Non-resident banking risk significantly reduced, says financial authority

Danske Bank's Estonian branch in Tallinn, site of the largest throughflow of potentially illicit funds.
Danske Bank's Estonian branch in Tallinn, site of the largest throughflow of potentially illicit funds. Source: Anna Aurelia Minev/ERR

The Estonian Financial Supervision Authority (FSA) has said that risks associated with serving non-residents have declined in the Estonian financial sector, BNS reports.

The announcement comes after one bank, the Tallinn branch of Danish bank Danske, was ordered to shut up shop this year after revelations that as much as €230 billion in illicit funds may have passed through the bank, 2007-2015, and, more recently, claims that similar activities may have happened via Swedbank in Estonia, over roughly the same period.

The FSA said that the risks to Estonian banking from serving non-residents have been substantially reduced, as the majority of the banking sector is not at high risk of money laundering and was focused mainly in 2019 on serving local or related business and private clients. The FSA said it is continuing its work with individual sources of higher risk.

Much of the potentially illicit funds to have passed through Danske and Swedbank in Estonia had been connected with non-resident accounts.

The FSA has carried out extraordinary anti-money laundering inspections at all the banks and branches of foreign banks operating in Estonia in late 2018 and early 2019, and authorities in Denmark and Sweden have also been involved in the banks' home countries.

On Wednesday, a report in Swedish daily Dagens Nyheter claimed that the European Cenral Bank (ECB) was also going to have a look at Swedbank in Estonia.

The FSA inspections examined the diligence measures of 16 banks, BNS reports, and their resilience to risks of potential money laundering and terrorist financing.

How each bank identified the risks in its own business activities, what risks it took on through its business strategy, and how this is reflected in the control systems of the bank, were all areas under scrutiny, as well as the business sectors in the client portfolio of the bank.

One measure of risk is the share of non-resident deposits, especially those of high-risk non-residents who generally have no link to the Estonian economic environment, or who operate in high-risk jurisdictions.

The share of non-residents in the banking sector in Estonia has fallen from 19.1% at the end of 2014, to around 7.91% at the end of 2018, BNS reports, and a fall from 8.50% to 0.46% is reported in deposits from very high-risk jurisdictions, including offshore locations.

The FSA said it believes that, given its assessment of the dangers, banks will have to show increased due care above all in providing services for non-residents who have no link with the Estonian economy or business environment, or for financial institutions such as payment institutions that serve clients of this type.

It also sees providers of virtual currency services as a new source of potential danger, which requires particular caution from the banks.

The FSA recently published a new supervisory policy, and introduced a comprehensive advisory manual on organisational solutions and preventive measures for credit and financial institutions to take against money laundering and terrorist financing, it is reported. The policy came into force on 1 March, 2019.

Editor: Andrew Whyte

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