(Bloomberg) -- Deutsche Bank AG (DE:DBKGn) and Bank of America Corp (NYSE:BAC). have been contacted by U.S. criminal investigators for information about transactions they handled for a small bank branch in Estonia that’s at the center of one of the biggest money-laundering investigations in history, according to two people familiar with the matter.
The Justice Department investigators have also asked questions about JPMorgan Chase & Co (NYSE:JPM).’s work with the branch, another person said.
The lenders, among the world’s largest, were correspondent banks for the Tallinn, Estonia, branch of Danske Bank A/S that is the focus of multiple international investigations. The Danish lender acknowledged that the branch moved nearly a quarter trillion dollars’ worth of cash into the global financial system, much of it from potentially illicit activity in Russia. It used the three banks’ global presence to convert foreign cash into U.S. dollars on behalf of its clients from 2007 to as recently as 2015.
The examination of whether the big banks gave appropriate scrutiny to the Estonia transactions is one aspect of a broader Danske Bank investigation being led by the U.S. Justice Department in Washington and prosecutors from the Manhattan U.S. attorney’s office, the people said.
The investigation is in its early stages, and there are no signs that the banks themselves are targets. None of them has disclosed contacts with investigators. The banks were discussed in regulatory reports and a Danske Bank internal probe released in September but weren’t mentioned by name.
The Securities and Exchange Commission and the Treasury Department are also investigating the Danske Bank transactions through the global banks, one of the people said.
JPMorgan stopped providing correspondent services to the Danske Bank branch in 2013. Deutsche Bank and Bank of America continued for another two years, according to the reports and the people familiar with the matter. Deutsche Bank handled the bulk of these transactions during the period under scrutiny, one of the people said.
Spokesmen for Deutsche Bank, Bank of America, JPMorgan and Danske Bank declined to comment.
“The problems related to the Estonian branch were much bigger than anticipated when we initiated the investigations,” Danske Bank said in September. The company’s findings “point to the fact that a number of controls at the group level were inadequate in relation to Estonia.”
Global System
The Danske Bank investigation puts a spotlight on the opaque business of correspondent banking -- a circulatory system of sorts for the $160 trillion in annual cross-border payments that support the global economy, as estimated by McKinsey. Major banks maintain their own accounts with other banks, keeping funds on deposit there and using them to make payments on their clients’ behalf in foreign countries and currencies.
Danske Bank, Denmark’s largest lender, has admitted that a large portion of the roughly $230 billion that flowed through its Estonia branch during the period under scrutiny -- an amount comparable to Estonia’s entire economic output during that time -- was suspicious. In recent weeks the bank’s chief executive officer and chairman have been forced out over the scandal.
The U.S., when it has prosecuted cases alleging illicit use of the financial system, has typically treated the dollar-clearing banks as unwitting dupes or victims. But the facts in the Danske Bank case -- including that at least one of the correspondent banks had money-laundering concerns in 2013 that led it to cease working with Danske Bank -- raise the prospect that authorities may scrutinize their roles.
Under U.S. law, correspondent banks must apply anti-money-laundering controls to foreign banks that include periodic reviews of accounts for suspicious activity. Certain foreign banks require additional scrutiny.
Estonia Branch
In 2013, JPMorgan said it was terminating its relationship with Danske Bank after operating as one of the Estonia branch’s dollar-clearing correspondent for years. The branch, acquired as part of a merger, was a far-flung outpost more than 500 miles from Danske Bank’s headquarters in Copenhagen, across the Baltic Sea. It operated differently than others, retaining its own correspondent banks instead of using those established by its corporate parent.
JPMorgan’s banking role included a two-year period from 2011 to 2013 when the majority of the Danske Bank customers tied to a European money-laundering ring opened accounts, according to a May report by Danish regulators that didn’t identify banks by name.
Regulatory concerns about correspondent banking are well-known in the finance industry. Months before ending its relationship with Danske Bank, JPMorgan was hit with an order from U.S. banking regulators demanding improvements to its anti-money-laundering controls, after finding that its overall practices were too weak to prevent suspect transactions.
As a result, JPMorgan undertook a widespread process known as “de-risking,” in which it reviewed client accounts and closed hundreds that it deemed suspect. (The order is still in place.)
Internal Probe
In June 2013, according to the Danske Bank internal investigation, a JPMorgan executive told a Danske Bank board member that it planned to terminate services for the Estonia branch because of its high percentage of nonresident clients, a potential sign of money laundering. When it did so two months later, another of Danske Bank’s correspondent banks -- Bank of America -- agreed to expand its dollar-clearing business with the branch, according to the internal report. It’s unclear whether Bank of America was aware of JPMorgan’s concerns.
In the meantime, internal and external warning signs were beginning to mount. Danske Bank’s executive board, prompted by the JPMorgan withdrawal, undertook a separate review of the business and noted that the branch was generating larger-than-normal profits from the business, a potential sign that clients were willing to overpay to handle business that other banks wouldn’t touch.
The board was also taken aback by the proportion of the Estonia branch’s profits -- 90 percent -- that were coming from transactions for clients who were residents of other foreign counties, primarily Russia. There were nearly 4,000 non-resident accounts at the end of 2012, according to the internal investigation. At the end of 2014, the branch terminated more than 850 customer relationships, the report said.
Regulators’ Suspicions
Estonian regulators were also increasingly suspicious of the branch’s activities. After conducting inspections in March 2014 and the summer after, it concluded that the Danske Bank branch systematically accepted customers bearing money-laundering characteristics.
It also found that the branch did a poor job of identifying the source of customer funds, closed suspicious customer accounts without notifying authorities and focused more on profits at the expense of money-laundering controls. The Estonian regulators repeatedly pressured Danske Bank to close the branch’s portfolio of foreign accounts and replace the branch’s management, according to the Danish regulatory report.
It’s not clear how much of this was known by Bank of America and Deutsche Bank at the time, even as reports in European news media had begun to trickle out about the “washing machine” operation and the concerns about the Estonia branch.
An internal whistle-blower came forward at the end of 2013 with claims about customers using hundreds of shell companies to move money through the financial system without triggering regulators or law enforcement, according to the internal investigation.
Cutting Ties
Bank of America contacted Danske Bank at the corporate level in May 2015 and asked that transactions on behalf of shell companies from the Estonia branch not be routed through Bank of America.
Two months later, Deutsche Bank followed suit, telling the bank that it had found transactions made by the branch that they were “not comfortable with” -- particularly flagging payments made to parties in Moldova, which was part of the [ALLEGED?] “washing machine” network, according to Danske Bank’s internal investigation.
As Bank of America and Deutsche Bank left the Estonian branch without a means of conducting transactions in U.S. dollars, Danske Bank was in the process of closing down its portfolio of foreign customers at the branch in July 2015. The branch is still operating, though Danske has said it will focus the business on customers with a “solid Nordic footprint.”