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Daily Briefing: U.S. Deutsche Bank angle of Danske scandal, Russia shuts U.S. rep’s bank, and more

Sunday, April 7, 2019   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
bmonroe@acfcs.org
April. 7, 2019

Quote of the Day: “By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest.” – Confucius

In today’s ACFCS Fincrime Daily Briefing a look at Deutsche Bank’s U.S. ties to Danske laundering scandal, Russia shuts bank owned by former U.S. lawmaker on AML, bank budgets, staffing, soar in wake of historic penalties, and more.

Please enjoy this unlocked story, part of the many benefits of being an ACFCS member.

Want to talk about industry trends, story ideas or get published? Feel free to reach out to ACFCS Vice President of Content Brian Monroe at the email address above. Now, on to more sweet sweet content!


Compliance

U.S. AML angle of Nordic, Baltic, EU money laundering scandal – Deutsche Bank's U.S. unit kept Danske's shady billions flowing: special Bloomberg report

Years before regulators learned about what may be one of the biggest money-laundering pipelines in history, that spanned Nordic and Baltic countries and is currently spilling into Europe, low-level bank employees in Jacksonville, Florida, sounded repeated alarms.

Compliance workers for Deutsche Bank AG flagged some of at least $150 billion in transactions that the bank’s U.S. subsidiary handled for a tiny Estonian unit of Danske Bank A/S, according to a former compliance officer.

But some former staffers in and out of the compliance department stated rigorous AML scrutiny of specific clients was discouraged. As a result, Deutsche Bank, which has already paid billions of dollars in penalties to U.S. and foreign regulators for compliance, sanctions and other failings, finds itself again in the bullseye of U.S. federal regulators and investigators.

It’s not clear how urgently the Florida team warned executives at Deutsche Bank Trust Co. Americas. But when workers sought broader scrutiny of certain clients, they got a familiar response from some higher-ups, the officer said: Shut up, focus on the transaction in front of you, file your paperwork and move on.

Internal documents, court records and interviews with dozens of people -- including more than 20 current and former employees of the troubled German lender -- show that its U.S. unit largely resisted strict money-laundering compliance for years. The insider accounts help explain why Deutsche’s U.S. subsidiary kept handling Danske’s business after competitors quit.

Although U.S. executives routinely promised regulators they’d get tough, former staffers say such efforts were often disregarded in favor of cozy relationships with overseas customers. The suspicious billions kept flowing -- not just from Danske’s Estonian branch, but from various clients that would eventually be snared in other global money-laundering scandals.

Throughout Deutsche Bank, compliance staff members were considered to be “one step above the janitors,” an unnamed former executive told lawyers who filed a 2016 lawsuit against the bank. The suit, in which investors claimed Deutsche Bank misled them about the effectiveness of its anti-money-laundering efforts, was later dismissed.

Banks’ efforts to prevent money laundering revolve around three words: “Know your customer.” U.S. rules under the Bank Secrecy Act require bankers to keep tabs on who they’re doing business with. The goal is to keep criminals and terrorists from plowing illicit cash into legitimate investments.

In Jacksonville, that task fell to an office that was understaffed and overly permissive, insiders recall. It was akin to assembly-line work with little review of potential clients and transactions, said a former employee who added that the organization’s willingness to bank just about anybody was a running joke.

Files submitted to compliance workers from overseas often lacked detail about who was transmitting money, according to former workers and legal filings in the 2016 lawsuit.

Specialists hired to advise the bank on gaps in its monitoring systems were instead assigned to review individual transactions that those systems had flagged. They were often rebuffed by New York executives or supervisors in New Jersey if they singled out particular customers for deeper scrutiny, (via Bloomberg).

Monroe’s Musings:

This is a fantastic story that answers a question everyone in the compliance community was thinking: what is the U.S. AML angle of the Danske Bank scandal? Well, now you have it.

This is also an enlightening porthole view of how the U.S. operations of a large international bank can get snared by a massive money laundering scandal and consequently dragged down by a bank with extensive compliance failings.

Not surprisingly, this revelation has brought rigorous scrutiny by U.S. federal regulators and investigators who will review what AML controls Deutsche Bank had in place to oversee the funds flowing in from Danske. Correspondent banking has already been a hot button topic in recent exam cycles and enforcement exams, so that will be a key program focal point.

Another question yet to be answered? How many other domestic or foreign banks with U.S. branches also did business with Deutsche Bank? Why is this relevant? Now, we all know that banks aren’t responsible for knowing the customers of a correspondent institution. That is the classic customers’ customer rabbit hole.

