## 1. Select Recommendations from Finance Denmark's AML Task Force

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---

### Overview and context
- TN prepared in the context of the Denmark 2020 FSAP and does not assess the impact of the COVID-19 pandemic; findings and recommendations remain pertinent.
- Recent progress:
  - Conducted or participated in three multinational on-site inspections of banks.
  - Developed a new institutional risk assessment model.
  - Issued an AML/CFT on-site inspection manual.
  - Via Act No. 1563 (2019), amended legislation to: bolster DFSA monitoring and enforcement powers; establish additional private sector reporting requirements; stiffen penalties for AML/CFT violations.
- Sector retrenchment following ML revelations:
  - Possible laundering of over $200 billion via Danske Bank’s branch in Estonia prompted major retrenchment by Danske Bank in 2019 (closed branches in Estonia and Russia; selling most activities in Lithuania and Latvia).
  - Jyske Bank sold its subsidiary in Gibraltar in 2019 in response to the UK’s decision to leave the EU.
- Surge in suspicious reporting:
  - MLS received a record 13,771 reports in Q3 2019, followed by a record 15,741 reports in Q4 2019.
  - In Q4 2019 the MLS disseminated 3,648 unique reports to receiving entities (SPSEIC, police districts, Tax Agency).
  - Note: reports include STRs, SARs, and TFRs.
- Political will and resource augmentation:
  - Broad parliamentary support, including the ruling party, for strengthening Denmark’s AML/CFT regime.
  - Political agreements have underwritten deeper cooperation, accelerated adoption of risk-based supervision, and enabled expedited legal changes to increase resources and powers for DFSA and MLS.
- Three follow-on (priority next-step) recommendations identified:
  - The Government should consider next-stage options for the integration/consolidation of AML/CFT supervision at the sub-regional or EU levels and pursue the selected option(s).
  - The DFSA should implement its new institutional risk assessment model.
  - The DFSA should intensify (i.e., significantly lengthen and deepen) its AML/CFT on-site inspections of higher-risk FIs.
- Timing and forums:
  - These recommendations could be implemented over the near-term (i.e., within one year).
  - The annual AML/CFT stocktaking exercise of the parties to the March 2019 political agreement is an ideal forum to discuss consolidated supervision options.
  - DFSA’s 2020 workplan includes testing its institutional risk assessment model and refining AML/CFT on-site inspections.

### International and domestic cooperation
- Importance:
  - International and domestic cooperation are critical for identifying and mitigating cross-border ML/TF risks given Danish banks’ operations abroad and service to non-resident customers.
  - DFSA effectiveness will depend on cooperation with foreign counterparts, bilateral channels, the Money Laundering Forum (MLF), and public-private partnerships.

A. Further formalizing international cooperation — Analysis of recent progress
- DFSA-led and participated inspections in 2019:
  - September 2019: DFSA-led two-day AML/CFT on-site inspection of Danske Bank with Finnish, Latvian, Norwegian, and Swedish inspectors.
  - September 2019: Finnish inspectors participated in a similar inspection of Nordea Danmark.
  - September 2019: DFSA representative took part in an AML/CFT on-site inspection of Danske Bank in Norway.
  - November 2019: DFSA conducted an AML/CFT on-site inspection of Danske Bank’s processing center in Lithuania — first time DFSA operated on its own outside national territory.
  - Inspections were within supervisory colleges and MOUs, demonstrating potential to enhance transparency, information-sharing, and cooperation in the Nordic-Baltic region.
- Nordic-Baltic Working Group (NBWG) MOU:
  - November 2019 draft MOU obliges members to cooperate and share information to the greatest extent possible, addressing weaknesses/ambiguities in bilateral MOUs.
  - NBWG includes both EU and non-EU members.
- Spectrum of deeper integration options that remain unimplemented:
  - Consolidation of off-site AML/CFT supervision at Nordic-Baltic or EU levels.
  - Formal integration/consolidation of AML/CFT supervision at the Nordic-Baltic level.
  - Formal integration/consolidation of AML/CFT supervision at the EU level (via Enhanced Cooperation or all member states).
  - Note: fully implementing any of these options would almost certainly require amendments to Danish law.
- Bilateral MOUs with non-EU/EEA counterparts:
  - Under Danish law, DFSA must conclude specific agreements before sharing information with non-EU, non-EEA supervisors.
  - DFSA negotiating two bilateral MOUs (banking and investment banking) with an important foreign counterpart.
  - DFSA should proactively pursue additional bilateral MOUs, prioritizing jurisdictions where Danish banks operate or plan to operate, or whose banks operate in Denmark (e.g., Australia, Brazil, India, Russia, Singapore, Switzerland).

