Russia’s Dirty Money Tars Europe’s Bank Elite

(Bloomberg Opinion) -- Even for those who haven't been following the vicissitudes of European banks blow by blow, the latest wave of money-laundering allegations to hit some of the region's lenders is reason to look away in despair.

Firms from Swedbank AB to Raiffeisen Bank International are alleged to have handled a broad range of suspicious transactions involving Russian money. It will take months, if not years, for regulators and enforcers to determine which, if any, of the claims are substantiated by fact. But one firm stands out: Danske Bank A/S. Under criminal probe in the U.S. and Europe for handling $230 billion of suspicious transactions, the sheer magnitude of the allegations facing the Danish lender put in a league of its own. Whether these more recent cases are in the same category remains to be seen.

What is clear, though, is that European banks have a problem detecting the movement of illicit funds, and one that will undoubtedly continue to add to their compliance costs. The absence of a single European Union body to tackle money laundering has exacerbated the deficiencies of fragmented oversight. What's more, regulators in the U.S. have been pushing financial firms harder on the quality of systems and controls, and not just their balance sheets.

For now, investors aren't waiting before pressing the sell button. But they should pause to consider the broader context in which European lenders operate and the merits of each case.

Unlike most U.S. firms, banks in Europe typically operate across multiple jurisdictions. That these lenders suddenly find themselves linked to questionable transactions is a reflection of the difficulty they face when building platforms and handling funds in remote countries, where language differences, for one thing, complicate oversight. Investors and regulators look to have become complacent about a risk that is always present in any business working across borders.

What's more, for years, fund managers favored banks in Europe's northern economies, helping to boost their valuations. Swedbank and Nordea both trade at, or at a premium to, the book value of their assets while rivals like Deutsche Bank AG and UniCredit SpA languish at a steep discount. The cleanup that followed Scandinavia's bailouts of the 1990s enabled lenders in the region to weather the global financial crisis from a position of strength. Their seemingly simple, solid commercial banking model ensured they maintained the trust of investors as their counterparts in southern Europe grappled with a plethora of near-existential crises in the past decade.

The dawning realization that these apparently staid banks in Sweden, Finland, Denmark and Norway were chasing growth in racier parts of the market while their Baltic units may have served as a hub for Russian criminals is prompting a broad re-rating. Investors will come to realize that, in banking, safety is a relative thing. In their rush, they risk overlooking the finer details.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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