Global banks are caught in US prosecutor’s cross hairs.  Not only do they have to worry about basic AML compliance and enforcement, they now have major risks in sanctions compliance.  For some inexplicable reasons, global banks appear to have committed themselves to circumvent and evade US sanctions.  It is hard to justify how foreign banks reached this point but they are now paying dearly for this decision.

Last year, BNP Paribas fell victim to an $8.8 billion dollar set of fines and penalties.  Before that HSBC, ING Bank, and Standard Chartered fell victim to US prosecutors.  Add Commerzbank to the list.

The headlines certainly caught everyone’s attention – Commerzbank was forking over $1.4 billion to the US and New York governments for violating US sanctions and BSA/AML requirements. If you take the time to read the settlement papers, the picture is not pretty. In fact, you might even think that Commerzbank and a number of individuals were very lucky to get this settlement.

The Commerzbank case is an interesting case for a number of reasons.   That is why I will take three postings to review the case and the implications of the case for enforcement and compliance purposes.  There are many lessons learned here and there are a number of new approaches that the US government has taken with regard to continuing supervision.  Today’s posting will focus on the big picture, the second will focus on the conduct, and the third on remediation.

The government, as reflected in the papers, was — and is — incredibly frustrated in its dealings with Commerzbank. Its frustration permeates the terms of the plea agreement, the description of the facts, and the details of the continuing supervision of Commerzbank’s activities.

Most importantly, the government’s frustration is evident from its requirement that Commerzbank report to the US government and NY government every 90 days over the next three years on the progress made on remediation and compliance improvements.   In addition, for the first time I can recall outside of a healthcare settlement, Commerzbank’s CEO is required to certify at the end of the term of the DPA, that Commerzbank has completed its improvement to its sanctions and BSA/AML compliance program.  Both of these requirements reflect the evident distrust between the government and Commerzbank.

The government’s attitude may also reflect its frustration with another global bank — HSBC, which is currently under a monitor and failing to meet benchmarks set by the monitor for remediation and compliance improvements.  It is hard to feel compassion for global banks — they certainly have the resources and the capabilities to build world-class compliance programs. What seems to missing is the will to implement change.  This cultural gap is hard to understand and even harder to justify.  

Despite all of these problems, Commerzbank earned a DPA and was not required to plead guilty to a criminal offense, notwithstanding the overwhelming amount of evidence showing that senior managers were well aware of Commerzbank’s deliberate scheme to circumvent sanctions and avoid reporting requirements under the BSA.

Under the DPA, Commerzbank agreed to the filing of a four-count information in US District Court for the District of Columbia for violations of the International Emergency Economic Powers Act (sanctions law and regulations); and Currency and Foreign Transactions Reporting Act or Bank Secrecy Act. You know everyone is holding his or her collective breath hoping that Judge Leon is not assigned the case.

Commerzbank is required to pay a fine of $79 million; to forfeit $563 million consisting of $263 million forfeiture for sanctions violations and $300 million for violations of BSA/AML requirements, the latter will be distributed to victims of the Olympus Corporate fraud). OFAC collected a civil penalty of $258 million for sanctions violations. Combined with payments to New York and other regulators, Commerzbank has to pay a total of $1.45 billion.

The government’s willingness to enter a DPA is questionable given the facts of the case, the treatment of BNP Paribas, which was required to plead guilty to a criminal offense, and the lack of trust and cooperation between prosecutors and Commerzbank officials.  It is even more questionable if you assume that the government does not intend to prosecute any individual officers or employees.

Furthermore, it is hard to justify a DPA when, at the same time, the government is requiring Commerzbank to report every 90 days on the progress of its remediation efforts, culminating in the CEO’s certification to completion of all compliance improvements at the end of 36 months.  If  the government does not trust Commerzbank, you have to question whether the resolution was appropriately tailored to punish Commerzbank and to ensure its rehabilitation.

I am sure there will be many questions raised over the settlement and whether it was the appropriate resolution.  Once you read the underlying facts of the case, along with the settlement, you may end up scratching your head with a number of questions as to the government’s actions.