NY Department of Financial Services Fines Deutsche Bank Over Jeffrey Epstein Abuses; Where Are the Feds?

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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
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18 comments

  1. vlade

    I honestly do not believe there’s a single bank in the world where the AML/KYC department is anything but for show and because the regulators require it.

    The banks are extremely good at making them look like funcitoning entitites, making life miserable for lots of normal customers, but pretty much always spectacularly failing when it comes to any amounts that actually matter.

    Reply
    1. templar555510

      I agree, it is just for show, and for another good reason; to block the trail that potentially leads to the real source of Epstein’s money . Like the Kennedy assassination , the whole Epstein fiasco is – to use Bob Dylan’s phrase a ‘ magic trick ‘ meaning we’ll never know how it was performed.

      Reply
        1. Susan the other

          But there’s at least one detail that doesn’t fit: Both Jeffrey and Gislaine were taking refuge in Paris after Epstein himself was prosecuted. (Why was that necessary?) And that his prosecution was unbelievably easy on him; only restricting him to voluntary rehabilitation behavior basically but it clipped his sexual delusions to the quick. If that is the reason he and Gislaine took refuge in Paris it seems superficial. It’s more believable that they knew they were hunted for the things they knew that pertained to the years following the dissolution of the USSR. And Paris is pretty close to all points in Germany which itself is almost synonymous with DB. There would have been more access by those associated with pillaging the USSR (if that is the crux) via DB in Paris than in New York. Yet they jetted off to New York to settle up legal accounts presumably; to reclaim their shredded reputations, etc. Who convinced them to do that? It’s like Jeffry didn’t have a shred of an instinct for self preservation at that point. Why? But Gislaine did. Why? She ferreted herself away in New Hampshire with the help of the French security services until it was safe to peek out. So my point is this: Stuff about DB being too sophisticated to not know what Jeffrey was up to is a red herring. Epstein’s usefulness to his handlers was done – it coincided with the days of cowboy capitalism – also being done. And now he’s an excellent distraction from all the underlying causes of the mess of the late 20th century. And etc. But why was it worth murdering him in that awful manner?

          Reply
          1. polecat

            Perhaps it’s the same reason Julius de Orange is being told .. via da Supremes essentially, to caugh up those precious tax records … that Deutsche Bank coincidentally holds to it’s beating black heart.

            Donald, to his unintended credit, is trying to crack that same nut I believe .. but from an oblique angle.

            Reply
            1. polecat

              “Find a dog, who’ll eat a dog ..”

              *Caligula explaining to Tiberius a way in which to to deal with the ‘Sejanus Problem’, in a scene from the series ‘I CLAVDIVS’.

              In a sense, that’s Donald!

              Reply
    2. HotFlash

      “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.”

      Compliance theatre, how sweet! Had to LOL at ‘meeting meetings’, though — will definitely be adding that to my vocab.

      Reply
  2. Bob

    I suppose it is foolish to ask why no one is looking at jail time. Nor is any attorney looking at disbarment.
    This fine will mean nothing and the fine is likely to be considered as an expense to be written off on taxes.

    Was it Bill Black that said the best way to rob a bank is to own one ?

    Reply
  3. Alfred

    I don’t know, but Bertolt Brecht captured a very similar idea in a line from his Threepenny Opera, often quoted as “What is robbing a bank compared to owning a bank?” It’s juxtaposed with another line that strikes me as having special relevance in this time of deciding which workers are essential: “What is killing a man compared to employing a man?”

    Reply
  4. Sancho Panza

    As Epstein is dead (presumably) I was wondering why now, and maybe Yves’ last paragraph provides a clue: “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.”

    Maybe this is a signal to other institutions to get their house in order? With the Steve Bing “suicide” and Maxwell’s arrest, high watch is the order of the day.

    Reply
  5. doug

    Am I reading this correctly? a $150 million fine for only one person’s accounts ‘mishandling’.
    How many other person’s accounts are being ‘mishandled’?
    I do wonder how DB is not in jail.

    Reply
    1. Yves Smith Post author

      No, there was a lot of press misreporting on that aspect. Please skim the order. The $150 million fine covered three separate categories of abuse: Epstein, trading with a Cyprus bank, and Danske Bank.

      Reply
  6. sam

    Charlie Munger famously said ‘show me the incentive and I’ll tell you the outcome.’ The bonus comp system that has taken over US banks since deregulation incentivizes illegality and poor credit decisions across the board, including wealth management for clients like Epstein but also manipulating accounting rules to book dodgy securities on the bank’s balance sheet, allowing big PE firms to díctate very unfavorable terms for LBO loans, assisting corporate clients with accounting fraud, etc. The bank employees who execute these transactions and have responsibility for the client ‘relationship’ routinely take up to half the projected profit (those projections are themselves often manipulated by the benefitted individuals – another story) in the form of bonus, which amounts to an institutionalized form of commercial bribery.

    Reply
  7. BrianM

    Not that long ago the FT highlighted issues about DB not having enough staff in compliance. It was so bad even the UK regulators were starting to threaten them quasi-publically. What horrified me was the reliance on contractors rather than staff. Seems to me that this is an area where you would want staff who can pay a price if they don’t do it properly rather than just moving onto the next gig.

    Reply
  8. John Wright

    The US regulators and US financial rescuers have looked kindly on Deutche Bank in the past.

    From the last financial rescue operation: (March 16, 2009)

    https://www.dw.com/en/us-insurer-aig-funnels-billions-from-bailout-to-european-banks/a-4101400

    “Deutsche Bank was paid out $11.8 billion in total, France’s Societe Generale received $11.9 billion and the UK’s Barclays was given $8.5 billion. All three banks have declined to comment on the payouts.

    Campbell Harvey, a finance professor at Duke University in the US, told news agency Reuters that the funneling of parts of the bailout package to European banks may raise doubts in the US about whether the financial rescue was economically necessary.”

    “It doesn’t to me seem fair that the American taxpayer has got to bear 100 percent of the downside,” he said. “A hedge is not a hedge if you did not factor in the counterparty risk. And the US taxpayer should not be obliged to make people whole for hedges that were not properly executed.””

    The $150million fine is dwarfed by the $11.8 billion DB received as a consequence of the 2009 financial rescue.

    Reply
  9. Sancho Panza

    It’s interesting the document limits discussion to money going out of the account. Presumably there were inflows too. What was the other side of his trades? Was he selling women too? What did he do with them when he was done with them? Was he moving other things too? Drugs? Organs?

    Reply

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