But what they are responsible for knowing is where the correspondent is banking, the types of customers and overall risk profiles and what AML controls are in place to mitigate those risks.

If any U.S. banks engaged in direct or correspondent transactions with Deutsche Bank, and failed to find out these answers, or failed to ask them as Nordic, Baltic and EU banking risks soared, that could cause regulators to question why not – leading to some potentially uncomfortable conversations.


Congress

Russian regulator pulls license of bank owned by former U.S. lawmaker once crowned as one of the most corrupt in Congress

A Russian regulator has revoked the license of a financial institution in Russia owned by a former member of Congress – the second time the lawmaker has had issues with banks and financial crime and compliance failures.  

Russia’s Central Bank Friday pulled the rug out from under the Commercial Bank of Ivanovo, an institution owned 80 percent by former Republican and North Carolina Representative Charles Taylor, for a host of anti-money laundering (AML) failings and falsely ballooning its capital to make its financial underpinnings look more secure than they actually were, according to a statement.

The regulator listed the bank’s many issues, including:

  • Failing on multiple occasions to comply with Bank of Russia regulations on countering money laundering and the financing of terrorism. The credit institution provided the regulator with incomplete and unreliable information, including on operations subject to mandatory control;
  • Systematically understating the amount of reserves to be set up and overstating the value of assets in order to improve its financial indicators and conceal its actual financial standing. The Bank of Russia will submit the information about these facts bearing signs of a criminal offence to law enforcement agencies. The Bank of Russia estimates that an adequate reflection of credit risks taken by CB Ivanovo and the value of its assets will lead to a significant, more than 30 percent, decrease in its capital and, consequently, to grounds to take measures to prevent the credit institution’s insolvency, which creates a real threat to interests of its creditors and depositors;
  • Performing ‘scheme’ operations to artificially maintain its capital to formally comply with the required ratios;
  • Violating federal banking laws and Bank of Russia regulations, making the regulator repeatedly apply supervisory measures over the last 12 months, including three impositions of restrictions on attracting household deposits.

The credit institution ranked 294th by assets in the Russian banking system, according to the central bank. CB Ivanovo’s key activity was providing corporate and retail loans.

That said, “low-quality loans accounted for more than” 70 percent of the loan portfolio. This activity was primarily financed by household deposits, about 90% of total funds raised by the bank.

Apart from his business interests, Taylor gave voice to North Carolina’s 11th district from 1991 to 2007, hitting the ground running as part of a “Gang of Seven” with other political bigwigs that probed a House banking scam that upended the lower chamber in favor of a Republican majority.

He is also known as the architect for several exchange programs and internships for Russian students during Russia’s move away from Communist rule, an initiative that required him to fly to Russia several times on the taxpayer’s dime.

But now, those Russian connections have risen to the fore anew, potentially creating a business loss due to compliance failings. Even so, this isn’t the first time a bank owned by Taylor has run into financial crime foibles.

In the mid-2000s, Hayes Martin, at that time the president of Blue Ridge Savings Bank in Asheville, N.C., who was also Taylor's campaign treasurer, and Charles Cagle, a former district Republican chairman who had taken out fraudulent loans from the bank, were sentenced for conspiracy to commit bank fraud and conspiracy to commit money laundering.

Both stated publicly Taylor knew about the scheme.

It was those and other problems that in 2006 led the Citizens for Responsibility and Ethics in Washington to grant Taylor the ignoble title of one of the “20 most corrupt members of Congress,” though he has evaded any formal charges.

More recently, the connection between risk, Russia and money laundering has been making headlines with several Nordic and Baltic banks accused of laundering hundreds of billions of dollars for a cabal of corrupt top political officials, oligarchs, fraudsters and criminal groups.

Sweden’s largest bank in recent weeks has suffered two major leadership upheavals in a fractious spasm that saw its long running chairman quit just days after the institution ousted its chief executive related to a controversial and still-growing money laundering scandal.

In a short statement, Swedbank Chairman Lars Idermark stated he is leaving the institution he has chaired multiple times over the past decade as the mushrooming scandal would be a negative distraction from his current role as chief of forestry-oriented firm, Sodra.

The news comes on the heels of the bank first supporting, then abruptly firing CEO Birgitte Bonnesen last week, roughly an hour before a contentious annual meeting where shareholders leveled much of their fury against her for how she handled the rising money laundering accusations and a related outside consultant's report watchdogs called cursory, shallow and deceptive.

