European Banking Authority Draws “Sharp Criticism” After Closing Investigation Into Danish and Estonian Financial Authorities’ Danske Bank Oversight

The April 16 decision by the European Banking Authority’s (EBA’s) Board of Supervisors to close the EBA’s investigation into the Danish and Estonian Financial Services Authorities’ oversight of Danske Bank “has drawn sharp criticism from senior [European Union (EU)]  policymakers,” according to the Financial Times.  The 45-page draft internal report on which the Board of Supervisors voted reportedly reviewed the period from 2007 to 2014, and

identified breaches of union law including “significant shortcomings” in co-operation between the Danish and Estonian supervisors, a lack of effective monitoring of whether due-diligence procedures were followed by the bank and insufficient reviews of Danske’s governance arrangements.

The draft specified four breaches of EU law in how Danske Bank was supervised by Danish and Estonian authorities and made recommendations to both countries for followup activity.

However, the EBA, in an April 26 letter to the European Commission (EC), stated that the draft report had been “rejected conclusively” by the Board of Supervisors.  The letter commented that “[a] number” of the Board’s members, “while acknowledging that with the benefit of hindsight there were failings in the supervision by the two authorities, did not consider that those failings amounted to a breach of union law.”

In response, Valdis Dombrovskis, the EC vice-president responsible for financial services policy, expressed to the Financial Times his disappointment that the Board “did not act on one of the biggest money-laundering scandals in Europe.”  Dombrovskis reportedly said that “the case showed it was ‘essential’ that legislation be adopted to ‘transform’ the way decisions were taken at the agency.”

In addition, Members of the European Parliament and others in EU government have said that the Board’s decision “is a sign of the agency’s inability to take a tough stand with its own members.”  One MEP, Sven Giegold, even urged the EC “to use its own powers to open ‘infringement procedures’ against Denmark and Estonia for failure to apply EU law.”

Note: At the moment, it is not clear whether MEP Giegold’s recommendation is a viable legal remedy for the EC.  Under EU law, the EC may launch a formal infringement procedure “[i]f the EU country concerned fails to communicate measures that fully transpose the provisions of directives, or doesn’t rectify the suspected violation of EU law.”  Under that process, the EC would send a letter of formal notice requesting further information to both Denmark and Estonia, which would have to send “a detailed reply within a specified period, usually 2 months.”  Should the EC conclude that either or both countries were failing to fulfil their obligations under EU law, it may send a reasoned opinion, constituting a formal request to comply with EU law, and requesting “that the country inform the Commission of the measures taken, within a specified period, usually 2 months.”  If the receiving country does not then comply, the EC “may decide to refer the matter to the Court of Justice.”

The problem is that the EU has already been informed of the EBA Board’s determination – in a manner in conformity with Article 17 of the EBA’s founding Regulation — that the reported failings did not breach EU law.  That fact would likely weigh heavily in the EC’s own decision whether to pursue an infringement procedure, and certainly would weigh heavily in any deliberations by the Court of Justice.

As a practical matter, the EBA Board’s decision is more likely to harden the resolve by EU and EC leaders to pursue creation of an EU-wide agency specifically charged with anti-money laundering (AML) oversight and enforcement, and to prompt further skepticism in Brussels about the EBA’s ability even to oversee EU Member States’ national financial supervisory authorities effectively.