Proposed next steps (international cooperation)
- The Government should consider next-stage options for integration/consolidation of AML/CFT supervision at the sub-regional or EU levels and pursue the selected option(s); discussions could occur in the annual stocktaking exercise of the March 2019 political agreement parties.
- DFSA should continue pursuing bilateral MOUs with foreign counterparts outside the EU and EEA, prioritizing jurisdictions linked to Danish banks’ operations.
- Over time, DFSA should reexamine and seek to strengthen existing MOUs with key non-EU, non-EEA counterparts to ensure MOUs presume cooperation (including information exchange) across a wide variety of cases.

B. Deepening domestic cooperation — Analysis of recent progress
- March 2019 Political Agreement stocktaking:
  - First annual stocktaking exercise convened in October 2019; objectives: follow-up on implementation and determine need for further agreements.
- MLF updates and Operational Forum:
  - October 2019: MOU governing MLF updated and adopted by all members.
  - An Operational Forum was established under MLF to enable closer coordination on individual cases; members meet monthly on a confidential basis.
- MLS proactive information-sharing and IT integration:
  - H2 2019: MLS provided a “warning” to DFSA on an evolving ML risk under analysis.
  - MLS database partially integrated into the police’s analysis platform (Polintel), enabling police/SPSEIC to determine if MLS database has relevant information and to request it via the platform.
  - This allows SPSEIC to conduct limited initial queries of MLS as part of investigations referred by DFSA.
- MLS limitations and opportunities:
  - MLS has not yet provided DFSA with information on individual FIs whose institutional risk tolerances or profiles appear to have changed (e.g., STR patterns suggesting increased transactions in high-risk jurisdictions).
  - If MLS provided such analyses, DFSA could file for future reference, check-in with subject banks, or add them to on-site inspection schedules.
- EU 5th AML Directive IT system:
  - IT system due to roll out in September 2020.
  - System will accept queries only from MLS, forward queries to FIs via secure server.
  - FIs must respond with particulars: names of account holder and beneficial owner, account number, date account opened, and, where applicable, date closed.
  - Positive responses (“hits”) will inform which FIs should receive formal requests for additional information (e.g., transaction excerpts).
- Finance Denmark (banking industry association) — December 2019:
  - Released 25 recommendations to further AML/CFT public-private cooperation; a selection is presented in Box 1.

Proposed next steps (domestic cooperation)
- MLS should, where relevant and appropriate, share with DFSA its analysis of STRs that may indicate shifts in individual banks’ institutional risk tolerances or profiles; this could prompt DFSA checks or on-site inspection scheduling.
- MLS should consider modifying its reporting regime to request that reporting entities identify any predicate offense(s) potentially linked to a suspicious or unusual transaction to enhance MLS ability to identify emerging risks and to prioritize STRs for analysis.
- MLF should review Finance Denmark’s AML Task Force recommendations that imply action by authorities and work to advance agreed initiatives; implementation of some recommendations would require changes to Danish law and Government support is critical.

Box 1. Select Recommendations from Finance Denmark’s AML Task Force
- Recommendation 1: Develop a register of bank account and safety deposit box holders, as well as a shared, industry-wide list of politically exposed persons (PEPs) and their relatives and close associates (RCAs).
- Recommendation 2: Identify the (technological and legal) requirements for establishing an industry-wide customer due diligence (CDD) “utility” to capture names, birthdates, addresses, and other identifiers as well as information on those customers whose accounts have been closed or else marked for special scrutiny owing to their suspected involvement in illicit financial activities.
- Recommendation 4: Establish a Joint AML/CFT Intelligence Unit as between banks, the MLS, the police, the intelligence services, and the Tax Agency, to exchange confidential information on “big fish”/“major cases”.
  - Note: This would be modeled on the United Kingdom’s Joint Money Laundering Intelligence Task Force (JMLIT), established in 2016.
- Recommendation 21: Conduct annual MLS “evaluations” of the quality of financial sector STRs with a view to minimizing unnecessary reporting.
- Source of recommendations: Finance Denmark.

### Translations, outreach, and next NRA
- In January 2020, the MLS published an English-language translation of the summary and methodology of Denmark’s 2018 ML National Risk Assessment (NRA).
- The MLS also provided an English-language translation of the full NRA to all reporting entities, including some owned by foreign firms whose corporate managers and compliance officers may not speak or read Danish.
- The MLS is preparing to conduct a next-round NRA that will incorporate feedback received on the 2018 text; this should not be understood as a backward-looking exercise.
- The DFSA has issued a Danish-language translation of the EU’s 2019 supranational ML/TF risk assessment (Assessment of the Risk of Money Laundering and Terrorist Financing Affecting the Internal Market and Relating to Cross-Border Activities).

