Deutsche Bank’s U.S. Unit Kept Danske’s Shady Billions Flowing
Years before regulators learned about what may be one of the biggest money-laundering pipelines in history, 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.
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.
Frankfurt-based Deutsche Bank, which is in talks to merge with Commerzbank AG after years of losses, declined to address allegations about its past practices. But the bank said in a statement that its U.S. operations “have increased our anti-financial crime staff and enhanced our controls in recent years.” The lender takes compliance with money-laundering laws and related provisions seriously, it said. In the Danske case, bank executives have said they’re cooperating with investigators in multiple jurisdictions and that they met their legal obligations as they dealt with the Danish lender from 2007 to 2015.
“Their defense would have more appeal if Deutsche Bank didn’t have such a poor track record,” said Jimmy Gurulé, a former undersecretary for enforcement in the U.S. Treasury Department and a professor at Notre Dame Law School. “There’s been one problem after another.”
Deutsche’s U.S. trust company, which houses a global transaction bank, a private wealth unit and a lender, has attracted attention for the hundreds of millions of dollars in loans it extended to President Donald Trump’s real estate business. But it’s now the focus of a Federal Reserve probe into the Danske affair, according to a person briefed on the situation who asked not to be named because the regulator’s work isn’t yet public. The U.S. Department of Justice has also sought information from the bank, two other people have said.
It’s hardly the first time for such scrutiny. Over the trust bank’s 20-year history, government authorities have concluded at least five times that it either failed to police the money flows it handled or enabled efforts to evade U.S. law.
Deutsche Bank Trust Co. Americas -- which is separate from Deutsche Bank Securities Inc., the better-known trading division -- rose from the ashes of another scandal-plagued bank. The century-old Bankers Trust was largely uncontroversial until the 1990s, when it began innovating in financial derivatives. Customers lost money and sued, and the litigation unearthed taped conversations among traders who called their deals “gravy trains.” In transcripts, an employee discussed a client’s loss on a trade, saying, “Pad the number a little bit.” Another worker told a colleague, “Funny business, you know? Lure people into that calm and then just totally f--- ’em.” By 1999, Bankers Trust was ripe for rescue by a German buyer with about $9 billion to spend.
Soon the new institution had its own tumultuous history. From 1999 through 2006, it handled almost $11 billion in U.S. dollar transactions for customers in nations under sanctions: Iran, Syria, Libya, Burma and Sudan. Later, it helped rich Russians move $10 billion from their country using “mirror trades” -- simultaneous stock trades in separate jurisdictions that bypassed customary hoops for transferring money.
In between, in cases where the bank wasn’t accused of any wrongdoing, it also provided banking services for:
- Russia’s Sberbank PJSC while the government-controlled bank was involved in a years-long scheme that funneled millions to a man in the U.S. who admitted to smuggling $65 million worth of potential nuclear technology to Russia, according to federal prosecutors;
- Kenyan fraudsters who scammed U.S. income tax refunds using identities stolen from Indiana sex offenders;
- and a Colombian drug cartel that received payments from the U.S. Drug Enforcement Administration as part of an undercover operation. The payments, disguised as profits from auto-parts sales, were transferred into a Deutsche account and exhibited what a DEA undercover agent called “obvious red flags.”
Today, Deutsche Bank Trust Co. Americas is one of the last Wall Street banks that’s actually on Wall Street. Former employees say the subsidiary -- housed in a skyscraper that’s sheathed in glass and lined with mahogany paneling -- has been a kind of legal mirage for most of its existence. The unit provides an entrée for Deutsche Bank to operate as a lender in America, those people said, but its U.S.-based executives have had little authority.
Much of its behind-the-scenes work is akin to plumbing: It opens channels for international cash, takes care of customers’ assets and clears transactions in dollars. It’s high-volume, low-margin work -- not glamorous, but necessary to the global economy.
For foreign banks like Danske, the unit opens an industrial-scale teller window into the U.S. financial system that their customers can use -- what’s known as a correspondent banking relationship. Of course, when the plumbing fails, the results can be unpleasant.
In Danske’s case, Danish regulators say Estonian employees covered up money-laundering violations for years. The bank has admitted that roughly $230 billion that passed through that unit between 2007 and 2015 -- much of it from Russian clients -- was suspicious. A person familiar with the matter confirmed that at least $150 billion flowed through Deutsche Bank, and one report put the figure at about $185 billion.
When that money flow began, the chief of the German lender’s U.S. business was Seth Waugh, a perpetually tanned executive who wore his graying hair a bit long by bankers’ standards. Waugh pledged to regulators in 2005 that he’d overhaul the bank’s money-laundering protections. But in a 2013 letter that served as a scathing review of his tenure, the Federal Reserve Bank of New York concluded that “no progress was made” on concerns first raised in 2002.
Waugh, widely described as affable and approachable, had only limited influence over staff members’ bonuses or other personnel matters -- or even key points of Deutsche’s U.S. balance sheet, according to several former colleagues. Employees say he often couldn’t answer questions about bank operations or regulatory matters because the real decision-makers were sitting in Europe.
One New York executive recalled visiting Waugh’s 46th-floor office to tell him about bonus-hungry co-workers who ignored danger signs to chase risky accounts. Waugh seemed sympathetic but said he wasn’t sure what he could do, the executive recalled.
