Price of Danske Bank Evaporates Under Investigation

Danske Bank (NASDAQ: DNSKF, OTCMKTS: DNKEY) officials will soon be answering to the United States Department of Justice, in addition to the ongoing investigations by Danish, Estonian, and British authorities. The Danish Bank’s Estonian branches appear to have been used to launder over $200 billion between 2007-2014 while third-party auditors failed to report any issues.

Additional details have continued to surface in recent weeks while shareholders have sold off in droves and the CEO of the bank has resigned in shame. The stock price is down to $26.35 from its 52-week high of $41.13 as of the time of this writing.

Ernst & Young, an international accounting firm who played the role of the Impartial Third-Party Auditor in the screen-worthy story, is the subject of an investigation by Denmark’s business regulator.  E&Y have been admonished in the press for a lack of diligence, since observers seem surprised that an auditor would not have noticed the long series of red flag transactions. Other firms were also contracted to audit the bank over the years in question: these include Deloitte, KPMG, PwC and Grant Thornton.

Large accounting firms have been under fire from regulators in recent years over the potential conflict of interest that exists between the companies and their long-term clients. None of them are publicly traded, although KPMG’s consulting spinoff, now rebranded as BearingPoint, Inc. went public at one point before going private again. The rest of the companies have been under pressure to spin off their consulting businesses to avoid such conflicts.

Many of the questionable transactions at Danske Bank involved large “mirror trades” which were highly profitable for the bank. They dealt with intermediaries for anonymous Russian clients who purchased securities, such as Russian bonds, in roubles and while selling identical securities for other currencies, such as USD. This purportedly allows clients to make international payments in a faster and more reliable way, although there is scant evidence that actual goods and services were being purchased. While the transactions themselves may not be illegal, the reporting requirements associated with them were not satisfied.

International banking regulations require that financial institutions gather the identifying information of individuals and companies engaged in certain types of large transactions, and that these transactions are reported to reduce to likelihood of money being laundered to fund terrorist organizations.

Danske Bank was already fined $630 million by the DOJ for a series of infractions that took place in a Moscow branch between 2011-2015.  Some have speculated that dollars acquired in this way could be used for covert purposes, such as influencing elections. 

A similar situation with Latvia’s ABLV, in which the bank was found to be covering up money laundering, resulted in the Bank being denied dollar-denomination, and the bank's board ultimately voted to voluntarily liquidate beginning in February 2018.