By Lisa M. Goolik, J.D.
Deutsche Bank AG will pay $258 million to settle charges brought by the New York State Department of Financial Services (NYDFS) and the Federal Reserve Board that the bank violated federal and state banking laws in connection with concealing $11 billion in transactions on behalf of countries and entities subject to U.S. sanctions, including Iran, Libya, Syria, Burma, and Sudan. Deutsche Bank also agreed to develop a compliance program, employ an independent monitor, and terminate six employees that were involved in the scheme but remained employed by the bank.
Stripped or concealed information. A joint investigation by the NYDFS and the Fed found that, from at least November 2001 to January 2006, overseas offices of Deutsche Bank, in Eschborn, Germany, and Bangalore, India, developed a practice for processing funds transfers through Deutsche Bank’s New York office, as well as other unaffiliated U.S. financial institutions, to conduct more than 27,200 U.S. dollar clearing transactions—valued at almost $11 billion—on behalf of Iranian, Libyan, Syrian, Burmese, and Sudanese financial institutions and other entities subject to U.S. economic sanctions by the Treasury Department’s Office of Foreign Asset Control (OFAC).
Bank staff in overseas offices used wire stripping, or alteration of the information included on the payment message, to remove information indicating a connection to a sanctioned entity before the payment was passed along to the correspondent bank in the United States. Employees also used non-transparent cover payments to split an incoming payment message into two message streams: one which included all details, sent directly to the beneficiary’s bank, and one which did not include details about the underlying parties to the transaction, sent to Deutsche Bank New York or another correspondent clearing bank. As a result, the payment message would not raise red flags or trigger any additional scrutiny that it otherwise would have merited if the details were included.
According to the NYDFS, bank relationship managers and other employees worked with sanctioned customers in the process of concealing the details about their payments. Bank employees instructed clients to include special notes or code words in their payment messages that would trigger special handling by the bank before the payment was sent to the United States. Sanctioned customers were told “it is essential for you to continue to include [the note] ‘Do not mention our bank’s name…’ in MT103 payments that may involve the USA. [That note] ensures that the payments are reviewed prior to sending. Otherwise it is possible that the [payment] instruction would be sent immediately to the USA with your full details. . . . [This process] is a direct result of the US sanctions.”
Moreover, the investigation found that the bank promoted its “OFAC-safe” handling processes and its experience in handling sanctions-related payments when soliciting new business from customers subject to U.S. sanctions. At the same time, employees recognized the legal and reputational concerns and acted to keep the payment handling methods—and the bank’s business dealings with sanctioned entities in general—on a “need-to-know basis.”
Consent orders. The $258 million penalty will be divided between the agencies. The NYDFS consent order requires that Deutsche Bank pay a $200 million penalty and install an independent monitor to ensure compliance with New York banking laws. In addition the NYDFS ordered the bank to terminate six employees who remain employed by the bank: a managing director in Global Transactions Banking; a managing director in Operations; a director in Operations; a director in Corporate Banking and Securities; a vice president in Global Transactions Banking; and a vice president/relationship-manager. Three other Deutsche Bank employees will be banned from holding any duties, responsibilities, or activities involving compliance, U.S. dollar payments, or any matter relating to U.S. operations.
The Fed’s consent order assesses a civil money penalty of $58 million and requires that Deutsche Bank implement an enhanced program to ensure global compliance with OFAC sanctions. The order also prohibits Deutsche Bank from re-employing the individuals involved in the past actions or retaining them as consultants or contractors.
This story previously appeared in the Banking and Finance Law Daily.
