Author: Bruce Zagaris
Date: January 8, 2015
On November 4, 2015, the New York State Department of Financial Services (NYDFS) and the U.S. Department of the Treasury entered into a settlement agreement with Deutsche Bank.1 Deutsche Bank agreed to pay an overall $258 million penalty, including $200 million to the NYDFS and $58 million to the Federal Reserve. Deutsche Bank (DB) agreed to have NYDFS appoint an independent monitor for one year and to fire six employees the NYDFS has said were involved in the misconduct.2
1. Use of Wire Stripping and Non-Transparent Cover Payments to Disguise Transactions
Between 1999 and 2006, to facilitate obtaining and continuing U.S. dollar business for sanctioned customers, DB employees developed and employed several processes to handle dollar payments in non-transparent ways that circumvented the controls designed to detect potentially-problem payments, including those involving Iran, Libya, Syria, Burma, and Sudan.
One method was ire stripping, or alteration of the information included on the payment message. Bank staff in overseas offices handling Message Type 2013 serial payment messages, or MT103s, removed information indicating a connection to a sanctioned entity before the payment was made to the correspondent bank in the U.S. The potentially problematic information was replaced with innocuous information, such as showing the bank itself as the originator, so that the payment message did not raise red flags in any filtering systems or trigger any additional scrutiny or blocking that otherwise would have occurred if the true details were included.
A second method was the use of non-transparency cover payments. The cover payment method involved splitting an incoming MT203 message into two message streams: an MT103, which included all details, sent directly to the beneficiary’s bank, and a second message, an MT202, which did not include details about the underlying parties to the transaction, sent to Deutsche Bank New York or another correspondent clearing bank in the U.S. In this way, no details that would have suggested a sanctions connection and triggered additional delay, blocking, or freezing of the transactions were included in the payment message sent to the U.S. bank.
On some occasions, payments that were rejected by DB New York due to a suspected sanctions connection were simply resubmitted to a different U.S. correspondent by the overseas office. Alternatively, some payments that were rejected in the U.S. when they were sent as MT103 serial payments (which included details about the underlying parties) were then resubmitted as MT202 cover payments. In other words, since the information included on the more detailed message caused the rejection, the overseas office simply sent the payment again using the less transparent method.
The special processing that the Bank used to handle sanctioned payments required manual intervention to identify and process the payments that required “repair” so as to avoid triggering any sanctions-related suspicions in the U.S.
2. Bank Staff Coordinated Wrongdoing with Customers
Bank relationship managers and other employees worked with the Bank’s sanctioned customers in the process of concealing the details about their payments from U.S. correspondents. During site visits, in emails, and during phone calls, clients were instructed to include special notes or code words in the payment messages that would trigger special handling by the bank before the payment was sent to the U.S. Additionally, DB’s payment processing staff was instructed to be on the lookout for any payment involving a sanctioned entity and ensure that no name or other information that might arouse sanctions-related suspicions was sent to the U.S. correspondents, even if the customer failed to include a special note to that effect.
3. Wrongdoing Was Formalized and Widespread
The practice of non-transparent payment processing was not isolated or limited to a specific relationship manager or small group of staff. Instead, Bank employees in many overseas offices, in different business divisions, and with various levels of seniority were actively involved or knew about it. At least one member of the Bank’s Management Board was kept apprised about and approved of the Bank’s business dealings with customers subject to U.S. sanctions.
DB disseminated formal and informal written instructions emphasizing the need for utmost care to ensure that no sanctions-related information was included in U.S.-bound payment messages and setting out the various methods to use when processing sanctions-related payments.
DB’s payments processing employees prepared a training manual for newly-hired payments staff in an overseas office. The manual had a section titled “U.S. Embargo Payments” that explained how to handle payments with a sanctions connection.
Less formal instructions were disseminated to certain staff via email throughout the relevant time period.
Simultaneously, the Bank staff was careful to avoid publicizing their non-transparency payments handling, both within and outside the bank due to their recognition of the legal and reputational concerns.
