The Auditor General of Pakistan and the State Bank of Pakistan (SBP) are at loggerheads over the recovery of $265 million funds from M/s Danske Bank, a Danish bank involved in money laundering.
The AGP, in its audit report 2020-21, has stated that one of the objectives of the Investment Risk Analysis Division (IRAD) of SBP is to evaluate new counterparty relationships and monitor and report the creditworthiness of counterparties through the Early Warning System on a daily basis.
During an audit of SBP and SBP-Banking Services Corporation (BSC) for the year 2018-19, AGP has observed that M/s Danske Bank is an active counterparty of SBP with a Global Credit Limit (GCL) of $290 million and money Market Placement limit of SBP of $275 million.
The SBP, according to the audit, was the target of criminal investigations in Denmark and Estonia — in connection with Estonian operations on September 07, 2018 — that were suspected to be involved in money laundering of almost $9 billion, mostly from Russia, between 2007 and 2015.
A Danish regulatory authority, Financial Supervisory Authority (FSA), also reiterated the failures in Danske’s internal procedures.
According to the document, Danske Bank’s equity registered a decline of 7.3% and its five-year Credit Default Swap (CDS) increased by more than 29% indicating troubles in the debt market. Since August 01, 2018, its CDS spread increased by 44%, indicating a significant increase in credit risk.
The audit revealed that SBP faced Counterparty Default Risk as well as Liquidity Risk. Had the regulators imposed restrictions on settlement of outstanding commitments of Danske Bank as an outcome of the investigation, the default and liquidity risk could have been avoided, adds the audit document.
The audit report further disclosed that the SBP Risk Management Department did not take any action on August 01, 2018, when Danske’s CDS increased by 44%. On the other hand, SBP terminated the counterparty limit on September 13, 2018, after 43 days. Consequently, $15 million having a maturity of September 05, 2018, was received on September 10, 2018, with a delay of five days without any penalty. The matter was reported to the management of SBP and the irregularity was also discussed in a DAC meeting, according to the audit document.
It was agreed in the DAC meeting that the SBP management would verify the recovered amount, as the full amount was recovered. However, no relevant record was provided to the audit till the finalization of the report.