The bank is still facing the possibility of billions of dollars in penalties and related remediation costs from domestic and foreign regulators, investigators and investors for broad financial crime compliance failures that allegedly allowed more than $10 billion in questionable funds to move through the institution from Russia and the former Soviet Union.

Swedbank is facing increased scrutiny of the AML controls in place amid allegations it moved billions of dollars in suspicious funds, particularly because they originated from the Estonian branch of Danske Bank, itself accused of laundering nearly $230 billion in a massive financial crime scandal roiling Europe.

In tandem, investigative journalists have pieced together a formalized Russian money laundering machine that cleansed some $9 billion, dubbed the “Troika Laundromat,” and spearheaded by what was once the country’s largest private investment bank, Troika Dialog, and many of the largest U.S. and European Union financial institutions.

Monroe’s Musings:

This story adds another layer of risk for someone who has already had several levels of risk interwoven around him like a thick winter coat. Politically-exposed persons (PEPs) are already considered at a higher risk for money laundering. Check box one.

A PEP who, when in office, was accused of ethics and other violations, owning a bank. Not just having a bank account. Owning a bank. Check mark for another higher risk. Now that bank is linked to a major fraud and money laundering scandal. I believe we are at risk layer No. 3.

For an AML officer, a former PEP who owns a bank in Russia should already be classified as high-risk or really high risk. But a former PEP tied to a bank in Russia that has AML problems so severe, it led to the institution folding?

Well, I think you see where I am going here. Good luck in your risk-ranking adventures on this one!


Money laundering

Rough week for Swedbank as chairman leaves days after CEO booted in mushrooming money laundering scandal

Sweden’s largest bank has suffered two major leadership upheavals in a fractious week that saw its long running chairman quit just days after the institution ousted its chief executive related to a controversial and still-growing money laundering scandal.

In a short statement, Swedbank Chairman Lars Idermark stated he is leaving the institution he has chaired multiple times over the past decade as the scandal would be a negative distraction from his current role as chief of forestry-oriented firm, Sodra.

The news comes on the heels of the bank first supporting, then abruptly firing CEO Birgitte Bonnesen last week, roughly an hour before a contentious annual meeting where shareholders leveled much of their fury against her for how she handled the rising money laundering accusations and a related outside consultant report watchdogs called cursory, shallow and deceptive.

The bank is still facing the possibility of billions of dollars in penalties and related remediation costs from domestic and foreign regulators, investigators and investors for broad financial crime compliance failures that allegedly allowed more than $10 billion in questionable funds to move through the institution from Russia and the former Soviet Union.

Swedbank is facing increased scrutiny of the anti-money laundering (AML) controls in place amid allegations it moved billions of dollars in suspicious funds, particularly because they originated from the Estonian branch of Danske Bank, itself accused of laundering nearly $230 billion in a massive financial crime scandal roiling Europe.

In response to questions from reporters, investors and independent financial crime fighters, Bonnesen downplayed the seriousness of the scandal, stating at one point it was “only” in the billions of dollars and even touted Swedbank’s supposedly stout AML compliance procedures, much to the chagrin of all involved.

She later backtracked and stated she had misspoken, but the damage had already been done.

Not surprisingly, as the leadership dominoes fall and any formation, high-level association with Swedbank becomes radioactive, other top officials are fleeing the sinking ship.

Idermark framed his departure as a re-focusing on his core role at Sodra.

“Following recent strong debate about Swedbank and questions about the bank’s control of suspicious money laundering in the Baltics, I have concluded that the media attention is not compatible with my CEO role at Södra,” he said in a statement. “Therefore, I have decided that the best alternative is to leave the position as Chair of Swedbank with immediate effect.”

He said little more, citing the ongoing scandal.

“It has been difficult, given the tense situation in media, to gain support for proportions and facts, and to correct direct errors,” Idermark said. “In addition, we must always respect bank privacy, and applicable laws and regulations that a bank must follow on the markets where it operates. This has added extra complexity to the communication aspect.”

He said the bank would survive the scandal and is well positioned to thrive in the future, but the money laundering scandal has made the present difficult. 

“I have always had shareholders and customers as my number one priority,” Idermark said. “Therefore, the recent developments are deeply regrettable.”

Swedbank shares, in the wake of the scandal, have fallen hard, dropping about a third of their value.

Shareholder associations, expectedly, have also been critical of how the bank has responded to the allegations and scoffed at a recent AML review focusing on names and risky entities stated in various Swedish TV reports, calling it incomplete and threadbare.

