The New York Department of Financial Services, which made its mark under Benjamin Lawsky by embarrassing Federal regulators via its aggressive pursuit of big bank money laundering, and later went after mortgage servicing misconduct, is back in the headlines. It’s dinged Deutsche Bank for $150 million for playing fast and loose with anti-money-laundering requirements on Jeffrey Epstein’s accounts, a bank in Cyprus accused of money laundering and connections to the Russian mob, and Danske Estonia, which conducted what was arguably Europe’s biggest money laundering operation. We’ve embedded the consent order at the end of the post and focus this post on Jeffrey Epstein, although for anyone in the banking business, the entire order is a good read.
Even though cynics have pointed out that the US likes to come down harder on misbehaving foreign banks than home grown ones, Department of Financial Services has clout over foreign banks because pretty much all of them choose to organize their operations through a New York branch. Long-standing readers may recall that Lawsky caused outrage in the Beltway when he ordered the CEO of serial anti-money-laundering-regulation abuser Standard Chartered to appear in his office and explain why his New York banking license should not be revoked. That was the equivalent of a death threat. No New York banking license means no dollar clearing, which would end Standard Chartered’s international operations.
In the past, Federal regulators embarrassed by the Department of Financial Services’ enforcement actions would either join the DFS effort or launch a parallel one and in either case, collect additional fines. So far, there’s no evidence of that happening with this DFS consent order with Deutsche.
One has to wonder if Deutsche is truly as incompetent and disorganized as it appears in the DFS account, or whether the bank was so caught with its pants down that this was the best defense it could muster. For instance, if you read carefully, you can infer that someone who had been on the Epstein team was able to produce a copy of an e-mail from a co-head of Wealth Management Americas saying the head of anti-money laundering and the General Counsel had said Epstein didn’t represent a reputation risk despite his sex offender warts and he was good to go as long as “nothing further is identified”. Deutsche maintained it had no record of that e-mail and claimed there had been no initial review by the Americas Reputational Risk Committee.
Similarly, even though Epstein’s accounts were designated high risk, which supposedly called for close supervision, the bank looked past obvious red flags. For instance, Epstein and his minions regularly wired $10,000 or more to three co-conspirators named in the press. His “Butterfly Trust” had these co-conspirators among its beneficiaries, as well as women with “Eastern European surnames” (this after the press had alleged that Epstein had been procuring underaged women from Eastern Europe). The Order makes clear the trust looks a, if not the, payment channel for Esptein’s sex trafficking via over 120 wires for $2.65 million.
The order blandly notes:
Although payments related to legal expenses are not inherently suspicious, Mr. Epstein also used his various accounts for what appear to have been multiple settlement payments totaling over $7 million to law firms, as well as dozens of payments to law firms totaling over $6 million for what appear to have been the legal expenses of Mr. Epstein and co- conspirators.
In 2014 and 2055, the bank’s Anti-Financial Crime arm raised new concerns because Epstein faced additional legal exposure. The main response was to sit down with Epstein…and curiously, there’s no record of what he said to reassure the officials, nor were there any of the mandated minutes of a follow-up Americas Reputational Risk Committee meeting. It nevertheless appeared some additional conditions were placed on the relationship, but they wound up being not observed by not being properly disseminated and being misinterpreted. For instance (emphasis original):
Specifically, AML OFFICER-2 interpreted the clause “transactions [with] unusual and/or suspicious activity or are in a size that is unusually significant or novel in structure” to mean transactions that were unusual, suspicious, or novel as compared to the prior history of transactions related to the Epstein relationship. He communicated this interpretation to the rest of the transaction monitoring team responsible for the Epstein relationship. The interpretation was exemplified by a later email exchange in March of 2017, when a member of the transaction monitoring team responded to an alert about payments to a Russian model and Russian publicity agent, stating, “[s]ince this type of activity is normal for this client it is not deemed suspicious.”
Another telling incident: One of Epstein’s lawyers asked how much he could withdraw cash without triggering a suspicious activity report. Bear in mind that even asking that question is supposed to trigger a suspicious activity report! That lawyer pulled out $7500 a pop, several time a month, 97 times for a whopping total of over $800,000, for “travel, tipping, and expenses.” And that wasn’t the only effort by that attorney to flout the requirements where Deutsche played along.
The money quote on Epstein:
…the Bank did little or nothing to inquire into or block numerous payments to named co-conspirators, and to or on behalf of numerous young women, or to inquire how Mr. Epstein was using, on average, more than $200,000 per year in cash.
ABC and Bloomberg reported on the DFS-Deutsche settlement, focusing as we did on Epstein. It’s obvious that the compliance effort was toothless, and the pretense at bumbling is inconsistent with the regularly inability to find key records. From ABC:
According to Roddy Boyd, the founder of The Foundation for Financial Journalism, the report describes a profound failure of the bank’s regulatory framework.
“The order revealed that while Deutsche Bank had a fully staffed and functioning compliance operation, it was as if it was designed only for show,” Boyd told ABC News. “A great deal of paper was generated, many meeting meetings were held, and yet no matter how troubling Epstein’s financial transactions were, the bank would only extend greater privileges and opportunity.”
Ghislaine Maxwell presumably has similarly cooperative banks in her corner…but will the regulators sus that out? Since she is believed to be even closer to the actual procuring, blowing up her money network could pull in other sex traffickers. Stay tuned.00 DFS Deutsche Bank Order