Waugh declined to be interviewed, but said in a statement that during his tenure, Deutsche made it a priority to be “best in class” in regulatory compliance. He also said he led the bank from “relative obscurity to a top position in the market.”
He pursued attention-getting projects. The bank installed the world’s highest solar panel on its headquarters in 2012. It sponsored a professional golf tournament from 2003 to 2016. (Waugh was appointed chief executive officer of the Professional Golfers Association of America in August.) And he advocated for a program to recruit military veterans into Wall Street jobs.
That’s how a retired general wound up overseeing the Jacksonville office.
In 2010, Brigadier General Michael Fleming of the Florida Army National Guard began talking to Deutsche about a new career, running its veteran-recruitment program. He got a bigger job instead: running its new outpost in North Florida.
“I really didn’t have any corporate investment banking experience at that point,” the one-star general told Fox Business Network in 2013. Fleming, who left Deutsche Bank in 2014, didn’t respond to requests for comment.
Former employees said he wasn’t a hands-on leader. Before his arrival, Deutsche executives had transferred some bank functions, including anti-money-laundering efforts, to the main Jacksonville site, several low-slung concrete buildings that surround a man-made pond in a suburban office park. It grew to become the bank’s second-largest office in the U.S., with approximately 2,000 employees working in various operations. Former compliance workers there describe a disregard for their work that emanated from New York.
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.
Know Your Customer
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.
In such cases, staff members were directed to file routine “suspicious activity reports,” or SARs, a basic legal requirement in cases where bank employees consider a source of funds to be questionable. Such filings record potentially problematic activity but don’t trigger government reviews on their own. Often, they simply languish at the Treasury Department.
Deutsche executives’ public responses to the Danske case tend to sidestep concerns about “know your customer” efforts. Because their bank had a correspondent relationship with Danske, they’ve argued that the Danish bank was the only customer they were required to know -- not clients who were banking with Danske.
“The primary duties rest with the bank that has the immediate contact with the client,” said Karl von Rohr, Deutsche Bank’s co-deputy CEO and legal head, on Feb. 1.
As Douglas Sloan, then a financial crimes investigative chief for Deutsche’s U.S. unit, said in testimony in December 2017: “We don’t know our customers’ customer on the other side of the planet.”
But it’s not that simple. U.S. banking laws require correspondent banks to make sure their customers are policing their own clients -- especially on big transactions. Another bank clearly had qualms about Danske; JPMorgan Chase & Co. ended its correspondent relationship with Danske’s Estonian branch in 2013. Bank of America Corp. cut off its relationship with the unit in May 2015. Deutsche Bank was the last to break with Danske later that year.
Why? Stephan Wilken, who runs Deutsche’s anti-money-laundering operations, told the European Parliament that he couldn’t speculate on what other banks saw, but a decision to break off business must be organized and planned.
Still, some aspects of the bank’s approach raise questions. Like other correspondent banks, it relies on a largely automated system called “straight-through processing,” or STP. That system checks names and places against government risk lists and other factors. For years, executives have bestowed an “STP Excellence Award” on customers that successfully move money through Deutsche’s system while raising the fewest red flags. The awards have sometimes gone to questionable recipients.
Cyprus-based FBME Bank Ltd. won eight of them through 2013, according to news releases. The Treasury Department later accused that bank of having weak money-laundering controls that allowed customers to conduct more than $1 billion in suspicious transactions through various correspondent accounts, including one with Deutsche Bank’s U.S. unit, from 2006 to 2014. Treasury officials said FBME helped organized crime and terror groups move money, evade sanctions and develop banned weapons. Deutsche Bank wasn’t accused of wrongdoing in the case.
The “mirror trades” scandal surfaced another issue: Warning bells sounded at the U.S. investigations unit after another European bank questioned some of the transactions, but the unit failed to follow up, according to an internal Deutsche report and a 2017 consent order issued against the bank by New York’s Department of Financial Services. Beyond that, the German bank didn’t even deem Russia to be at high risk for financial crime until late 2014 -- much later than its peers -- according to that 2017 order.
In that 2017 order, regulators sounded optimistic that the bank was finally cracking down on money laundering, saying it attempted “genuine reform” in 2016. By then, Susan Skerritt had become CEO of Deutsche Bank Trust Co. Americas as the bank implemented a global campaign aimed at preventing financial crime and known internally as “Get Sharp.”
Training sessions were held. Posters adorned the walls. The new CEO spoke publicly about the lender’s willingness to end perilous correspondent banking relationships. Skerritt, who didn’t respond to requests for comment, left in early 2018.
The bank has had trouble retaining its reformers elsewhere too. One executive hired to combat financial crime globally left after just six months. Another left to work at Danske.
Deutsche’s most attention-getting U.S. addition was Richard Weber, a veteran federal prosecutor and former chief of the Internal Revenue Service’s criminal investigations. Weber, who declined to comment, was part of a team that prosecuted HSBC Holdings Plc in an unprecedented 2012 money-laundering and sanctions case. Deutsche trumpeted his 2016 hire as demonstrating its “commitment to fighting financial crime.”
The bank gave investors a frank warning about the importance of that fight in its annual report last month. Failure to fix its money-laundering protections quickly would mean its “financial condition and reputation could be materially and adversely affected,” the bank said. Weber might have been just the person to help. But he quit three months ago.
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