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Morningstar | Money Laundering Scandal at Swedbank Deepens; Offices Raided by Swedish Crime Unit

The frequency of negative headlines is accelerating at the Swedish lender Swedbank. On March 27, the Swedish Economic Crime Authority raided the lender’s headquarters in relation to potential insider information violations and police investigations of aggravated fraud. On March 28, CEO Birgitte Bonnesen was released of her duties as it became apparent that major shareholders would vote against releasing her of her liabilities at the annual general meeting. Additionally, Swedish, Estonian, and U.S. regulators are intensifying their inquiries into Swedbank’s involvement in money laundering schemes related to money flows from former Commonwealth of Independent States countries and regarding revelations in the Panama Papers. We have changed our fair value uncertainty rating to very high from medium owing to the increased possibility of material downside risks, which are largely unquantifiable given the scarcity of public information. We also rate Swedbank’s stewardship as poor.

The Swedish ECA is investigating Swedbank for potential fraudulent communications with the public and investors. New media reports suggest that internal communications within Swedbank give an indication that management was aware of a larger problem with regards to its anti-money-laundering processes. This is at odds with statements the CEO made to investors in conference calls and to the public in general claiming that there is no connection between Swedbank and the scandal involving Danske. After these claims, it was revealed that about EUR 4 billion-5 billion in suspicious funds flowed from Danske customers to Swedbank. This number was subsequently raised to about EUR 10 billion. The latest media reports now show that about EUR 135 billion in suspicious funds flowed through Swedbank from 2008 to 2015. Danske has acknowledged EUR 200 billion in suspicious funds over the same period. We think the issue at this point is what management knew and when, and how did it act on information of suspicious behaviour. It appears now more likely that not all transactions were adequately reported.

As we outlined for Danske already in a similar argument, we would urge investors not to focus on the sheer size of the EUR 135 billion in suspicious funds. As these funds mostly originated from former CIS countries, it is likely that they would be declared suspicious owed to the higher money laundering risk stemming from these countries. The ultimate question is whether the bank fulfilled its duty in screening and reporting such transactions to the best of its ability. Also, we think it needs to be distinguished between facilitating money laundering and failing to detect weak spots in banking systems allowing for systematic money laundering schemes to operate. Based on this, we believe potential fines and economic impacts can follow a large range of scenarios, but we don’t think that the EUR 135 billion is a helpful yardstick.

Swedbank is also being investigated for sharing price-sensitive information with selected investors, which would constitute an insider information violation. Swedbank was aware of a TV program in Sweden ahead of its airing date, which revealed about EUR 4 billion-5 billion in transactions between suspicious customers at Danske to Swedbank accounts. The stock price declined about 20% following the airing of the program. We are not aware if any shareholders acted on this information specifically. Looking at the volume traded in Swedbank shares up to the release of the Swedish TV program on Feb. 20, 2018, we think it is unlikely that any major shareholder unloaded a material number of shares, however.
Next to the money laundering scandal in the Baltics, Swedbank is also being investigated by U.S. authorities for potentially withholding information on connections with the law firm Mossack Fonseca. The firm is at the center of the tax avoidance schemes revealed in the Panama Papers. It is alleged that more than 100 companies did business with Mossack Fonseca through Swedbank’s Baltics operation. Previously, Swedbank reported Scandinavian clients to U.S. authorities only.

Our Poor stewardship rating is based on management’s unsatisfactory handling of the money laundering case, which to be fair are allegations at this point. We said in an earlier note that the pattern seemed strangely familiar to Danske’s conduct faced with similar accusations. Indeed, involvement was denied by both banks until made public by whistleblowers or third parties gaining access to internal documents to prove otherwise, upon which both lenders acknowledged what was revealed but hid behind bank privacy laws when asked about the full extent of the matter. This resulted in a strange attempt to display transparency by way of citing official press releases and reports. The latest similarity between Danske and Swedbank’s case has been the release of Bonnesen, who like Danske’s former chief executive used to oversee the Baltic operations. We would have preferred a quick and comprehensive acknowledgement of involvement, getting ahead of the news cycle and showing full transparency in the matter. A bank’s business relies on trust by clients, regulators, and even competitors, and we believe that management’s actions have shown poor stewardship with regard to this most valuable asset.