The reporting in early September of the “Azerbaijani Laundromat” alleged money laundering and lobbying scheme is the latest public revealing of the workings of a major money laundering operation, and the latest cause for scrutiny of the anti-money laundering (AML) practices of a bank and of an entire country. Revealed on September 4 in investigative reports by the Organized Crime and Corruption Reporting Project (OCCRP), and the other media organizations, the scheme allegedly moved approximately $3 billion from sources in Azerbaijan, using accounts at the Estonia branch of Denmark’s Danske Bank, to shell companies registered in the United Kingdom that made payments to Azerbaijanis abroad and to European politicians from 2012 to 2014.
The Azerbaijani Laundromat revelations have compelled Danske Bank and the government of Denmark to take action to remedy AML problems at the bank and throughout the country’s financial system. A closer look at the scheme and the problems that it has created for Danske Bank and Denmark show the constantly evolving nature of money laundering threats, the importance of constant vigilance against them, and the international consequences of AML deficiencies in one bank and one country.
The Azerbaijani Laundromat and Danske Bank
The Azerbaijani Laundromat allegedly had its origins in the oil wealth of Azerbaijan and was used to move funds to Europe to cover the expenses of Azerbaijani elites and to make payments to European politicians. The full extent of the scheme may still be hidden, because the leaked banking records revealing the operation only covered transactions over a 30 month period, which may represent only part of the time period and scale of the scheme.
As described in the OCCRP’s report $2.9 billion of unclear origins, about half ($1.4 billion) from an Azerbaijani shell company called Baktelekom MMC and part ($29.4 million) from Rosoboronexport, the main Russian weapons export firm, flowed through U.K.-registered shell companies using accounts at the Estonia branch of Danske Bank. It was a classic example of money launderers finding and exploiting weak spots in the international financial system, before authorities found and closed them.
The Azerbaijani Laundromat used U.K. shell companies to take advantage of anonymity in corporate ownership that was possible in the United Kingdom at that time. Hilux Services LP and Polux Management LP, responsible for over $1.7 billion in transactions, were Scottish limited partnerships that used addresses on the same street in Glasgow. LCM Alliance LLP was an English limited liability partnership with an address in Hertfordshire, and Metastar Invest LP was an English limited partnership with an address in Birmingham. These companies, all since dissolved, could operate without reporting the identities of their beneficial owners in 2012-14. The United Kingdom began to require English LPs and LLPs to keep a register of “people with significant control” and to provide the register to Companies House starting in April 2016, and it extended the requirement to Scottish LLPs in June 2017.
To move funds internationally for these U.K. shell companies, the organizers of the Azerbaijani Laundromat turned to Danske Bank, the largest bank in Denmark. Selecting a bank from a country known for transparency and lack of corruption was a clever choice, almost certainly intended to exploit a jurisdiction and a bank unprepared for a major money laundering scheme. Denmark has been consistently rated first in the world in perceived lack of corruption by Transparency International since 2012. However, possibly as a result of lack of domestic organized crime and corruption, Denmark has had weak policies and practices against money laundering. The 2017 Financial Action Task Force (FATF) mutual evaluation of Denmark found significant weaknesses in the country’s AML regime, with a lack of a national strategy and under-resourced and uncoordinated authorities.
Danske Bank appears to have been unprepared for the AML issues that it encountered when it expanded its branch network into Estonia, Latvia and Lithuania in 2008 after an acquisition of Finland’s Sampo Bank in 2007. Denmark’s bank regulator, the Danish Financial Supervisory Authority (FSA), attempted to get Danske Bank to address its weaknesses after an inspection in 2011-12. The FSA issued a 2012 order for the bank to introduce satisfactory procedures with respect to cross-border correspondent bank relationships, but the FSA’s efforts were clearly unsuccessful.