Even when DB New York staff occasionally raised objections to the Bank’s business relationship with U.S.-sanctioned parties based on U.S. law, DB’s overseas staff redoubled their efforts to hide the details from their US. colleagues and saw the objections as indicating a need to better train the non-U.S. staff who handle the “very lucrative” sanctioned business to ensure such disclosures did not occur in the future.
4. Settlement Provisions
The settlement provisions require DB to pay a civil monetary penalty of $200 million pursuant to Banking Law § 44 to NYDFS. As mentioned above, DB has also agreed to pay $58 million to the Federal Reserve.
DB agrees to retain an independent monitor, which the NYDFS will select, for one year to conduct a comprehensive review of DB’s existing BSA/AML and OFAC sanctions compliance programs, policies, and procedures that pertain to or affect activities conducted by or through DB. The monitor has to report on five different elements of DB’s corporate governance leading to the problems, its BSA/AML and OFAC compliance program, the propriety, reasonableness, and adequacy of any proposed, planned, or recently-instituted changes to its BSA/AML and OFAC compliance programs, and any corrective measures necessary to address identified weaknesses or deficiencies in DB’s corporate governance or its global BSA/AML and OFAC compliance program.
NYDFS orders DB to take all steps necessary to terminate six DB employees involved in the misconduct and refrain from ever rehiring for any full-time, part-time or consulting position ten employees who played central roles in the misconduct.
If NYDFS believes DB is in material breach of the Consent Order, it will provide written notice to DB and the latter must within ten business days appear before the NYDFS to show that no material breach has occurred or, to the extent pertinent, that the breach is not material or has been cured. The NYDFS, upon a finding that DB has breached the Consent Order, has all the remedies available to it under the New York Banking and Financial Services law.3
The settlement provisions are harsh, especially considering that DB worked with the NYDFS to resolve the allegations. The amount of the fine is substantial and the term of the monitorship is also substantial although not so unusual. Part of the reasons for the heavy fine include the length of time of the misconduct, the formalization and widespread nature of the misconduct, and the high levels at which the misconduct was condoned or known (e.g., bank’s management board).
The DB settlement is the latest substantial settlement of economic sanctions involving banks. The largest case was last year when BNP Paribas, France’s largest bank, pleaded guilty to criminal charges and paid a record $8.9 billion penalty to federal and state authorities. The week before the BNP settlement, Crédit Agricole, another large French bank, agreed to settle regulatory and criminal investigations of economic sanctions by paying $787 million. There remain pending investigations into Sóciété Général and Unicredit for economic sanctions.4
This article is reprinted from 31 IELR 458 (Nov. 2015).
Bruce Zagaris is partner with the law firm of Berliner, Corcoran & Rowe, LLP. He can be reached at email@example.com.
1. In the Matter of Deutsche Bank AG, New York State Department of Financial Services, Consent Order Under New York Banking Law §§ 39 and 44, Nov. 4, 2015.
2. New York State Department of Financial Services, NYDFS Announces Deutsche Bank to Pay $258 Million, Install Independent Monitor, Terminate Employees for Transactions on Behalf of Iran, Syria, Sudan, Other Sanctioned Entities, Nov. 4, 2015.
3. For additional background on corporate monitor arrangements, see Prosecutors in the Boardroom: Using Criminal Law to Regulate Corporate Conduct (Anthony S. Barkow and Rachel E. Barkow, eds.) (2011). Veronica Root, The Monitor-“Client” Relationship, 100 VA. L. REV. 523 (2014; Vikramaditya Khanna and Timothy L. Dickinson, The Corporate Monitor: The New Corporate Czar, 105 MICH. L. REV. 1713 (June 2007); Caelah E. Nelson, Corporate Compliance Monitors Are Not SuperHeroes With Unrestrained Power: A Call for Increased Oversight and Ethical Reform, 27 GEO. J. LEGAL ETHICS 723 (2014); Hon John Gleeson, Supervising Criminal Investigations: The Proper Scope of the Supervisory Power of Federal Judges, 5 J.L. & Pol’y 423 (1997).
4. Ben Protess and Peter Eavis, Deutsche Bank Is Expected to Settle One Inquiry into Sanctions Violations, N.Y. Times, Oct. 29, 2015, at B1, col. 1.