“Significant Compliance Failures” - Deutsche Bank fined US$150M in Epstein case

In a July 2020 Consent Order, the Frankfurt based Deutsche Bank agreed to pay a fine of US$150M “for significant compliance failures” leading to “mistakes and sloppiness” in failing to “properly monitor” its relationship with disgraced American financier, socialite, and convicted sex offender Jeffery Epstein. The bank processed “hundreds” of suspicious transactions for Epstein without investigation “despite ample information that was publicly available concerning” Epstein’s past criminal misconduct.

Over the five year relationship the late Jeffery Epstein had with Deutsche Bank, the bank processed millions of dollars worth of ‘suspicious’ transactions for him, including payments to Russian models, alleged co-conspirators, legal fees, school tuitions for several women, US$13M in payments to possible victims, various other payments, and cash withdrawals averaging US$200,000 a year said the New York State Department of Financial Services (DFS).

Deutsche Bank only ended their relationship with Epstein and “related individuals and entities” in December of 2018, when the Miami Herald published a series of articles scrutinising the reduced prison sentence and the federal non-prosecution deal Epstein obtained in Florida in 2008 regarding the initial 2005 incident, whereby he solicited sexual acts from a 14 year old in Palm Beach. Palm Beach police launched an investigation immediately after receiving the initial complaint, and very quickly uncovered dozens of other alleged victims, many of which were also minors.

Deutsche bank, on the other hand, was well aware of Epstein’s criminal past, and had long considered him a “high-risk” client “subject to increased due diligence”, yet ignored all the red flags, and “inexcusably failed to detect or prevent millions of dollars of suspicious transactions” that “at the very least, should have prompted additional scrutiny in light of Mr. Epstein’s history” said Linda Lacewell, Superintendent of Financial Services, in a July press release. These severe oversights on the part of Deutsche Bank, in part, allowed Epstein and his accomplices to continue to finance their sex trafficking ring without significant financial interference and to “further or cover up criminal activity ... perhaps even to endanger more young women".

In the 38 page consent order, it is further alleged that “very few [of Epstein’s] problematic transactions were ever questioned [by the bank], and when they were, they were usually cleared without satisfactory explanation”.

In April of 2013, a junior account executive at Deutsche Bank flagged Epstein’s plea deal, prison sentence and that “Mr. Epstein was involved in 17 out-of-court civil settlements related to his conduct in the 2007 conviction”, in a memorandum to a senior executive whilst the bank was contemplating taking him onboard as a client. Another account executive was quoted in a memo note to senior executives noting how “lucrative the relationship could be” and estimating exorbitant cash flows of “$100-300 [million] overtime (possibly more)w/ revenue of $2-4 million annually over time,” [sic]. In other words, Deutsche Bank weighted the risks of Epstein as a client, but put them aside, enticed by the revenue he might generate. “For years, Mr Epstein’s criminal, abusive behaviour was widely known, yet big institutions continued to excuse that history and lend their credibility or services for financial gain” put New York Governor Andrew Cuomo in a statement.

Between 2014 and 2015, Deutsche Bank’s anti-financial crime department identified a number of further red flags, some regarding Epstein’s relationships with prominent US political figures and a member of a European royal family, and in early 2015, two Deutsche Bank executives agreed to meet Mr Epstein in his New York home to further discuss these issues. They allegedly questioned him on the “recent allegations and appeared to be satisfied by Mr. Epstein’s response” said the DFS. But a week later, at the bank executives meeting, there were no recorded minutes from the meeting at Epstein’s home, and later that same day, one of the executives emailed another to say that the “committee was comfortable with things continuing” and that they would be keeping Epstein as a client for the foreseeable future.

In yet another shortcoming, the bank chose not to investigate the payments made from Epstein to a Russian model and Russian publicity agent in 2017, as “this type of activity is normal for this client it is [thus] not deemed suspicious" said a compliance monitor in an internal email.

Between Epstein and Deutsche Bank’s August 2013 to December 2018 relationship, Deutsche Bank had operated over 40 accounts related to him, some of which were for the ‘Butterfly Trust’ whose beneficiaries included many alleged co-conspirators in sexual abuse.

Following Epstein’s July 2019 arrest on federal charges of sex trafficking of minors out of Florida and New York, in an internal staff memo, Deutsche Bank Chief Executive Officer, Christian Sewing, was quoted saying that accepting Epstein as a client in 2013 “was a critical mistake and should never have happened”, “Our reputation is our most valuable asset and we deeply regret [our] association [with Epstein]”. Since then, the bank has invested nearly US$1B in training, controls and operational processes, and has hired more than 1,500 people to its financial crime team to “help ensure this kind of thing does not happen ever again”.

The US$150M settlement represents the first federal action taken in relation to Epstein’s dealings, but is also a huge blow to Deutsche Bank’s reputation as it undergoes a major restructuring following five years of losses totalling more than €15 billion (S$23.6 billion).

In addition to this, over the past decade, Deutsche Bank has had a history of regulatory problems in the United States, and has paid billions of dollars in fines and settlements in a number of misconduct issues in an attempt to shed its reputation for high-risk relationships and poor compliance controls. This includes a 2017 case where the bank was ordered to pay a US$630M penalty over a US$10B Russian money laundering scandal, and a 2016 agreement where the bank was to pay a US$7.2B settlement over toxic mortgage assets, and another agreement in 2015 where the bank paid US$2.5B in penalties over interest rate manipulation.

The bank was also the subject of an investigation into president Trump’s financial ties to Russia.

The new 2020 consent order by the Department of Financial Services stated that banks, “In addition to having effective AML controls in place” need to “monitor their customers for the purpose of preventing their customers from facilitating criminal activity using the institutions’ facilities”, something that Deutsche Bank repeatedly failed to do during its five year relationship with Epstein. Recent advancements in Regulatory Technology (RegTech) have dramatically expedited this process by reducing the amount of low-skill, manual labour tied up in gathering information required in decision making processes. In a time as such, as more companies, and whole industries, seek to digitise their offerings and processes, it is foreseeable to see how the adoption of RegTech is becoming increasingly vital for the survival and effective compliance of businesses by facilitating the process of proper and informed decision making, especially in financial institutions, and, in the words of Deutsche Bank CEO, Christian Sewing, “to help ensure that this kind of thing does not happen again”.

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Watch -this- space

REFERENCES:

https://www.straitstimes.com/business/banking/deutsche-bank-fined-us150-million-over-suspicious-jeffrey-epstein-transactions

https://www.ft.com/content/a19e6cdc-55ae-4dda-aca3-42197280e558

https://en.wikipedia.org/wiki/Jeffrey_Epstein

https://letstalkaml.com/deutsche-bank-fined-150-million-for

https://www.dfs.ny.gov/system/files/documents/2020/07/ea20200706_deutsche_bank_consent_order.pdf

https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202007071

https://www.miamiherald.com/news/local/article220097825.html

https://www.db.com/newsroom_news/2020/update-on-our-transformation-progress-and-on-today-s-events-message-from-christian-sewing-to-staff-en-11629.htm