Danske wields risk axe after Estonia money laundering scandal

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By:
Dominic O'Neill
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Danske Bank’s compliance head Philippe Vollot is on a hiring spree, but parts of its international network might still be too risky.

In an era when compliance heads have unprecedented importance in banking, there is perhaps no other major financial institution in the world where the role is quite as crucial as it is at Danske Bank. Philippe Vollot became the Danish lender’s new chief compliance officer in November last year, just weeks after former chief executive Thomas Borgen resigned, amid a €200 billion money-laundering scandal.

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In a sense, Vollot has jumped from the frying pan to the fire. Originally a French lawyer, he previously ran financial crime compliance at Deutsche Bank, when the German lender faced hundreds of millions of dollars of fines for anti-money laundering failures.

The money-laundering scandal has hit Danske’s reputation hard. In Denmark, it has haemorrhaged customers, and it is now being forced to reassess business it has done for years as an international Scandinavian corporate banking champion.

Vollot’s mandate, as he sees it, is to make sure such a scandal “never happens again” – that Danske regains trust, and its various stakeholders have faith that no corner of its business is any longer a magnet for dirty money. There is plenty to do. Largely in anticipation of fines in the US and elsewhere, the bank’s shares have steadily fallen to about a 40% discount to book value over the past 18 months, with no imminent catalyst for a recovery, according to Berenberg.

Since Vollot joined, Danske’s compliance department has grown by more than 50%, to around 280 people. This still seems low. Vollot says he needs at least another 100 people and expects the final figure at Danske to rest at just over 400. The bank may do more, too, to adapt its geographic, client and product exposures to reduce risk.

De-risking

Danske started running down its Estonian non-resident portfolio – the source of the scandal – four years ago. After it became clear last autumn just how much of these Estonian flows could be related to money laundering, the local financial supervisor ordered Danske to cease operations in the country. In February, Danske said of its own accord it was stopping all its activities in Latvia, Lithuania and Russia. Close peer Nordea has done something similar.

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Philippe Vollot, Danske Bank

These exits have made Vollot’s job simpler, but the de-risking could go further. In July, after six weeks at the bank, new chief executive and former ABN Amro banker Chris Vogelzang, said he would be going through the business, pending an update on the strategy later this year. Money-laundering headaches will figure prominently in Vogelzang’s considerations.

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Chris Vogelzang, Danske Bank

Vollot is working alongside Vogelzang and others to figure out how Danske can adjust its product and geographical scope in line with its new appetite and business priorities. Businesses like transaction banking and wealth management, outside Scandinavia, will be a focus.

Vollot is already overseeing a full review of the bank’s correspondent banking relationships, which can number in the thousands at a bank like Danske with a large international wholesale-banking businesses. “The goal is to serve our Nordic clients, wherever they are in the world,” he says. “Even if you’re a strong regional bank, you need correspondents all over the world for this purpose. The question is are they the right ones, and do we need all of them?”

This follows drastic culls of correspondent relationships at other big banks in recent years, including in Germany. Deutsche, indeed, was the main correspondent bank for Danske’s Estonian unit, and its termination of that relationship in 2015 spurred Danske to run off the non-resident portfolio.

Now the extent of the scandal is clear, Danske will be particularly lacking in enthusiasm for a large correspondent network – even if it would like, in an ideal world, to do such business. The bank needs to be realistic, says Vollot: “It’s a question of having the right control environment. Right now, it’s known in the market: we’re on a journey to make sure that we can have the right systems and controls.”

Expertise

Vollot has already put in place the key planks for what he hopes will be a more robust structure in his own department. In recent weeks, he has hired 12 senior lieutenants to help lead the effort, including new heads from outside Danske for anti-financial crime (Satnam Lehal, previously at Morgan Stanley) and for surveillance and investigations (Simon Kingsbury, from HSBC).

“Quite quickly I realised that the bank hadn’t waited for me to join before it started tackling the issue,” he says, referring to a post-2015 financial crime transformation and remedial programme. “I saw that progress had been made, but that there was still a way to go. We needed more technical expertise.”

Vollot says that bringing the compliance function up to scratch goes well beyond de-risking, hiring and IT investment. “I’m talking to people in the business, making sure that every employee is aware of the key risks,” he says.  “To succeed in the implementation of a robust control environment, you need the right people around you, but it’s also of paramount importance you have a proper cultural grounding at the same time.”

He concludes: “It’s not a one-person job. It’s the responsibility of the entire executive board, and it needs to cascade down to the whole organization, including junior people joining the firm. It takes years. The key thing for me is that we need to be judged on the actions we take when we find issues and challenges.”