Proposed next step
- The DFSA should actively solicit supervised entities’ feedback on the accuracy and value of Denmark’s 2018 ML NRA and the EU’s 2019 supranational ML/TF risk assessment.
- As the DFSA conducts AML/CFT inspections over the course of 2020, it should note key differences between the national and supranational risk assessments and the institutional-level risk assessments prepared by individual FIs, and feed private sector reactions into the next round of assessments.

### Implementing the risk-based approach
- Rationale:
  - Fully implementing the risk-based approach will maximize DFSA efficiency and effectiveness; full-scope on-site inspections of every FI every year are infeasible despite new resources allocated by the government.
  - The risk-based approach varies timing, frequency, scope, and intensity of inspections based on assessed ML/TF risks at national, sectoral, and institutional levels.

DFSA institutional risk assessment model (scoreboard)
- The DFSA developed a new ML/TF institutional risk assessment model ("scoreboard") that includes cross-border risks as a core component.
- The scoreboard will calculate institutional-level risks as a function of 27 sets of inputs provided on a quarterly basis by every supervised entity.
- The model will account for both inherent and residual risk and build in cross-border elements from FI-supplied data on foreign customers and transactions and DFSA-developed geographic risk categories.
- During development, the DFSA consulted with five foreign (EU and non-EU) counterparts via study visits, teleconferences, and e-mail exchanges to collect international good practices.

Deployment timeline and testing
- The DFSA will begin testing the model, aiming for full deployment in 2021.
- The DFSA has begun private sector consultations on the specific data to be collected and the reporting template format via the existing FIONA Online internet platform.
- The DFSA will test the model using data and feedback from five volunteer banks recently identified by Finance Denmark.

Inspection scheduling and methods
- In the second half of 2019, the DFSA made risk-related adjustments to its on-site inspection schedule, using intentionally blank and tentatively filled slots to respond nimbly to developments.
- During the 2019 inspection cycle, the DFSA conducted an off-site inspection of 15 banks’ institutional risk assessments and a series of thematic on-sites.
- The DFSA leveraged off-site and on-site tools, focusing on transaction monitoring as a critical theme, enabling broader sector coverage.
- In 2019, the DFSA performed a mix of off-site and on-site inspections totaling 37 AML/CFT inspections (or sets of inspections); it aims to conduct approximately 45 in 2020, including 15 in the banking sector. Note: the 15 figure may include multiple inspections of the same banks, including thematic visits of 2-3 banks assessed as highest ML/TF risks.

Limitations identified
- The DFSA continues to spend only one-to-two days on the premises of inspected FIs, conducting interviews only with senior managers and compliance officers.
- Full-scope on-site inspections do not include testing of critical systems (e.g., customer, transaction, and/or sanctions screening systems), discussions with line staff, or visits to individual bank branches.
- A 2012-2014 experiment with branch visits and line staff interviews produced mixed results because junior employees tended to defer to managers and were hesitant to engage without managers present.
- The Danske Bank case highlighted risk from transactions conducted through a small branch in Estonia with seemingly insufficient oversight from corporate headquarters.

Proposed next step
- The DFSA should fully deploy its new institutional risk assessment model by the beginning of 2021, including:
  - (i) complete consultations with the private sector;
  - (ii) make a first round of necessary adjustments;
  - (iii) complete drafting of the data reporting template;
  - (iv) test/validate the model using data from a vanguard group of supervised entities;
  - (v) make a second round of necessary adjustments; and
  - (vi) issue comprehensive instructions, interpretive notes, and guidelines.
- The DFSA should intensify (i.e., significantly lengthen and deepen) its AML/CFT on-site inspections of higher-risk FIs to test key systems and procedures, analyze additional samples of customer files and transactions, verify front-line employee training and sensitization, and assess consistent application of corporate policies at local branches.

