioned the Russian plane directly between Israel’s jets and Syria’s anti-aircraft batteries, allegedly to protect Israeli pilots from retaliatory fire.
While the Israeli military was indeed conducting operations in the area, no party is disputing the fact that the Russian plane was shot down by Syria’s armed forces. The blunder can largely be explained by the use of out-dated technology and poorly trained military personnel. Many of Syria’s S-200 anti-aircraft batteries, provided by Russia in the 1980s, lack modern identification-friend-or-foe (IFF) systems, while others have no IFF systems at all. Additionally, SAA anti-aircraft battery crews generally receive little training, likely resulting in the oversight which saw the SAA launch its missiles without identifying their target.
The timing of the missile attack also suggests incompetence played a major role in the explosion. During the meeting in Moscow, the Israeli delegation provided evidence indicating that its fighter jets had returned to Israeli airspace 40 minutes before Syria launched a barrage of missiles off the coast of Latakia province. The delay in timing suggests that the launch was likely a display of strength, aimed at demonstrating to the local population, and to foreign elements, that the SAA can, and does, respond to attacks by the Israeli Defence Force (IDF). This notion is supported by US military reports suggesting that, in response to US airstrikes on 14 April 2018, the SAA indiscriminately fired at least forty S-200 anti-aircraft missiles into the air more than 30 minutes after the strikes took place.
An (in)convenient opportunity
Russia’s emphasis on Israel’s culpability, however, and the change in tone following initial reconciliatory rhetoric, likely reflects its strategic interests as much as it does its displeasure with the turn of events. The fallout with Israel provides Russia with the opportunity to reinforce and upgrade Syria’s military capabilities, and cement its own strategic position in the country. Thus, in response to the incident, on 3 October, Russia announced that it had delivered superior S-300 anti-aircraft missiles to the Assad regime, a move which Israel has stridently objected to since it was first proposed in 2013. The specific type of anti-aircraft missile promised to Assad – the S-300 PMU-2 – has improved computer systems for recognising friendly aircraft, can hit enemy aircraft or ballistic missiles from up to 200km away, and has the capability to engage multiple targets simultaneously. Additionally, Russia plans to train the SAA’s air-defence personnel. While the S-300 systems are unlikely to prevent further Israeli Air Force operations in Syria, on 19 October, Israel’s Deputy Minister of Diplomacy, Michael Oren, confirmed the IDF will have to operate with greater caution and maintain a lower profile when conducting in-country operations.
Furthermore, by equipping the SAA with the S-300 air defence system, Russia has strengthened Assad’s position at a critical point in the Syrian conflict. At the same time, the move likely serves to progress Russia’s own interests in Syria. Although Putin suggested in late September that all foreign forces should ultimately leave Syria, the Russian president is unlikely to risk leaving a political vacuum in the country, even once Assad’s power has been fully consolidated. There remain a number of international powers using Syria as a proxy playing field to further their own political, security and territorial interests. Beyond the proxy war between Israel and Iran, Turkey and US maintain forces on the ground, while other western countries continue to participate in airstrikes as part of the coalition against Islamic State (IS). Russia’s move to upgrade SAA capability therefore likely speaks to a longer-term intention to maintain its strategic footprint in the region.
Back to business?
Russia’s entrenchment in Syria has tipped the scales in favour of Assad’s regime, and continues to bolster the SAA’s efforts to quash any remaining pockets of resistance. In line with this consolidation, at the end of August, Russia’s defence minister stated that, with the help of Moscow-backed reconstruction initiatives, Syria would be ready to receive one million of its refugees currently residing abroad. However, the country is likely far from returning to ‘business as usual’. The power moves and proxy conflicts permeating Syria continue to be of concern to international non-governmental actors, including corporates, news agencies and not-for-profit organisations, looking to operate in the region. This would require an ongoing and robust understanding of the various territorial claims and interests of both Syrian and foreign political stakeholders as these vie to cement their positions within a more secure Syria.