These groups have put more pressure on Swedbank to be more open, transparent and honest, including doing a more rigorous transactional lookback and publicly publish the result.

Those findings, and how the bank attempts to remediate them, will also be a potential mitigating or aggravating factor in expected penalties and sanctions from current ongoing investigations by regulatory authorities and investigators in Estonia, Latvia, Lithuania and Sweden, with likely probes coming from countries including the United States and European Union, (via Swedbank).

Monroe’s Musings:

The Swedbank and Danske Bank scandals are putting front and center – sometimes on a weekly basis – the importance of a strong AML compliance program and the potential pitfalls that can happen when a poor program is left to fester.

How bad can things get? Well, Danske has already gotten kicked out of Estonia. It’s being investigated by regulators and investigators in multiple jurisdictions and top executives have been axed in the still-roiling aftermath.

Similarly, now Swedbank has suffered two massive leadership shakeups and will be hard-pressed to bring in new blood to take those positions as Danske, and any institution linked to it, has become radioactive. As one official stated, the Danske Bank scandal has, in the eyes of the world, tarnished Estonia’s overall reputation as a safe, clean place to bank.


Enforcement

From compliance pariahs to law enforcement partners: Stung by record fines, big banks bolster AML controls

Over the last decade, many of the world’s largest domestic and foreign banks paid record financial crime penalties. But now, many former compliance pariahs are bona fide law enforcement partners, proactively countering large-scale crimes, from human trafficking to money laundering, with thousands of new staffers, fresh ideas and former government expertise.

When U.S. authorities shut the sex-ad site Backpage.com last year, financial-crime monitors at an HSBC Holdings Plc office in New York sprang into action.

They started looking at hundreds of thousands of HSBC accounts in the U.S., searching for patterns of activity that might suggest involvement with sex trafficking, according to bank executives interviewed in March. The list was narrowed to several hundred names, then to a few dozen. Months later, after reviewing customer transactions for things like condom purchases and hotel reservations, HSBC closed the accounts of a handful of people and turned over their findings to police.

That wouldn’t have happened a few years ago. Stung by a $1.9 billion fine in 2012 for failure to prevent money laundering by Latin American drug cartels and facilitating trading with sanctioned countries, HSBC has been trying to get its house in order.

It quintupled the number of employees assigned to spot suspicious activity to 5,000, upgraded its technology and, in 2016, hired Jennifer Calvery, the U.S. Treasury Department’s top anti-money-laundering official, to oversee its efforts – the same woman who helped slap the 2012 fine on the bank.

HSBC’s efforts to catch a few sex traffickers shows how far many of the biggest banks have come since a wave of fines got their attention half a decade ago. The changes help explain why few recent money-laundering scandals have involved big global banks.

It’s a mindset echoed in conversations with financial-crime executives at four other global banks. All have at least doubled staff levels in the past five years, as fines piled up.

Nine big banks paid a total of $20 billion from 2012 through 2015 for having lax controls against money laundering, helping clients evade taxes or violating U.S. sanctions. Most of the settlements came with deferred-prosecution agreements and outside monitors.

Like HSBC, other banks have hired officials from Treasury, law enforcement and regulatory agencies to help with their efforts. Regulators and compliance officers in the U.S., the U.K. and the European Union have established new channels for sharing information.

And banks are throwing more money at the problem: The 14 largest now spend $2.6 billion a year fighting financial crime, according to the Bank Policy Institute, an industry association, (via Bloomberg).

Monroe’s Musings:

For the AML compliance filed, the last decade has been a painful period when it comes to enforcement.

Banks with serious financial crime, compliance and sanctions failures absorbed penalties that broke records multiple times, soaring into the hundreds of millions, then billions of dollars, then nearly into the double digits with a peak at nearly $9 billion.

But, as this story rightly points out, state and federal regulators and investigators were not levying those penalties to tout their own examiner prowess or prove to Congress they are not asleep at the wheel. Similarly, the Department of Justice wasn’t trying to crush criminal money laundering hubs or put these banks out of business.

The goal of these AML penalties – just as with the full spectrum of compliance enforcement actions – is to identify program weaknesses, improve them and strengthen an institution so it can better manage financial crime and compliance risks and truly improve in the detection and prevention of all financial crime.

It’s good to see that is happening, at least in pockets, at some large banks that were hit with high-profile, statement-making penalties. The challenge in the very near future though?

How can these institutions keep up the positive momentum, keep and hire high quality talent and expertise and engage in proactive, resource-intensive and data-driven internal investigations when compliance hiring starts to slow? Some banks are already dealing with this now. 


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