### Resources — analysis of recent progress and proposed step
Budget and staffing
- The DFSA received a budget increase in 2019 of DKK 63 million to expand its AML Division and complete a special government-requested project.
- Funds to sustain the AML Division expansion have been provided for 2020 and are slated to be provided through and beyond 2022.
- Over the second half of the year, the AML Division recruited and hired 5.5 new staff members; the DFSA now has 20 full-time equivalents working on AML/CFT. (Footnote: I.e., 19 full-time and 2 part-time employees.)
  - Breakdown: 14-15 full-time inspectors, 3-4 staff on international affairs, and 2 staff on AML/CFT legislation.
- New hires undergo the AML Division’s standard training program: external courses, internal seminars, and on-the-job learning via participation in on-site inspections with experienced staff, consultants, or other DFSA divisions.
- The MLS staff grew by approximately 6 percent or 1.5 full-time employees over the last nine months: not including the Head of Unit, the MLS had a staff of 26 full-time employees at the end of June 2019; as of March 2020, it had a staff of 27.5 full-time employees.

Proposed next step
- The DFSA should develop a formal staff retention plan to address strong demand for compliance staff in the Danish financial sector and to retain trained inspectors, cataloguing retention tools and crafting a consistent, enduring strategy.

### Procedures — analysis of recent progress and proposed step
- The DFSA formulated and issued a comprehensive AML/CFT inspection manual prepared with international consultants in 2019 and distributed to inspectors in early 2020; the manual explains core concepts, standard procedures, key questions for discussion with supervised entities, and references to Danish law and regulation.
- The AML Division conducted twelve full-scope on-site inspections and one set of (five) thematic on-site inspections from June-December 2019.
- Total AML/CFT inspections in 2019: 37 (or sets of inspections); target for 2020: approximately 45, including 15 in the banking sector (subject to overlap and thematic inspections).

Proposed next step
- As a matter of priority, the DFSA should intensify on-site inspections of higher-risk FIs (significantly lengthen and deepen) to enable system testing, larger sample analysis, frontline employee verification, and assessment of group-wide policy implementation.

### Powers — analysis of recent progress and integration
Legislative changes
- Act No. 1563 (2019) amended the Danish legal framework to expand DFSA monitoring and enforcement powers, stiffen penalties, and create new reporting requirements. Select reforms from Act No. 1563 (2019) include:
  - Enables the DFSA to issue administrative fine (“fixed-penalty”) notices to FIs for violations of AML/CFT obligations.
  - Enables the DFSA to place one or more monitors within an FI for up to six months.
  - Enables the DFSA to ban FIs’ acceptance of new customers, including at foreign branches, until specific breaches are rectified.
  - Requires FIs to submit “information that is of critical importance” to supervision by the DFSA “at [their] own initiative and as soon as possible.”
  - Requires FIs to rectify with the DFSA any previously submitted information subsequently determined to be incorrect or misleading.
  - Increases the maximum prison term for: (i) “particularly gross or extensive intentional violations” of the AML Act and; (ii) persons connected to FIs who “submit incorrect or misleading information” to public authorities.

Practical implications
- The DFSA now has the power to levy administrative fine (“fixed-penalty”) notices; this allows resolution of violations without referral to the SPSEIC if the affected FI pleads guilty and pays the prescribed amount.
- Any FI that refuses to plead guilty or disputes the amount remains subject to law enforcement action.
- By law, an FI’s acceptance of guilt and concomitant fine has the same effect as a judicial ruling/conviction.

Proposed next step
- The DFSA should fully integrate its new monitoring and enforcement powers into existing business procedures to ensure consistent and predictable exercise of its mandate.

### Recommendations and conclusions
Key recommendations (staff)
- The Government consider next-stage options for the integration/consolidation of AML/CFT supervision at the sub-regional or EU levels and pursue the selected option(s).
- The DFSA test, adjust, and fully deploy its new institutional risk assessment model by the beginning of 2021.
- The DFSA intensify (i.e., significantly lengthen and deepen) its AML/CFT on-site inspections of higher-risk FIs as a matter of priority.

Conclusions
- Reinforced international and domestic cooperation, expanded powers, new resources, and adoption of the risk-based approach have poised the DFSA for continued progress.
- Despite a change in government following the June 2019 elections, the necessary political will is firmly in place to support and strengthen Denmark’s AML/CFT supervisory regime.
- Further reform remains necessary; ever closer international cooperation, full deployment of the risk-based approach, and intensified AML/CFT on-site inspections of higher-risk FIs are the vital and achievable next steps.

