Commerzbank’s Compliance Catastrophe — Flouting Sanctions and BSA/AML Laws (Part II of III)
Sometimes a picture is very clear but legal words and concepts are proffered in an attempt to disguise and even deceive. As set forth in the factual statements outlined by the government, and agreed to by Commerzbank, it is evident that Commerzbank had no culture of ethics and compliance. Instead, Commerzbank was committed, strategically and operationally, to circumventing and evading US sanctions and BSA/AML laws. To call the conduct reckless would be a gross understatement. Commerzbank’s conduct was criminal, the intent was proven over and over, and Commerzbank is now paying the price.
If I were still a federal prosecutor, there is no doubt that I would be committed to individual criminal prosecutions in this case. If the Department of Justice fails to do so, they will be — and should be — held accountable. The government’s prosecutorial discretion depends on its credibility. When a case is close, that discretion can become critical to exercise. However, when the facts require prosecution, the government has an obligation to do so. If it does not act in the face of clear facts, the government loses credibility and its discretion can be undermined, all to the detriment of justice.
To me, the cultural failure surrounding Commerzbank comes down to this — where was the board of directors? where was senior management? Cynics may argue that both the board and senior management were personally willing to violate the law in the interest of financial gain. We may never know the real answer to that question but the scope of the conduct certainly raises some real questions as to the intent of the board and senior management.
The Sanctions Violations: The factual statements provide a detailed glimpse into a dysfunctional, and some would argue ongoing criminal enterprise. With support from upper management, Commerzbank carried out a comprehensive scheme to process financial transactions for entities in sanctioned countries, especially Iran.
Starting in 2002, a group of employees in Frankfurt reviewed and amended Iranian payments so that the transactions would evade Commerzbank’s New York sanctions compliance filters. Frankfurt officials carried out this “stripping” operation with the full knowledge of senior management, including detailed presentations and power point training sessions designed to ensure compliance with the ongoing criminal practices. Everyone knew what they were doing and knew they were acting to evade Iran sanctions. Within Commerzbank, there was a compliance rift – New York sought to ensure compliance, implemented detailed sanctions filters and to adhere to strict sanctions compliance.
Outside of New York, Commerzbank’s culture of compliance was non-existent. The culture was built around circumventing known US sanctions to earn large amounts of money through processing financial transactions.
As cited by the government, in 2003, when two state-owned banks sought to route US dollar transactions through Commerzbank, a back office employee wrote in an email:
If for whatever reason CB [Commerzbank] New York inquires why our turnover has increase[d] so dramatically, under no circumstances may anyone mention that there is a connection to the clearing of Iranian banks!!!!!!!!!!!!!.
Even the Internal Auditor was aware of these violations and reported to bank management about the processing of Iranian transactions. These reports however fell on deaf ears and nothing was done to rectify the situation.
In yet another scheme, Commerzbank officials paid US beneficiaries directly with Commerzbank-issued checks because they did not include detailed information about the payor other than the account number and a London address.
In 2005, Commerzbank developed a “safe payment solution” for an Iranian shipping company by using special purpose entities controlled by the Iranian company. The SPEs were organized outside of Iran. When Commerzbank New York’s filtering system was updated to address this technique, the Frankfurt office continued to hide these transactions through another mechanism to disguise the SPE.
The BSA/AML Violations: Commerzbank New York was cited in great detail for its failure to follow BSA reporting regulations in relation to the Olympus fraud scheme. Starting in 2008 and continuing unto 2013, Commerzbank New York failed to maintain adequate policies and procedures to ensure compliance with the BSA. As a result, Commerzbank New York facilitated a multi-million dollar fraud by Olympus senior executives against shareholders.
Olympus perpetrated a massive securities fraud to conceal from auditors and investors hundreds of millions of dollars in investment losses. In September 2012, Olympus and three executives pleaded guilty in Japan to inflating the company’s net worth by $1.7 billion.
Commerzbank’s affiliates in Singapore loaned money to off-the-balance-sheet entities created to perpetrate the fraud, and approximately $1.6 billion in transactions were funneled through the New York branch.
Commerzbank used special purpose vehicles, some of which were created by Commerzbank, to facilitate the fraud. False confirmations from these entities were provided to Olympus’ auditors to carry out the scheme.
Olympus also asked Commerzbank officials to provide false documents to Olympus’ auditors which failed to disclose that certain assets were pledged as collateral for loans from a Commerzbank affiliate. Outside counsel advised Commerzbank against providing such a letter, but Commerzbank executives continued to advise Olympus executives on how they could avoid disclosing the pledge.
Throughout its relationship with Olympus, Commerzbank executives expressed their suspicions about the Olympus transactions. In March 2010, two suspicious transactions were flagged by Commerzbank New York – one for $455 million, and another for $67 million. The transactions came in through a correspondent account at Commerzbank Singapore. Commerzbank had conducted no due diligence on the correspondent account since it was its own branch. The New York branch sent an information request and Singapore responded with a brief email indicating no concerns with the transactions. Commerzbank New York closed the inquiry, despite the fact that it had processed a total of $1.6 billion in furtherance of the fraud prior to this transaction.
Commerzbank did not file a SARs until 2013, two years after the Olympus fraud was disclosed. Commerzbank New York’s BSA officer from 2003 to 2014 had continuously raised concerns about AML compliance.
Commerzbank’s failure to conduct any basic or enhanced due diligence, along with its failure to file a SARs, along with a pattern of neglect in investigating flagged transactions, were all cited by the government as failures to comply with BSA compliance and reporting requirements. The New York branch suffered significant delays in getting responses to its inquiries, sometimes extending as long as eight months without filing a SARs. As a result, the New York branch cleared a number of transactions that were flagged and required further scrutiny.
The above-described facts certainly call into question Commerzbank’s corporate culture and its commitment to violating the law. How to fix such a situation calls into question how and whether this situation actually can be corrected.