GIR Global Investigations Review Global Investigations Review The law and practice of international investigations DFS flexes regulatory muscle

Global Investigations Review GIRin CommerzbankThe law and practice of iinnternternatiatioonalnal investigationsinvestigations settlement

Rahul Rose, 16 March 2015

The fine imposed on Commerzbank by the DFS accounts for nearly half of the company’s US$1.45 billion multi-agency settlement, a sign of the power the regulator holds over New York-based banks, lawyers say.

As part of a settlement announced on 12 March, Commerzbank admitted to moving US$263 million through the US financial system between 2002 and 2008 on behalf of Iranian and Sudanese entities subject to US sanctions. The bank was also found to have a deficient anti-money laundering compliance regime, which allowed Japanese optics manufacturer Olympus to use the bank to commit a multi-billion dollar fraud between 2008 and 2013.

According to the New York Department of Financial Services (DFS), in the early 2000s, Commerzbank created special internal procedures to process US dollar payments on behalf of clients subject to US sanctions. The bank stripped information from transactions involving Iranian companies. In one email in 2003, a Commerzbank employee said: “If for whatever reason CB New York inquires why our turnover has increased so dramatically, under no circumstances may anyone mention that there is a connection to the clearing of Iranian banks!!!!!!!!!!!!!.”

The financial institution also repeatedly failed to act despite suspicions that it was being used for money-laundering by Olympus. Between the late 1990s and 2011, the Japanese manufacturer concealed hundreds of millions of losses from investors. Part of this accounting fraud was carried out using Commerzbank’s private banking business in Singapore. One of the bank’s compliance officers in region even remarked that bank’s controls in Singapore were a “time bomb ready to go off”, yet failed to take action.

The US$1.45 billion settlement, which was announced on 12 March, will be divided between five authorities. The DFS received the lion’s share at US$610 million, while the Federal Reserve imposed a US$200 million penalty. As part of its deferred prosecution agreement with Manhattan and federal prosecutors, Commerzbank agreed to pay US$300 million to the US Attorney’s Office for the Southern District of New York, US$172 million to the Manhattan District Attorney’s Office and $172 million to the US Department of Justice (DoJ).

First published on the Global Investigations Review website, 16 March 2015 globalinvestigationsreview.com GIR Global Investigations Review Global Investigations Review TheThe law Officeand practi of ceForeign of intern Assetsational Control investigations also imposed US$258 million fine, but the agency said this penalty was covered by the DoJ’s and the Manhattan District Attorney’s Office settlement with Commerzbank for the same misconduct.

In addition, Commerzbank will install a monitor as part of its settlement with the Global Investigations Review DFS. GIR The law and practice of iinnternternatiatioonalnal investigationsinvestigations The head of anti-money laundering, fraud and sanctions compliance at Commerzbank’s New York branch also resigned as a result of the DFS’s investigation.

The DFS has ordered the bank to fire four additional employees. However, the regulator acknowledged in its consent order that Commerzbank may be unable to fire the employees under German law. It said if this was the case, then these individuals should be prevented from holding duties involving compliance, US dollar payments or US operations.

Hillary Rosenberg at Lewis Baach in New York said the DFS has proven more effective than the DoJ in holding senior compliance staff at financial institutions accountable. “The DoJ has said for a long time said it wants to hold individuals accountable, but in the Commerzbank case and the BNP Paribas cases we see DFS actually putting this into practice,” she said. “It’s impressive from that perspective.”

As part of its settlement with the French bank BNP Paribas, the regulator asked the financial institution to fire 13 individuals, including the chief operating officer and head of North American ethics and compliance.

Rosenberg added that financial institutions are particularly fearful of the DFS, which has the power to strip a bank of its licence. “The DFS is seen as being new and unpredictable,” she said. “It is the new kid on the block, unlike the Manhattan DA’s office or the DoJ. Banks are unsure what stance it will take.”

Rosenberg said while the DoJ can cause potentially catastrophic damage if it chooses to indict a bank, it is in practice difficult to do this. “Indicting a bank is a lot more work. The DFS can much more easily pull a bank’s charter,” she said.

Barbara Linney at Miller & Chevalier in Washington, DC, said the DFS poses a strong regulatory threat to financial institutions. “Banks need to keep the DFS happy if they want to continue to do business in New York,” she said. “Any financial institution or regulated company will have a strong concern during an investigation by its principal regulator that it could be frozen out of the industry if it does not comply and cooperate.”

First published on the Global Investigations Review website, 16 March 2015 globalinvestigationsreview.com