*Source: IMF country report excerpt (DENMARK).*

### 1. Select Recommendations from Finance Denmark's AML Task Force ___________________________ 9

### 1. Select Recommendations from Finance Denmark's AML Task Force ___________________________ 9

### Overview and context
- The Technical Note (TN) was prepared in the context of the Denmark 2020 FSAP and does not assess the impact of the COVID-19 pandemic; findings and recommendations remain pertinent.
- Recent progress noted:
  - Conducted or participated in three multinational on-site inspections of banks.
  - Developed a new institutional risk assessment model.
  - Issued an AML/CFT on-site inspection manual.
  - Via Act No. 1563 (2019), amended legislation to: bolster DFSA monitoring and enforcement powers; establish additional private sector reporting requirements; stiffen penalties for AML/CFT violations.
- Sector retrenchment following ML revelations:
  - Possible laundering of over $200 billion via Danske Bank’s branch in Estonia prompted major retrenchment by Danske Bank in 2019 (closed branches in Estonia and Russia; selling most activities in Lithuania and Latvia).
  - Jyske Bank sold its subsidiary in Gibraltar in 2019 in response to the UK’s decision to leave the EU.
- Surge in suspicious reporting:
  - MLS received a record 13,771 reports in Q3 2019, followed by a record 15,741 reports in Q4 2019.
  - In Q4 2019 the MLS disseminated 3,648 unique reports to receiving entities (SPSEIC, police districts, Tax Agency).
  - Note: reports include STRs, SARs, and TFRs.
- Political will and resource augmentation:
  - Broad parliamentary support, including the ruling party, for strengthening Denmark’s AML/CFT regime.
  - Political agreements have underwritten deeper cooperation, accelerated adoption of risk-based supervision, and enabled expedited legal changes to increase resources and powers for DFSA and MLS.
- Three follow-on (priority next-step) recommendations identified:
  - The Government should consider next-stage options for the integration/consolidation of AML/CFT supervision at the sub-regional or EU levels and pursue the selected option(s).
  - The DFSA should implement its new institutional risk assessment model.
  - The DFSA should intensify (i.e., significantly lengthen and deepen) its AML/CFT on-site inspections of higher-risk FIs.
- Timing and forums:
  - These recommendations could be implemented over the near-term (i.e., within one year).
  - The annual AML/CFT stocktaking exercise of the parties to the March 2019 political agreement is an ideal forum to discuss consolidated supervision options.
  - DFSA’s 2020 workplan includes testing its institutional risk assessment model and refining AML/CFT on-site inspections.

