Why it matters: Banks are increasingly under pressure by U.S. regulators to be vigilant and enhance scrutiny of their compliance and regulatory programs, to costly results when they do not. Following last year’s $8.9 billion deal between the government and French bank BNP Paribas relating to sanctions violations, the Commerzbank settlement resolves a multi-federal and state agency investigation into activities in violation of the sanctions and money laundering statutes that allegedly should have or did come to its compliance function’s attention but were not adequately addressed.
Detailed discussion: In an agreement announced on March 12, 2015, Commerzbank AG (Germany’s second largest lender) agreed to pay U.S. and state authorities (including the DOJ, the New York Department of Financial Services, the Federal Reserve Bank, and the Manhattan DA) an aggregate $1.45 billion to settle parallel investigations into the activities of its New York branch in connection with (1) sanctions violations for doing business with blacklisted countries Iran and Sudan, and (2) money laundering transactions related to the long-running investigation of Japanese camera and medical device maker Olympus Corp. (which admitted in 1991 that it had committed accounting fraud for over a decade to conceal investment losses).
The head of the NYDFS said in a March 12, 2015, press release that “[w]hen there was profit to be made, Commerzbank turned a blind eye to its anti-money laundering compliance responsibilities. Bank employees helped facilitate transactions for sanctioned clients such as Iran and Sudan, and a company engaged in accounting fraud. What is especially disturbing is that employees sought to alter the Bank’s transaction monitoring system so that it would create fewer ‘red flag’ alerts about potential misconduct, which highlights a potential broader problem in the banking industry.”
A three-year deferred prosecution agreement and accompanying criminal information filed by the DOJ on March 11, 2015, and a consent order filed by the NYDFS on March 12 detail the particulars of both the sanctions violations and money laundering allegations against Commerzbank and its New York branch. In brief, these documents relate that from at least 2002 through 2008, employees at Commerzbank’s New York branch engaged in a series of measures, including “wire-stripping,” or deleting the identity of the parties to the transaction, so as to be able to secretly conduct business with Iran and Sudan, countries subject to U.S. sanctions. During an overlapping time period starting as early as 1999 through 2013, due to deficient and lax anti-money laundering controls, employees at Commerzbank’s New York branch helped facilitate transactions of over $1.6 billion in connection with the Olympus accounting fraud scheme. The authorities found in both instances that “red-flag” warnings generated by the compliance programs in place and/or by employees were systematically ignored.
Commerzbank was found to be in violation of the relevant provisions of the International Emergency Economic Powers Act (regarding the sanctions violations) and the Bank Secrecy Act for, among other things, willfully failing to maintain effective money laundering controls, conduct adequate due diligence on its foreign correspondent accounts, and notify banking authorities of suspicious activity.
As part of the settlement, the government required Commerzbank to implement rigorous internal controls and to install an independent monitor to conduct a thorough review of the bank’s regulatory compliance programs pertaining to its New York branch. Commerzbank was also ordered to terminate the New York branch’s head of compliance as well as four additional employees in its various finance control departments.
In a March 12 press release, the DOJ Assistant Attorney General indicated that this heightened scrutiny on banks operating in the United States will continue, emphasizing that “[f]inancial institutions must heed this message: banks that operate in the United States must comply with our laws, and banks that ignore the warnings of those charged with compliance will pay a very steep price.”
Click here to see the NYDFS consent order In the Matter of Commerzbank AG, Commerzbank AG New York Branch (filed 3/12/15).
Click here to see the criminal information in U.S. v. Commerzbank AG and Commerzbank AG New York Branch (filed 3/11/15).
For more on this matter, refer to the following:
DOJ press release issued 3/12/15
NYDFS press release issued 3/12/15
Deferred Prosecution Agreement in U.S. v. Commerzbank AG and Commerzbank AG New York Branch (filed 3/11/15)