Danske Bank's Money Laundering Scandal
Madinger (2006) points out that the net worth method is among the most common used in accounting forensics when it comes to detecting illegal income, such as by way of money laundering. The case of Danske Bank and its money laundering escapades from 2007 to 2015 through an Estonian branch where a quarter of a trillion dollars flowed is a prime example of a situation in which the net worth method could be applied to investigate this corporate fraud.
As Schwab (1961) states, the net worth theory rests upon the idea that if one’s net increase exceeds the income reported, the corporation has understated its income; additionally, “if there is no increase in net worth but if the taxpayer has expended larger amounts than his reported income on nondeductible items, there has been an understatement of income” (p. 78). With Danske Bank, billions were passing through its Estonian branch from several different sources in dozens of different currencies. If net worth is the difference between assets and liabilities, which equals equity, then one can begin with the equity of the firm and move on from there. With Danske Bank, the increase in equity has to be the result of income. So the first steps in addressing the red flags at Danske would be to:
1. Go to the bank’s records
2. Obtain information from the bank’s informants, i.e., cooperating individuals
3. Assess loan applications, financial statements, tax returns, etc.
4. Catalogue assets and liabilities and expenses.
These steps will provide the foundation for proceeding into the next stage of investigation (Madinger, 2006).
This phase starts by looking at assets valued at cost without accounting for depreciation or appreciation. With Danske, “the Estonian branch generated 11...
In other words, assets were not aligning with income. Because 99% of the bank’s customers were non-Estonian customers, it was another signal of laundering.
After looking at assets, the next step is to use the same accounting techniques that the subject was using, and all items pertaining to the calculation should be included in the investigation even if they do not alter from one year to the next (IRS, 2017). Cash on hand and expenses can become problem areas. For Danske,...…income and that the holdings of the branch were different from what was being reported. This was how the firm was laundering money and why no investigation was permitted. An investigation would have shown right away using net worth method that the accounting tricks of the branch were hiding dirty money.
The net worth method is thus a useful way to uncover the facts of a corporation’s holdings and its net worth—i.e., equity—that has to be connected to income but in a money laundering situation cannot be directly linked or else it would show what the bank was really up to. Thus there has to be a means of hiding the money coming in via currency swaps and mirror trading so as to dupe regulators. Because the bank was clearly not even attempting to stay in compliance with regulations by reporting large deposits from non-resident customers, there should have been a red flag immediately. The forensic accountant should be interviewing those involved and definitely should be interviewing any whistleblowers as they can provide direct firsthand knowledge of the reality of the situation. It is not just about looking at the bookkeeping; it is also about talking to those involved.
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