### International and domestic cooperation
- Importance:
  - International and domestic cooperation are critical for identifying and mitigating cross-border ML/TF risks given Danish banks’ operations abroad and service to non-resident customers.
  - DFSA effectiveness will depend on cooperation with foreign counterparts, bilateral channels, the Money Laundering Forum (MLF), and public-private partnerships.
A. Further formalizing international cooperation — Analysis of recent progress
- DFSA-led and participated inspections in 2019:
  - September 2019: DFSA-led two-day AML/CFT on-site inspection of Danske Bank with Finnish, Latvian, Norwegian, and Swedish inspectors.
  - September 2019: Finnish inspectors participated in a similar inspection of Nordea Danmark.
  - September 2019: DFSA representative took part in an AML/CFT on-site inspection of Danske Bank in Norway.
  - November 2019: DFSA conducted an AML/CFT on-site inspection of Danske Bank’s processing center in Lithuania — first time DFSA operated on its own outside national territory.
  - Inspections were within supervisory colleges and MOUs, demonstrating potential to enhance transparency, information-sharing, and cooperation in the Nordic-Baltic region.
- Nordic-Baltic Working Group (NBWG) MOU:
  - November 2019 draft MOU obliges members to cooperate and share information to the greatest extent possible, addressing weaknesses/ambiguities in bilateral MOUs.
  - NBWG includes both EU and non-EU members.
- Spectrum of deeper integration options that remain unimplemented:
  - Consolidation of off-site AML/CFT supervision at Nordic-Baltic or EU levels.
  - Formal integration/consolidation of AML/CFT supervision at the Nordic-Baltic level.
  - Formal integration/consolidation of AML/CFT supervision at the EU level (via Enhanced Cooperation or all member states).
  - Note: fully implementing any of these options would almost certainly require amendments to Danish law.
- Bilateral MOUs with non-EU/EEA counterparts:
  - Under Danish law, DFSA must conclude specific agreements before sharing information with non-EU, non-EEA supervisors.
  - DFSA negotiating two bilateral MOUs (banking and investment banking) with an important foreign counterpart.
  - DFSA should proactively pursue additional bilateral MOUs, prioritizing jurisdictions where Danish banks operate or plan to operate, or whose banks operate in Denmark (e.g., Australia, Brazil, India, Russia, Singapore, Switzerland).
Proposed next steps (international cooperation)
- The Government should consider next-stage options for integration/consolidation of AML/CFT supervision at the sub-regional or EU levels and pursue the selected option(s); discussions could occur in the annual stocktaking exercise of the March 2019 political agreement parties.
- DFSA should continue pursuing bilateral MOUs with foreign counterparts outside the EU and EEA, prioritizing jurisdictions linked to Danish banks’ operations.
- Over time, DFSA should reexamine and seek to strengthen existing MOUs with key non-EU, non-EEA counterparts to ensure MOUs presume cooperation (including information exchange) across a wide variety of cases.
B. Deepening domestic cooperation — Analysis of recent progress
- March 2019 Political Agreement stocktaking:
  - First annual stocktaking exercise convened in October 2019; objectives: follow-up on implementation and determine need for further agreements.
- MLF updates and Operational Forum:
  - October 2019: MOU governing MLF updated and adopted by all members.
  - An Operational Forum was established under MLF to enable closer coordination on individual cases; members meet monthly on a confidential basis.
- MLS proactive information-sharing and IT integration:
  - H2 2019: MLS provided a “warning” to DFSA on an evolving ML risk under analysis.
  - MLS database partially integrated into the police’s analysis platform (Polintel), enabling police/SPSEIC to determine if MLS database has relevant information and to request it via the platform.
  - This allows SPSEIC to conduct limited initial queries of MLS as part of investigations referred by DFSA.
- MLS limitations and opportunities:
  - MLS has not yet provided DFSA with information on individual FIs whose institutional risk tolerances or profiles appear to have changed (e.g., STR patterns suggesting increased transactions in high-risk jurisdictions).
  - If MLS provided such analyses, DFSA could file for future reference, check-in with subject banks, or add them to on-site inspection schedules.
- EU 5th AML Directive IT system:
  - IT system due to roll out in September 2020.
  - System will accept queries only from MLS, forward queries to FIs via secure server.
  - FIs must respond with particulars: names of account holder and beneficial owner, account number, date account opened, and, where applicable, date closed.
  - Positive responses (“hits”) will inform which FIs should receive formal requests for additional information (e.g., transaction excerpts).
- Finance Denmark (banking industry association) — December 2019:
  - Released 25 recommendations to further AML/CFT public-private cooperation; a selection is presented in Box 1.
Proposed next steps (domestic cooperation)
- MLS should, where relevant and appropriate, share with DFSA its analysis of STRs that may indicate shifts in individual banks’ institutional risk tolerances or profiles; this could prompt DFSA checks or on-site inspection scheduling.
- MLS should consider modifying its reporting regime to request that reporting entities identify any predicate offense(s) potentially linked to a suspicious or unusual transaction to enhance MLS ability to identify emerging risks and to prioritize STRs for analysis.
- MLF should review Finance Denmark’s AML Task Force recommendations that imply action by authorities and work to advance agreed initiatives; implementation of some recommendations would require changes to Danish law and Government support is critical.
Box 1. Select Recommendations from Finance Denmark’s AML Task Force
- Recommendation 1: Develop a register of bank account and safety deposit box holders, as well as a shared, industry-wide list of politically exposed persons (PEPs) and their relatives and close associates (RCAs).
- Recommendation 2: Identify the (technological and legal) requirements for establishing an industry-wide customer due diligence (CDD) “utility” to capture names, birthdates, addresses, and other identifiers as well as information on those customers whose accounts have been closed or else marked for special scrutiny owing to their suspected involvement in illicit financial activities.
- Recommendation 4: Establish a Joint AML/CFT Intelligence Unit as between banks, the MLS, the police, the intelligence services, and the Tax Agency, to exchange confidential information on “big fish”/“major cases”.
  - Note: This would be modeled on the United Kingdom’s Joint Money Laundering Intelligence Task Force (JMLIT), established in 2016.
- Recommendation 21: Conduct annual MLS “evaluations” of the quality of financial sector STRs with a view to minimizing unnecessary reporting.
- Source of recommendations: Finance Denmark.

### Implementing the risk-based approach
- Rationale:
  - Fully implementing the risk-based approach will maximize DFSA efficiency and effectiveness; full-scope on-site inspections of every FI every year are infeasible despite new resources allocated by the government.
  - The risk-based approach varies timing, frequency, scope, and intensity of inspections based on assessed ML/TF risks at national, sectoral, and institutional levels.
- Next section begins with "A. Assessing ML/TF Risks" (content not included in this unit).

