Estonia warns of risks in wake of money laundering scandal

By John O'Donnell

FRANKFURT (Reuters) - Banks in Estonia have not yet plugged all the gaps in their money laundering controls, the Baltic state's regulator told Reuters, pledging to maintain a clampdown in the country at the center of one of Europe's biggest financial scandals.

Estonia's efforts to tighten money laundering controls at its banks follows a scandal at Danske Bank which has been ejected from the country after coming under investigation for 200 billion euros ($228 billion) of suspicious transactions that flowed through its Estonian branch.

Kilvar Kessler, Estonia's top bank supervisor, said he had also concluded an investigation of money laundering controls at Swedbank, as well as making checks on other lenders including SEB.

Kessler said his investigations had shown that, although there had been improvement in banks' attitude to money laundering, there were "still weaknesses in the control systems".

"Most of the risk is the past but some of the risk elements are still there," said Kessler, who heads financial watchdog, the Finantsinspektsioon. "We don't want to see sloppy banking here."

His comments underline the widespread scale of the problem that affected many banks in the Baltic state that had become a route for money leaving neighboring Russia.

A Swedbank spokeswoman said it was "fully cooperating with the authorities". An SEB spokesman said it had an ongoing dialogue with regulators and welcomed any review of its Baltic business.

Last week, Swedbank, which is under investigation by U.S. authorities, suspended two executives at its Estonian business. In April, it admitted to failings in combating money laundering.

Kessler said almost all banks in Estonia, which has a population of 1.3 million, had earlier dealt with foreign so-called "non-resident" customers, such as from Russia, but that this business had shrunk.

"It is not possible to do all the parties in the market at once," he said, outlining his efforts to clean up the sector. "There are a number of them. We have our priority list."

The scandal has tarnished the reputation of the tiny state, which has marketed itself as a digital hub, offering electronic residency cards to foreigners including Pope Francis.

The Danske case, which followed the sudden closure of ABLV bank in Baltic neighbor Latvia for money laundering discovered by U.S. authorities, prompted calls to tighten anti-money laundering rules.

Kessler appealed to bankers aware of wrongdoing to come forward.

He said bankers with a "dark conscience" should come clean. "If you have something to hide, maybe you will be treated in a milder way if you talk with us," he said. "If not, wait for the law enforcement (to come) knocking at your door."

Earlier this month, Estonia's Corruption Crime Bureau of the Central Criminal Police said they had detained three employees of Tallinn Business Bank, as part of an investigation into alleged money laundering and bribery.

Mati Ombler, who heads the Corruption Crime Bureau, said in a statement outlining the action that "illegal cash flows" were a threat to the country's reputation.

Igor Novikov, chairman of Tallinn Business Bank's management board, told Reuters by email that the investigation was directed at employees and not the bank itself.

"During (the) last 9-10 months, the number of accounts of non-residents has been decreased very substantially," Novikov said, referring to foreign customers. "Money laundering controls have been adjusted."

(Reporting By John O'Donnell. Editing by Jane Merriman)