Danske Bank money-laundering scandal drags down Deutsche Bank

Fears that Deutsche Bank may be facing yet another scandal and huge fine in connection with the money-laundering case at Danske Bank sent its shares plunging to an all-time low, undermining tentative efforts to restore credibility at Germany’s largest bank and wiping out recent gains in the share price.

Danske Bank whistleblower Howard Wilkinson told the Danish parliament that the US unit of a large European bank — quickly identified as Deutsche — handled the bulk of the $230 billion in hot money that flowed through Danske’s Estonian branch between 2007 and 2015.

Deutsche, one of the Danish bank’s main correspondent banks in the US, handled $150 billion of the amount, Wilkinson testified. JPMorgan Chase and Bank of America were also active as correspondent banks.

Yet more bad news

But for Deutsche, it is another unfortunate mess that fits in too well with the scandals and losses that have accumulated over the past several years, from rigging benchmark indices to marketing toxic mortgage securities to manipulating currency markets. The German bank already paid $630 million to US and British authorities to settle earlier charges of laundering Russian money.

The latest whiff of scandal comes as the new chief executive, Christian Sewing, is trying to cut the bank’s bloated cost structure and get back to sustainable profitability. His efforts were bolstered recently when US hedge fund Hudson Executive bought a 3-percent stake in the bank.

But that little bubble burst on Tuesday. Deutsche’s shares at one point were down 6 percent to €8.05, before recovering to €8.12 by the close. That means Deutsche’s share price has halved in the last twelve months. Back in May 2007, by contrast, one Deutsche Bank share was worth more than €108.

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Authorities seek more information

Wilkinson’s disclosure came after US authorities last week said they were seeking more information from Danske’s correspondent banks in the US, though they were not themselves targets of the investigation. At least, not yet.

Wilkinson, a British subject, finally left his position as trader at the Estonian branch in 2014 after his suspicions about some of the money flows were ignored by management. He told the Danish parliament that Danske Bank offered him money not to talk about his suspicions. The bank is currently under investigation by Danish, Estonian and US authorities.

The Danske scandal has raised the alarm about the extent of money laundering in Europe despite efforts to crack down on it along with the tax evasion and terrorism financing that it often indicates.

Banks are supposed to scrupulous about reporting any suspicious money flows and most experts feel that the amounts of money flowing through the tiny Estonian branch should have been flagged as suspicious. The scandal has already cost both the chief executive and the chairman of Danske Bank their jobs.

Cost and revenue losses in vicious circle

For Deutsche Bank, the latest setback comes as analysts are questioning whether it can ever get on top of its cost problems. Barclays analysts suggested that revenues are declining even faster than costs in a vicious circle that makes profitability recede even further. These analysts warned that Deutsche is losing important market share in investment banking.

DZ Bank analysts said Deutsche’s disappointing performance in the recent European stress tests highlighted how poor its profitability is even in good times.

Building new reserves against possible fines in the Danske scandal won’t help. Sewing has been forecasting a net profit for the year in spite of the bank’s disappointing third-quarter loss, but investors ran for the exits with the latest news of possible misconduct.

Source: handelsblatt.com