*Source: International Monetary Fund — Denmark Financial Sector Assessment Program Technical Note (Extract).*

### 20.      In January 2020, the MLS published an English-language translation of the summary

### 20. In January 2020, the MLS published an English-language translation of the summary

### Translations, outreach, and next NRA
- In January 2020, the MLS published an English-language translation of the summary and methodology of Denmark’s 2018 ML National Risk Assessment (NRA).
- The MLS also provided an English-language translation of the full NRA to all reporting entities, including some owned by foreign firms whose corporate managers and compliance officers may not speak or read Danish.
- The MLS is preparing to conduct a next-round NRA that will incorporate feedback received on the 2018 text; this should not be understood as a backward-looking exercise.
- The DFSA has issued a Danish-language translation of the EU’s 2019 supranational ML/TF risk assessment (Assessment of the Risk of Money Laundering and Terrorist Financing Affecting the Internal Market and Relating to Cross-Border Activities).
Proposed next step
- The DFSA should actively solicit supervised entities’ feedback on the accuracy and value of Denmark’s 2018 ML NRA and the EU’s 2019 supranational ML/TF risk assessment.
- As the DFSA conducts AML/CFT inspections over the course of 2020, it should note key differences between the national and supranational risk assessments and the institutional-level risk assessments prepared by individual FIs, and feed private sector reactions into the next round of assessments.

### Conducting risk-based AML/CFT supervision — analysis of recent progress
- Effective cooperation between AML/CFT and prudential banking supervisors is essential; much supervisory information (governance, risk management, compliance, internal controls, operational resilience) is mutually relevant and should be freely shared.
- The DFSA, responsible for both AML/CFT and prudential supervision, has an institutional advantage to obtain greater insights and share pertinent information internally.

DFSA institutional risk assessment model (scoreboard)
- The DFSA developed a new ML/TF institutional risk assessment model ("scoreboard") that includes cross-border risks as a core component.
- The scoreboard will calculate institutional-level risks as a function of 27 sets of inputs provided on a quarterly basis by every supervised entity.
- The model will account for both inherent and residual risk and build in cross-border elements from FI-supplied data on foreign customers and transactions and DFSA-developed geographic risk categories.
- During development, the DFSA consulted with five foreign (EU and non-EU) counterparts via study visits, teleconferences, and e-mail exchanges to collect international good practices.

Deployment timeline and testing
- The DFSA will begin testing the model, aiming for full deployment in 2021.
- The DFSA has begun private sector consultations on the specific data to be collected and the reporting template format via the existing FIONA Online internet platform.
- The DFSA will test the model using data and feedback from five volunteer banks recently identified by Finance Denmark.

Inspection scheduling and methods
- In the second half of 2019, the DFSA made risk-related adjustments to its on-site inspection schedule, using intentionally blank and tentatively filled slots to respond nimbly to developments.
- During the 2019 inspection cycle, the DFSA conducted an off-site inspection of 15 banks’ institutional risk assessments and a series of thematic on-sites.
- The DFSA leveraged off-site and on-site tools, focusing on transaction monitoring as a critical theme, enabling broader sector coverage.
- In 2019, the DFSA performed a mix of off-site and on-site inspections totaling 37 AML/CFT inspections (or sets of inspections); it aims to conduct approximately 45 in 2020, including 15 in the banking sector. Note: the 15 figure may include multiple inspections of the same banks, including thematic visits of 2-3 banks assessed as highest ML/TF risks.

Limitations identified
- The DFSA continues to spend only one-to-two days on the premises of inspected FIs, conducting interviews only with senior managers and compliance officers.
- Full-scope on-site inspections do not include testing of critical systems (e.g., customer, transaction, and/or sanctions screening systems), discussions with line staff, or visits to individual bank branches.
- A 2012-2014 experiment with branch visits and line staff interviews produced mixed results because junior employees tended to defer to managers and were hesitant to engage without managers present.
- The Danske Bank case highlighted risk from transactions conducted through a small branch in Estonia with seemingly insufficient oversight from corporate headquarters.

Proposed next step
- The DFSA should fully deploy its new institutional risk assessment model by the beginning of 2021, including:
  - (i) complete consultations with the private sector;
  - (ii) make a first round of necessary adjustments;
  - (iii) complete drafting of the data reporting template;
  - (iv) test/validate the model using data from a vanguard group of supervised entities;
  - (v) make a second round of necessary adjustments; and
  - (vi) issue comprehensive instructions, interpretive notes, and guidelines.
- The DFSA should intensify (i.e., significantly lengthen and deepen) its AML/CFT on-site inspections of higher-risk FIs to test key systems and procedures, analyze additional samples of customer files and transactions, verify front-line employee training and sensitization, and assess consistent application of corporate policies at local branches.

