Fed warns Deutsche Bank against backsliding in fight against money laundering

The Federal Reserve told Deutsche Bank AG

DB 0.40%

in recent weeks, the lender has failed to address persistent shortcomings in its anti-money laundering controls, according to people familiar with the matter.

The Fed’s frustration has escalated to the point that the bank could be fined, people said.

Deutsche Bank has invested enormous resources to address repeated loopholes and penalties associated with authorizing suspicious transactions. The Fed told Deutsche Bank that instead of moving up, the German lender, which has a strong presence on Wall Street, is backing down. The regulator said some of the anti-money laundering control issues needed immediate attention, people said.

A spokesperson for Deutsche Bank said the bank was not commenting on the dialogue with regulators. A Fed spokesperson declined to comment.

The Fed’s harsh words contrast with the bank’s message that it has worked diligently to improve its systems and put most of its legal problems in the past.

The Fed’s latest warning comes four years after it classified Deutsche Bank’s US operations as “in trouble,” a rare reprimand for a major bank. In May 2020, he issued a new warning against the bank’s money laundering controls.

In 2020, Deutsche Bank also settled with the New York Department of Financial Services the bank’s role as correspondent bank in one of the biggest money laundering scandals in Europe and for failing to properly monitor his relationship with the late financier and convicted sex offender Jeffrey Epstein.

In 2017, the Fed fined Deutsche Bank $ 41 million for failing to maintain an effective anti-money laundering program.

Deutsche Bank is Germany’s largest lender and, as a Fed-regulated dollar clearing bank, is a major player in global financial transactions.

Banks are required to control the way money flows through their networks to guard against the proceeds of criminal activity flowing through the economy. They are required to know who their customers are and to report transactions that indicate potentially illegal activity to authorities.

Deutsche Bank’s financial situation has improved after it began an overhaul in 2019 to dramatically cut costs and shut down some operations, including stock trading in the U.S. This year it recorded its best quarter in seven years.

Deutsche Bank officials adopted a bullish tone at the bank’s annual meeting of shareholders on Thursday, saying the lender has found its footing and is regaining confidence in the market. He also said he wanted to play an active role in banking consolidation in Europe.

“There has been a fundamental change in the way people see our bank,” CEO Christian Sewing said in a speech.

Mr Sewing told shareholders that the bank had “significantly strengthened our control systems,” but added that “we are also aware of areas where we need to improve,” including its efforts to fight financial crime.

The bank has struggled to shake off its reputation for loose control. In April, BaFin, the German financial regulator, ordered the bank to take further steps to guard against money laundering. BaFin said Deutsche Bank must comply with due diligence obligations, especially during regular customer reviews. He expanded the role of a controller he appointed in 2018 to oversee implementation.

After the BaFin order, Deutsche Bank said it had significantly improved its controls, spending around $ 2.4 billion and increasing its anti-money laundering team to more than 1,600 in the past two years. He admitted that he still had work to do.

Deutsche Bank also remains under the watch of outside observers appointed in 2017 by the New York Department of Financial Services in connection with a settlement of a “mirror transaction” case, in which the bank transferred $ 10 billion to money from Russian customers outside the country.

The Wall Street Journal reported last November that monitors were alarmed by a possible expansion of the bank’s business in Russia. In October, they told the bank that efforts to improve its operations were not enough to offset the significant risks involved in trading with Russian clients, and that the bank should instead shut down operations there.

Earlier this month, the bank appointed Joe Salama, its U.S. general counsel responsible for negotiating recent regulatory deals with U.S. officials, to head its global financial crime unit. The move was aimed at improving the bank’s relationship with regulators, according to people familiar with the situation.

Unlike his predecessor, who was based in Frankfurt, Mr. Salama will split his time between Germany and the United States.

Deutsche troubles

More WSJ coverage of Deutsche Bank anti-money laundering controls and sanctions, selected by editors.

Write to Patricia Kowsmann at [email protected] and Jenny Strasburg at [email protected]

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