Commerzbank: Keeping Its Own Compliance Staff in the Dark

Commerzbank agreed to a $200 million Federal Reserve civil penalty in March 2015 alongside a deferred prosecution agreement covering sanctions violations and the anti-money laundering failures that let Olympus fraud money clear through New York. Under the criminal deferred prosecution agreement, the bank admitted concealing sanctioned business and failing to maintain effective anti-money laundering controls. The bank kept even its own New York branch in the dark. For someone inside a payments or compliance team, the case turns on a familiar divide: what the bank knew and what it allowed the people checking the payments to see.

Its New York branch admitted failures in its anti-money laundering program, correspondent due diligence and suspicious activity reporting.

How Commerzbank Hid Sanctions Payments

Commerzbank’s payment-message stripping removed the information that would have exposed sanctioned customers to U.S. screening. In the criminal agreement admissions described by the Justice Department, the bank used nontransparent cover payments and removed identifying information from messages sent through its New York branch and other U.S. financial institutions. A Frankfurt back-office team reviewed and amended Iranian payments so that sanctions filters would not stop them.

What travels with the payment matters. Commerzbank admitted arranging messages so the Iranian entity disappeared from what the U.S. institution received.

In its deferred prosecution agreement admissions, Commerzbank described concealing the business from its own staff. When Iranian banks brought dollar-clearing business to Commerzbank, a back-office employee instructed colleagues not to reveal the connection if New York asked about the increase in turnover. The bank’s internal audit head warned senior management that its procedures expressly contemplated suppressing the ordering party to avoid problems processing U.S. payments. The conduct continued.

The criminal agreement admissions describe other ways the bank hid the customer. Commerzbank issued checks for an Iranian bank that showed its account number and London address but omitted its name. For an Iranian shipping company, payments ran through entities incorporated outside Iran with no obvious connection to the client. When New York’s filters caught one entity, the bank and its client switched to another. Commerzbank also admitted removing references to sanctioned Sudanese companies from transaction records.

The filters could recognize a name. People inside the bank changed the names the filters received. An original payment instruction, its transmitted version and the approval for changing it tell that story together.

Olympus Warnings Stayed Outside New York

The Olympus-related anti-money laundering failures concerned an accounting fraud that moved through Commerzbank’s Singapore operations and its New York correspondent account. Olympus manufactured medical devices and cameras. The Justice Department’s account of the criminal information and related filings describes a scheme to conceal losses from auditors and investors, using entities kept off Olympus’s balance sheet. Commerzbank’s Singapore operations helped create and fund some of those entities.

The criminal-case account describes warnings well before the New York alerts. Olympus had asked Commerzbank executives for documents that would conceal pledged collateral from its auditors. The bank declined to provide the false documents, but executives suggested other ways Olympus could leave the pledge undisclosed. After Olympus returned its business to Commerzbank in 2005, executives again expressed concerns about its transactions and structure.

The Justice Department’s criminal-case announcement quotes a compliance officer’s account of a senior Singapore executive: “he did not typically ask questions of clients as he felt he was at less risk by not knowing.”

The compliance officer rejected that approach. Another senior legal and compliance officer had raised concerns about fraud, asset stripping and market manipulation. Those concerns did not accompany the later explanation sent to New York.

In March 2010, Olympus-related wire transfers of approximately $455 million and $67 million triggered New York’s automated anti-money laundering monitoring. New York asked Frankfurt and Singapore for information. Singapore replied that the entities were part of an investment structure and that the payments represented investment proceeds to be reinvested. It omitted the concerns already circulating inside the bank.

New York closed the alert. According to the criminal-case account, more than $1.6 billion in furtherance of the Olympus fraud cleared through the branch between 1999 and 2010. The branch did not file a U.S. suspicious activity report concerning Olympus or its associated entities until November 2013.

The software had noticed the wires. The explanation used to close the alert left out what colleagues elsewhere already knew.

What Are the Red Flags for AML Transaction Monitoring?

At Commerzbank, the red flags for AML transaction monitoring included unanswered information requests, alerts closed without those answers and foreign group accounts that had received no due diligence. The Justice Department’s criminal-case account describes a bank policy that left its own foreign branches and affiliates outside those checks.

The information problem extended beyond Olympus. Requests could remain unanswered for as long as eight months. New York closed alerts using cursory internet and public-database searches without receiving the information it had requested from overseas. A monitoring officer escalated the growing queue to the Bank Secrecy Act officer and New York’s compliance head. New procedures followed, but the information delays persisted.

The Wharton Initiative on Financial Policy and Regulation paper Anti-Money Laundering: Opportunities for Improvement explains that financial institutions often use overlapping infrastructure for anti-money laundering and sanctions compliance. It also questions whether increasing suspicious activity report volumes show better detection or more defensive, low-quality reporting.

Commerzbank makes the operational issue concrete. An alert count says little about whether an investigator received the customer’s history, the earlier internal warnings or a useful answer from another branch. The sanctions conduct hid information before screening. The Olympus response withheld information after monitoring had already raised the question.

Separate Civil Penalties for Separate Failures

The Federal Reserve order divided its civil assessment between $66 million for sanctions-related practices and $134 million for Bank Secrecy Act and anti-money laundering practices.

The New York Department of Financial Services consent order assessed a larger civil penalty, $610 million, for sanctions and anti-money laundering failures. The Justice Department’s announcement separately described a $258.6 million Office of Foreign Assets Control assessment, satisfied by payments to the Justice Department.

What the Internal Records Can Show

Payment operations staff can see the difference between an incoming instruction and the message sent onward. Compliance staff can see the question an alert raised and the response used to close it. Auditors and managers may see the earlier warning that never reached either team. We connect those accounts to establish who knew what, and which decision let the transaction proceed.

The same gap between internal knowledge and the explanation given to a clearing bank appears in Danske Bank’s guilty plea. Danske admitted misleading U.S. correspondent banks about its controls and customer risk despite internal warnings and audits. Both cases make the bank’s explanation part of the evidence, alongside the payment itself.

Whistleblower Rewards for Sanctions and Money Laundering Cases

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Bank Secrecy Act and sanctions information has a separate route through the Financial Crimes Enforcement Network’s whistleblower program. We assess the conduct and the information you hold to identify the whistleblower route for your case.

You Know What the Payment Left Out

If you know who changed a payment message or what an alert response concealed, speak to one of our whistleblower experts. We build your strongest case around that knowledge, bring in sanctions and AML whistleblower lawyers with the experience your matter needs, and stay beside you throughout the case.