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July 18, 2019, 11:11 p.m. EDT

Anti-money-laundering rules weigh on Nordic banks

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By Kristin Broughton

Efforts to improve anti-money-laundering controls continue to weigh on the financial results of Nordic banks, which have faced allegations in recent months of moving dirty money.

The region's largest lenders -- Swedbank AB, Nordea Bank ABP and Danske Bank A/S -- said this week that investments in new compliance systems and staff members have taken a bite out of quarterly profits. The banks have been swept up in the wave of crises over alleged compliance lapses that have rocked Europe's banking sector.

The uptick in compliance spending comes at a tricky time, as lenders across the continent face an outlook for lower interest rates and uncertainty surrounding the U.K.'s planned exit from the European Union.

"The banks in my view that will be successful in the future are the banks that tackle compliance issues head on," said Chris Vogelzang, Danske's chief executive, during the bank's quarterly call Thursday.

Mr. Vogelzang took the helm at Danske in May. Danske revealed last September that more than $230 billion in suspicious funds, mostly from Russia, flowed through a small branch in Estonia. The bank faces a series of probes related to those transactions.

Investments in additional compliance staff and technology pushed quarterly expenses higher, and will continue to do so in the months ahead, executives said.

Danske's operating costs during the first six months of 2019 rose 12% from a year earlier, to 12.8 billion Danish kroner ($1.9 billion).

Its core banking business will continue to face pressure while the "overhang of regulatory investigations persists," Richard Smith, an analyst with Keefe, Bruyette & Woods, said in a research note to clients Thursday. Second-quarter profit at the Copenhagen lender slid 7% from a year earlier.

Nordea said Thursday it plans to review its financial targets, including its dividend policy, given the pressures the Helsinki bank faces on a number of fronts, including the cost of improving its compliance systems.

Nordea's Danish headquarters were searched last month by the Danish Prosecution Service as part of a probe, launched in 2015, into possible money-laundering violations.

Nordea's spending on compliance systems has recently stabilized, after years of ramping up, CEO Casper von Koskull said during an earnings call Thursday. The bank, however, is looking at ways to improve compliance efficiency through automation.

"We were behind the game in the beginning," Mr. von Koskull said. "But now I think we are partly ahead of the game, at least compared to some."

Swedbank -- whose CEO was ousted in March after police raided its headquarters as part of a money-laundering probe -- said Wednesday that expenses rose 12% from a year earlier, mostly from investments in compliance, as well as an investigation by an external law firm into previous lapses.

Anders Karlsson, interim CEO of the Stockholm lender, said the bank has identified weaknesses in its processes for screening transactions for criminal activity and conducting due-diligence investigations on its customers.

"I am not in a position, and I don't think any other CEO of any bank would be in a position, to say that everything looks dandy today," he said during an earnings call Wednesday.

Dominic Chopping contributed to this article.

Write to Kristin Broughton at Kristin.Broughton@wsj.com

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