Deutsche Bank has become the poster boy for money laundering.
A version of this article was first published on theglobaist.com on February 5, 2017.
Hard though it may be to imagine for anyone who still recalls the 1970s and 1980s, Germany’s Deutsche Bank, once upon a time a financial institution with a truly stellar reputation, has become the poster boy for money laundering.
The bank pursued thousands of transactions from its Moscow office amounting to around $10 billion that violated every rule in the book. It has been caught and fined.
The New York Department of Financial Services and the U.K. Financial Conduct Authority (FCA) have respectively fined Deutsche $425 million and £163 million for a host of crimes that were initiated by the bank’s Moscow office.
Beyond the monetary fallout, the damage to Deutsche Bank’s reputation further compounds the financial problems this once mighty institution confronts.
Official bank regulators will see this case as a model for how to strengthen anti-money laundering enforcement.
For Deutsche Bank, this latest scandal is a major blow. For other global banks, this is a definite warning that the U.S. and the U.K. authorities are taking a much closer look at the legitimacy of international banking transactions. This is long overdue.
One of the first finance leaders I met in Frankfurt on arriving there in 1970 as the new European Business Correspondent for The Times (UK) was Hermann Josef Abs. He was Deutsche Bank’s venerable chairman emeritus at the time.
His bank dominated its domestic business turf, with huge shareholdings in such giant corporations as Daimler-Benz and Krupp.
To move beyond the home turf, Deutsche subsequently launched a major strategy to become a powerful global bank. Today, Deutsche Bank is in shambles.
Under Abs and a series of subsequent CEOs, the bank secured an excellent reputation for integrity and financial strength. Today, the opposite is the case.
No magic wand
John Cryan is the man who now must bring stability to a fallen institution, let alone seek to revive some of its former glory. His bank posted a loss of € 1.9 billion in the final three months of 2016.
Cryan, who joined DB as co-CEO in mid-2015, became the chief executive officer last May. He must move rapidly to restore business profitability, strengthen the capital base and, perhaps most difficult of all, build a new culture among employees.
Deutsche urgently needs to replace its anything goes, ethics-free short-term profit maximization “culture” with a focus on two core values, trust and honesty.
In the four years to the end of 2015, Deutsche Bank transferred about $10 billion “of unknown origin, from Russia to offshore bank accounts in a manner that is highly suggestive of financial crime,” according to the FCA.
Very substantial sums of cash were transferred from Moscow through Deutsche Bank in the UK to overseas bank accounts in such places as Cyprus, Estonia and Latvia.
According to the New York state regulator, “The bank has conducted its banking business in an unsafe and unsound manner, failing to maintain an effective and compliant anti-money laundering program. The bank failed to maintain and make available true and accurate books, accounts and records reflecting all transactions and actions.”
The bank’s two previous chieftains, Josef Ackermann and Anshu Jain, are responsible for many of the problems the institution now confronts and the lax management culture described in the devastating charges now brought by the New York and U.K. regulators, which Cryan now has to clean up.
Specifically, Deutsche Bank was accused of inadequate customer due diligence, which means it disregarded “know-your-customer” (KYC) rules. These rules demand that banks only accept deposits when the customer can prove the legal origin of the funds.
In a finding that would have left former CEOs like Abs speechless and shell-shocked, the regulators reviewed Deutsche’s anti-money laundering policies and procedures and found them deficient. DB’s customer and country risk rating methodologies were flawed.
A lesson in Deutsche’s failures
Managing and restructuring anti-money laundering management systems in a major bank is a very substantial and costly task and DB is bound now to make wholesale reforms.
Other major banks, if prudent, should be reviewing their own systems.
Some may believe that President Donald Trump, with his declared opposition to business regulation, will restrain the zeal of U.S. banking regulators.
This may not be the case, however, when it comes to money laundering given White House concerns about terrorism, including illicit financing of terrorist actions.