Head of the Estonian Financial Inspectorate Kilvar Kessler says that the watchdog was told by Danske Estonia that everything was fine over the years and that problems concerning non-resident clients were being addressed. That is not what really happened.
The inspectorate pointed to what was going on at Danske Estonia already in 2007, but everything continued for years. How can you say your activity had any effect if nothing changed for years?
The relative importance of the non-residents business varied at Danske and the banks that came before it. Sampo was a separate legal entity, a subsidiary that was subject to our supervision in full. In 2008, it became a branch and most of the supervision was moved to Denmark. Estonia kept some aspects, like anti-money laundering.
We carried out an on-the-spot inspection in 2007 and concluded things were not good. We found things had improved when we inspected the bank again in 2009. Danske took over, and we hoped the organization would address these issues.
There were quite a few money launderers there. Information we had in 2011 – account balances of non-resident clients – showed that the relative importance of non-residents had started to grow at Danske Estonia. We contacted our colleagues in Denmark and told them to look into it as it was their bank.
But they didn’t?
As it turned out today (yesterday – ed.), Danske Denmark misled its watchdog. Supervision based on documentation is largely a matter of trust. When we ask for information and are given access, we assume the documents are authentic, accurate and complete. You do not expect to be lied to.
How can the monitoring of such – potentially criminal – sums be based only on trust?
We do not receive notifications of suspicious transactions, they go to the money laundering data bureau. Financial supervision is in charge of making sure banks are capitalized and sport transparent and functional organization. As concerns trust, it should be there but isn’t always.
The breakthrough came in the second half of 2013 by which time the balances of non-resident clients had grown. We also received other information. Next, you will ask me where.
I will not say. But the information we received allowed us to say stop. On-the-spot inspections also require an explanation in terms of why they are necessary.
They are considered the severest form of inspection, having the watchdog show up and sit there with you. We carried out two such checks in 2014 and the second one revealed how processes the bank had introduced were not working, there were not enough people to address risks. We also found that some risks were not covered even in theory.
You saw that something was wrong prior to 2014 but were told that there is no reason to panic because we are already addressing them, and there was nothing you could do but to accept it?
We saw that non-residents made up a considerable part of the bank’s business and were told that while that is correct risks are under control. That we are diligent and have internal audit. That was not really the case.
Were you told that precautions would hold by the headquarters in Denmark or by the Estonian branch?
We make no distinction there.
Yes, I understand that it was a branch of a Danish bank; however, the distinction is critical because, according to the report, Copenhagen claims it was given misleading information from Estonia.
What Danske Estonia told Copenhagen is a part of bank governance that falls in the jurisdiction of the Danish financial watchdog. Estonia is only looking at select matters concerning that branch. However, the Danes had the capacity for on-the-spot-checks, that much is for sure.
You did not look for a contact with Copenhagen; however, as it was evident you couldn’t handle their employees in Estonia, that they would keep telling you the same fairy tale without really changing anything, perhaps you should have been more active in talking to the Danes?
We contacted the Danish supervision. When we see a problem at a branch of a Danish bank, we turn to the Danish watchdog. They decided the following steps, contacted Copenhagen and asked for an explanation.
Where your Danish colleagues interested in pursuing this matter?
That is difficult for me to assess. The report can show how that communication happened exactly; I don’t have all the details.
How significant was the role of the Estonian whistleblower who contacted the executives in Denmark?
I believe it was quite significant. Their actions also played a part in our activities.
Who are they?
Have you talked to them? Do you know who they are?
Why is it that things seemed to start moving only after the whistleblower came forward, while nothing really changed as a result of your inspections?
We kept pointing it out, but it did not produce an effect. We need information to do anything beyond that. We got it, and because our previous efforts had not produced results, we went over there to see what was happening.
The information you could forward to the watchdog in Denmark was just so general and vague that it failed to convince them to act?
I do not dare draw such a conclusion. Because we do not handle primary supervision of branches, we cannot go into great detail in our analysis.
Could it have been possible for the financial inspectorate to be more aggressive in this matter to put it to bed sooner?
(Thinks.) Looking at things from the watchdog’s point of view, there is a difference between a bank and a branch. A branch cannot go bankrupt. If Danske goes bankrupt, the Danish deposit guarantee system and Danish rules step in. That is why Estonian supervision does not pay as much attention to branches. It is a matter of EU framework.
Was this position knowingly taken advantage of in Estonia?
On the one hand, the branch had a history. It had been an independent bank that handled non-resident business. Looking at the report, there is a graph there that shows that business shrink and then start to grow again.
Danske turned Sampo into a branch in 2008 and, looking at the facts, that is when non-residents business started growing again. Was it a conscious decision – a branch is not an independent unit according to the law. It is rather like a person’s right hand. And a hand decides nothing on its own – it is the head that makes decisions.
Based on this, I suppose that continuing the non-residents business was a conscious decision. A decision made by the head and not the hand. If that was not the case, we are dealing with a serious governance issue.