When New York banking regulators levied a $150 million fine against Deutsche Bank earlier this month, the enforcement action highlighted the financial crime and regulatory risks associated with serving wealthy, controversial individuals, in this case Jeffrey Epstein.
However, this headline-grabbing element overshadowed another important compliance lesson addressed in the regulatory action, the risk of recklessly serving foreign correspondents, in this case Danske Bank Estonia and the now-defunct Federal Bank of the Middle East Ltd.
The New York State Department of Financial Services (DFS) found that Deutsche Bank failed to properly monitor the activities of these foreign bank clients with respect to their correspondent and dollar clearing business. “The bank failed to maintain policies that set out sufficiently specific criteria, such as patterns of high (risk assessment) scores or high suspicious activity volumes, under which the bank would determine whether to terminate a correspondent banking relationship or whether lesser risk-mitigation measures would be appropriate,” the DFS consent order stated.
The regulator added that Deutsche failed to maintain “procedures for determining whether other foreign banks use the respondent’s correspondent account, or explanations of how employees could verify the identities of respondents’ beneficial owners.”
Danske Estonia, which is at the heart of one of the world’s largest money laundering scandals, “suffered from inherent control failures that resulted in large quantities of money being moved on behalf of Russian oligarchs,” DFS said.
Danske, the largest bank in Denmark, acquired the Baltic business of Finland’s Sampo Bank in 2007, and the segment in Estonia became Danske Estonia, and established a correspondent relationship with Deutsche Bank. U.S. authorities concerned about money laundering are investigating Danske, which was forced out of Estonia after admitting that 200 billion euros ($226 billion) in suspicious payments moved through its branch there. Danske has acknowledged the problems and said it is cooperating with authorities.
Over the years, Deutsche Bank was “repeatedly” put on notice regarding Danske Estonia’s purported AML failings “and of the fact that few improvements were undertaken,” DFS said. “Despite the fact that Deutsche Bank assigned Danske Estonia its highest possible risk rating, Deutsche Bank failed to take appropriate action to prevent Danske Estonia from transferring billions of dollars of suspicious transactions through Deutsche Bank accounts in New York.”
By mid-2008, Deutsche Bank had observed an increase in AML-related alerts generated by monitoring systems involving non-resident customers of Danske Estonia with a Russian or Latvian connection, the consent order states. Deutsche officials from the U.S. and Germany met with Danske Estonia representatives in New York and “were assured that Danske Estonia was moving away from its non-resident client portfolio.”
A year later, Deutsche Bank was so concerned about the AML risks posed by Danske Estonia that an unnamed compliance director provided on-site training to Danske staff to address anti-money laundering (AML) and Know Your Customer (KYC) topics and provide an overview of U.S. regulatory requirements, DFS said. Deutsche continued its relationship with Danske Estonia until October 2015, despite concerns expressed by its own AML leadership and the ongoing risk posed by its non-resident customer portfolio, the consent order states.
Between 2007 and 2015, Deutsche Bank identified 340 suspicious transactions that referenced Danske Estonia’s U.S. dollar correspondent accounts, DFS said. During that period, Deutsche Bank cleared more than $267 billion in transactions for Danske Estonia, including at least $150 billion in payments from Russia and other former Soviet states. Stefan Singh Kailay, head of media relations at Danske Bank, said it is cooperating fully with investigating authorities. “As we have already said, we should never have had the portfolio of customers and the setup we had in Estonia,” he added. “The portfolio was closed down in 2015, but in general there is no doubt that we did too little, too slowly in this case.”
With regard to FBME, which was established in Cyprus, Deutsche Bank failed “to act on red flags” that emerged during its correspondent banking relationship, DFS said. “From the beginning of its relationship with FBME, Deutsche Bank considered FBME to be a high-risk client that required annual enhanced anti-money laundering checks,” the regulator said. “Despite these checks, there was little evidence that FBME improved the quality of its controls over several years.”
Deutsche Bank was aware of “potential issues” with FBME’s compliance regime — including concerns about staffing and antiquated transaction monitoring — as early as May 2005, the DFS consent order against Deutsche said, adding that Deutsche’s North American client screening committee was aware that “other banks had alleged in the past that FBME had been associated with money laundering linked to Russian organized crime.”
In 2008, Deutsche Bank analyzed the volume of suspicious transactions related to FBME “and concluded that FBME presented an average to greater-than-average risk… in an already high-risk market,” the DFS order states. The annual number of suspicious transactions tied to FMBE was 96 in 2008 and peaked at 132 two years later.
Nonetheless, Deutsche maintained the correspondent relationship, during which more than 478,000 dollar-denominated transactions totaling more than $618 billion were facilitated, the consent order states.
In 2014, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) labeled FBME a “primary money laundering concern” to begin the process of severing it from the U.S. financial system. At that time, Deutsche Bank was the last major Western bank with correspondent ties to FBME, DFS said. Three days after FinCEN’s action, Deutsche “decided… to end its relationship with FBME.” In response to U.S. concerns, the Central Bank of Cyprus revoked FBME’s branch license in 2015.
The DFS consent order against Deutsche Bank said that “the high-risk nature of the FBME relationship, the red flags, numerous suspicious transactions, and overt lack of transparency exhibited by FBME should have prompted Deutsche Bank to exit the relationship before (FinCEN’s action), yet it failed to do so.”
Notably, FBME’s activities were reportedly probed by U.S. authorities — including Robert Mueller, the former U.S. special counsel who investigated ties between President Donald Trump’s 2016 presidential campaign and the Kremlin.