### Resources — analysis of recent progress and proposed step
Budget and staffing
- The DFSA received a budget increase in 2019 of DKK 63 million to expand its AML Division and complete a special government-requested project.
- Funds to sustain the AML Division expansion have been provided for 2020 and are slated to be provided through and beyond 2022.
- Over the second half of the year, the AML Division recruited and hired 5.5 new staff members; the DFSA now has 20 full-time equivalents working on AML/CFT. (Footnote: I.e., 19 full-time and 2 part-time employees.)
  - Breakdown: 14-15 full-time inspectors, 3-4 staff on international affairs, and 2 staff on AML/CFT legislation.
- New hires undergo the AML Division’s standard training program: external courses, internal seminars, and on-the-job learning via participation in on-site inspections with experienced staff, consultants, or other DFSA divisions.
- The MLS staff grew by approximately 6 percent or 1.5 full-time employees over the last nine months: not including the Head of Unit, the MLS had a staff of 26 full-time employees at the end of June 2019; as of March 2020, it had a staff of 27.5 full-time employees.

Proposed next step
- The DFSA should develop a formal staff retention plan to address strong demand for compliance staff in the Danish financial sector and to retain trained inspectors, cataloguing retention tools and crafting a consistent, enduring strategy.

### Procedures — analysis of recent progress and proposed step
- The DFSA formulated and issued a comprehensive AML/CFT inspection manual prepared with international consultants in 2019 and distributed to inspectors in early 2020; the manual explains core concepts, standard procedures, key questions for discussion with supervised entities, and references to Danish law and regulation.
- The AML Division conducted twelve full-scope on-site inspections and one set of (five) thematic on-site inspections from June-December 2019.
- Total AML/CFT inspections in 2019: 37 (or sets of inspections); target for 2020: approximately 45, including 15 in the banking sector (subject to overlap and thematic inspections).

Proposed next step
- As a matter of priority, the DFSA should intensify on-site inspections of higher-risk FIs (significantly lengthen and deepen) to enable system testing, larger sample analysis, frontline employee verification, and assessment of group-wide policy implementation.

### Powers — analysis of recent progress and integration
Legislative changes
- Act No. 1563 (2019) amended the Danish legal framework to expand DFSA monitoring and enforcement powers, stiffen penalties, and create new reporting requirements. Select reforms from Act No. 1563 (2019) include:
  - Enables the DFSA to issue administrative fine (“fixed-penalty”) notices to FIs for violations of AML/CFT obligations.
  - Enables the DFSA to place one or more monitors within an FI for up to six months.
  - Enables the DFSA to ban FIs’ acceptance of new customers, including at foreign branches, until specific breaches are rectified.
  - Requires FIs to submit “information that is of critical importance” to supervision by the DFSA “at [their] own initiative and as soon as possible.”
  - Requires FIs to rectify with the DFSA any previously submitted information subsequently determined to be incorrect or misleading.
  - Increases the maximum prison term for: (i) “particularly gross or extensive intentional violations” of the AML Act and; (ii) persons connected to FIs who “submit incorrect or misleading information” to public authorities.

Practical implications
- The DFSA now has the power to levy administrative fine (“fixed-penalty”) notices; this allows resolution of violations without referral to the SPSEIC if the affected FI pleads guilty and pays the prescribed amount.
- Any FI that refuses to plead guilty or disputes the amount remains subject to law enforcement action.
- By law, an FI’s acceptance of guilt and concomitant fine has the same effect as a judicial ruling/conviction.

Proposed next step
- The DFSA should fully integrate its new monitoring and enforcement powers into existing business procedures to ensure consistent and predictable exercise of its mandate.

### Recommendations and conclusions
Key recommendations (staff)
- The Government consider next-stage options for the integration/consolidation of AML/CFT supervision at the sub-regional or EU levels and pursue the selected option(s).
- The DFSA test, adjust, and fully deploy its new institutional risk assessment model by the beginning of 2021.
- The DFSA intensify (i.e., significantly lengthen and deepen) its AML/CFT on-site inspections of higher-risk FIs as a matter of priority.

Conclusions
- Reinforced international and domestic cooperation, expanded powers, new resources, and adoption of the risk-based approach have poised the DFSA for continued progress.
- Despite a change in government following the June 2019 elections, the necessary political will is firmly in place to support and strengthen Denmark’s AML/CFT supervisory regime.
- Further reform remains necessary; ever closer international cooperation, full deployment of the risk-based approach, and intensified AML/CFT on-site inspections of higher-risk FIs are the vital and achievable next steps.

*Source: IMF country report excerpt (DENMARK).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1dnkea2020006.pdf_