Christmas just came early for Maxine Waters and Adam Schiff.
As the leaders of the House Financial Services Committee and House Intelligence Committee ramp up an investigation into Deutsche Bank's lending relationship with the Trump Organization (the first round of subpoenas has already been sent and Waters has said that DB is cooperating in the probe), Bloomberg has handed them a gift in the form of an extensive report chronicling a culture of chronic compliance failures at the bank's US unit. At first glance, the story appears to support Waters' claim that Deutsche is "one of the biggest money laundering banks in the country, or maybe the world."
The report describes Deutsche's US unit, which is headquartered inside a gleaming Wall Street tower, making it one of the few Wall Street banks still situated on Wall Street, as a "kind of legal mirage". For years, the leaders of the US subsidiary were merely puppets, with little real power, influence or knowledge about the subsidiary's operations. Even the distribution of bonuses was outsourced to the headquarters in Frankfurt, BBG said. Top executives couldn't answer questions about the bank's operations, and they had little influence over personnel decisions.
This lack of authority helped foster an atmosphere of lax compliance and AML controls, which endured even after US regulators demanded that changes be made.
After DB expanded its US presence by buying out the floundering Bankers Trust, which was mired in a scandal involving sales of shady derivatives products. But DB swiftly established a shady track record of its own:
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.
And those were just the cases where the bank was accused of wrongdoing. Here's a roundup of other incidents where the bank managed to escape regulatory scrutiny.
- 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.”
Through interviews with more than a dozen former employees, as well as a review of hundreds of pages of court documents, a picture emerged of why Deutsche Bank waited so long to break off its correspondent banking relationship with Danske Bank's Estonian branch, the epicenter for one of the biggest money laundering scandals in European banking history. JPM broke off its relationship with the unit in 2013, while BofA waited until early 2016. DB didn't sever its ties until late in 2016.
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.
And what's worse, the bank failed to act even after managers in the bank's Jacksonville, Fla. office, its second-largest in the US, where most of its compliance workers were stationed, confronted executives about their concerns after more than $150 billion in suspicious funds flowed through Deutsche's correspondent banking unit. How did the executives respond?
They told the compliance workers to shut up and worry about the work in front of them.
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.
Moving on, BBG discussed how the leaders of the bank's US unit repeatedly broke promises to regulators to reform the bank's AML controls. During the 2000s, the unit was led by Seth Waugh, who was later called out by the Federal Reserve Bank of New York for making "no progress" on improving the bank's AML controls.
Employees said Waugh's failure wasn't surprising. They recalled how during conversations about bank operations, Waugh often couldn't answer questions because the real decisions were made in Europe.
When that money flow began, the chief of the German lender’s US 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.
In a sign of just how much value Deutsche placed on compliance, the bank hired a former one-star general with no investment banking experience to run the locus of its compliance operations - effectively killing two birds with one stone: Showing its peers that it was serious about hiring veterans, and hamstringing its compliance operation. In a shareholder lawsuits brought against the bank in 2016, an executive who was deposed by the investors' lawyers said compliance staff were treated as "one step above janitors."
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.
But in what was perhaps the most humorous detail from the story, BBG reported on how DB's correspondent bank would hand out "excellence awards" to clients who raised the fewest number of red flags from the bank's automated compliance system. A Cypriot bank later accused of laundering money for terrorists received one of the awards, though DB wasn't accused of wrongdoing.
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.
Ironically, though it apparently had no problem offering banking services to criminals, terrorists and sanctioned governments, DB drew the line in 2016 when it opted not to lend more money to the Trump Organization over fears of being associated with such a controversial candidate, as well as worries about being put in the awkward position of seizing assets from the president should his company default while in office.
In summary, terrorists and criminals good, Trump bad.