The failure of Danske Bank to detect and address the alleged money laundering occurring through the U.K. shell company accounts at its Estonia branch allowed over 16,000 transactions to flow through these accounts, moving approximately $2.9 billion from Azerbaijan into Europe, from 2012 to 2014. The $2.9 billion allegedly went to a variety of purposes. Many payments were for the medical bills and other personal expenses of Azerbaijani senior government officials, and for school tuitions, apartment rents, luxury cars, designer dresses, and other expenses of Azerbaijani students from politically connected families. Some payments went to European political figures, two who are former members of the Parliamentary Assembly of the Council of Europe and one who was later appointed to the board of the European Bank for Reconstruction and Development, in an apparent lobbying campaign during a period when Azerbaijan was subject to international criticism for rigging of its elections and for arresting journalists and political activists.
Neither a BSA Violator Nor a Launderer Be
The public revealing of the Azerbaijani Laundromat story on September 4 appears to be only one step in a larger and longer process for authorities in Denmark and other countries investigating a broader money laundering problem and its AML implications. On September 5, Danske Bank announced that it was hiring the former head of Denmark’s Security and Intelligence Service, Jens Madsen, to head its internal investigation of money laundering and overhauling of its AML compliance. The investigation is likely to extend far beyond Danske Bank and Denmark, because Danske Bank’s Estonia branch allegedly was also heavily involved in a larger “Russian Laundromat” money laundering scheme, reported by OCCRP in March 2017, that moved approximately $20 billion out of Russia using companies and banks in multiple countries, including Moldova and Latvia.
These September 2017 announcements are the latest developments in actions by Danske Bank and the FSA since 2014 that appear to have only begun to address the problems revealed by the Azerbaijani Laundromat story. In October 2014, the bank introduced measures for a special control unit to check customer information, and after a 2015 FSA inspection it added resources to address correspondent bank due diligence. After the 2015 inspection, the FSA made additional findings in March 2016 regarding deficiencies in risk assessment and risk management, know your customer procedures, and correspondent bank relationship due diligence and monitoring, with a reprimand for Danske Bank for failures at its branch in Estonia. The FSA also reported Danske Bank to the police for its violations of the correspondent bank relationship provisions of Denmark’s AML Act. These actions have not ended the problems for Danske Bank or Denmark as a whole. Denmark has had to take further actions to address its AML regime deficiencies since receiving criticism in its 2017 FATF mutual evaluation, and the publicity given to the Azerbaijani Laundromat has put additional pressure on Danske Bank and Danish authorities.
It is possible that the extent of the investigation and of any resulting law enforcement and AML regulatory enforcement action will not be confined to Europe. Suspicious activity through Danske Bank may have reached the U.S. financial system in multiple ways. Funds from Azerbaijani Laundromat or Russian Laundromat transactions through Danske Bank may have been later transferred to the United States, possibly becoming involved in cases of criminal money laundering of interest to U.S. federal or state law enforcement. Also, the New York branch of Danske Bank may have been involved in clearing dollar-denominated transactions from the Azerbaijani Laundromat or Russian Laundromat, and if it was, then the Federal Reserve or the New York Department of Financial Services may have jurisdiction and policy reasons to initiate a Bank Secrecy Act (BSA) enforcement action. With both U.S. federal and New York authorities having a history of imposing significant monetary penalties for BSA violations in dollar transaction clearing operations for foreign banks, Danske Bank has to hope that no or few Azerbaijani Laundromat or Russian Laundromat transactions cleared through its New York branch, or that U.S. authorities will see its actions in cooperation with its domestic FSA as adequate remediation.
The exploitation of vulnerabilities in the corporation laws of the United Kingdom and the AML regime of Denmark by the Azerbaijani Laundromat shows how money launderers have been able to find paths of least resistance even in sophisticated jurisdictions, after over a decade of international attention toward countering money laundering and terrorist financing. The alleged spread of laundered money around Europe and the possibility of international regulatory and law enforcement actions, all still to be determined and possibly far more extensive than currently suspected, may make the case a landmark development in AML in Europe.