March 12, 2015
Contact: Matt Anderson, 212-709-1691
NYDFS ANNOUNCES COMMERZBANK TO PAY $1.45 BILLION, TERMINATE EMPLOYEES, INSTALL INDEPENDENT MONITOR FOR BANKING LAW VIOLATIONS
Bank Ignored Compliance Staff Warnings of Potential “Fraud, Asset Stripping, Market Manipulation, and Derivative Tax Offences”
Compliance Personnel Altered Bank Transaction Monitoring System; Calibrated System Based on a Desire Not to Generate “Too Many Alerts”
Commerzbank Employee: Bank’s Lax Compliance “A Time Bomb Ready to Go Off”
Benjamin M. Lawsky, Superintendent of Financial Services, announced today that Commerzbank will pay a $1.45 billion penalty, terminate individual employees who engaged in misconduct, and install an independent monitor for Banking Law violations in connection with transactions on behalf of Iran, Sudan, and a Japanese corporation that engaged in accounting fraud. The overall $1.45 billion penalty includes $610 million to the Department of Financial Services (DFS); $300 million to the U.S. Attorney’s Office for the Southern District of New York; $200 million to the Federal Reserve; $172 million to the Manhattan District Attorney’s Office and $172 million to the U.S. Department of Justice.
Superintendent Lawsky said: “When there was profit to be made, Commerzbank turned a blind eye to its anti-money laundering compliance responsibilities. Bank employees helped facilitate transactions for sanctioned clients such as Iran and Sudan, and a company engaged in accounting fraud. What is especially disturbing is that employees sought to alter the Bank’s transaction monitoring system so that it would create fewer ‘red flag’ alerts about potential misconduct, which highlights a potential broader problem in the banking industry.”
From at least 2002 to 2008, Commerzbank used a series of measures – including stripping out information identifying clients subject to U.S. sanctions (“wire-stripping”) – to process 60,000 U.S. dollar clearing transactions valued at over $253 billion on behalf of Iranian and Sudanese entities. Additionally, deficiencies in Commerzbank’s anti-money laundering compliance program resulted in Commerzbank’s facilitation of numerous payments through the Bank’s New York Branch that furthered a massive accounting fraud by the Olympus Corporation, a Japanese optics and medical device manufacturer.
Anti-money-laundering Compliance Failures
Foreign branches often transmitted payment requests to Commerzbank’s New York Branch using non-transparent SWIFT payments messages that did not disclose the identity of the remitter or beneficiary. As a result of not having a complete picture of the transactions, Commerzbank’s New York Branch’s compliance processes and controls were ineffective, and fewer alerts or red flags were raised than would have been if full information had been shared.
Even when transactions from foreign branches did trigger alerts in New York, the New York compliance staff did not have access to the customer information necessary to investigate the alert; they had to request relevant information directly from the foreign branch or from the Home Office in Frankfurt. Overseas personnel, however, often did not respond to those requests by New York staff for many months or sent inadequate or insufficient responses. Many overseas employees were uncooperative or did not respond to requests for more information by those investigating alerts – they felt that New York compliance staff were simply “crying wolf” when they raised BSA/AML compliance issues.
On some occasions, because information from overseas offices was not provided, New York staff “cleared” or closed alerts based on its own perfunctory internet searches and searches of public source databases, without ever receiving responses to its requests for information from the foreign offices.
In an interview with investigators, a New York-based vice president in compliance who was involved in establishing the thresholds used by Commerzbank’s New York Branch’s monitoring software in effect until 2010 reported that, while the goal of the threshold-setting process was to identify suspicious transactions and exclude irrelevant alerts, the threshold floors were driven by the volume of the output of alerts – that is, the threshold floors were set based on a desire not to generate “too many alerts.”
In addition, the New York compliance staff member charged with overseeing the implementation of a new transaction monitoring tool told investigators that the Head of Regional Compliance for Commerzbank’s New York Branch required a weekly update as to the number of alerts generated by the transaction monitoring system.
Furthermore, the compliance staff member reported that in 2011, both the Head of Regional Compliance and the Head of AML Compliance asked him to change the thresholds in the automated system to reduce the number of alerts generated. The compliance staff member reported that he refused to do so.
Olympus Corporation Accounting Fraud
Commerzbank’s BSA/AML compliance deficiencies allowed a customer to operate a massive corporate accounting fraud through the Bank, during which time some senior bank officials in Singapore – two of whom later held senior positions in Commerzbank’s New York Branch while the fraud was ongoing – had suspicions about the business but failed to convey those suspicions to compliance personnel in Commerzbank’s New York Branch or take adequate steps to stop fraudulent transactions.
From the late 1990s through 2011, the Olympus Corporation, a Japanese optics and medical device manufacturer, perpetuated a massive accounting fraud designed to conceal from its auditors and investors hundreds of millions of dollars in losses. Olympus perpetuated its fraud through Commerzbank’s private banking business in Singapore, known as Commerzbank (Southeast Asia) Ltd. (“COSEA”), and a trusts business in Singapore, Commerzbank International Trusts (Singapore) Ltd., and the New York Branch, through its correspondent banking business. Among other things, the fraud was perpetuated by Olympus through special purpose vehicles, some of which were created by Commerzbank – including several executives based in Singapore – at Olympus’s direction, using funding from Commerzbank. One of those Singapore-based Commerzbank executives, Chan Ming Fong – who was involved both in creating the Olympus structure in 1999 while at COSEA, and who later on his own managed an Olympus-related entity in 2005-2010 on behalf of which Chan submitted false confirmations to Olympus’s auditor – subsequently pled guilty in the United States District Court for the Southern District of New York to conspiracy to commit wire fraud. Starting as early as 1999 and continuing intermittently until 2010, Commerzbank facilitated numerous transactions through New York, totaling more than $1.6 billion, which supported the accounting fraud by Olympus.
Over the life of the fraud, numerous Commerzbank employees in Singapore raised concerns about the Olympus business and related transactions. But those concerns did not lead to effective investigation of the business and were not shared with relevant staff in New York responsible for BSA/AML compliance. For example, when Commerzbank sent a London-based compliance officer on special assignment to Singapore in 2008 to analyze and help enhance compliance efforts there, he was told by the Bank’s Asian Regional Head of Compliance and Legal to pay particular attention to the Olympus-related business. The Regional Head of Compliance warned him that, while the business yielded “very substantial” fees for Commerzbank, the structure of the business was “complex” and “extraordinarily elaborate and redolent of layering” and that it raised suspicions of money laundering, “fraud, asset stripping, market manipulation, and derivative Tax offences.”
A new staff member was installed as Head of Regional Compliance for the New York Branch in approximately June 2010. He, too, had spent time at Commerzbank’s Singapore affiliates before coming to New York. And he, too, was aware of the compliance deficiencies in Singapore and of the suspicious nature of the Olympus-related business, which he also knew involved wire transactions through New York. For example, while he was working in Singapore, a resigning compliance staff member told him that Singapore compliance was “a time bomb ready to go off.” Yet, after moving to the New York Branch, he also failed to share any concerns with the New York compliance staff who would have been in a position to scrutinize the fraudulent transactions being processed through New York.
Wire Stripping and Other Schemes to Facilitate Iranian and Sudanese Transaction
Commerzbank also used altered or non-transparent payment messages to process tens of thousands of transactions through New York on behalf of customers subject to U.S. economic sanctions.
In an effort to grow its business relationships with Iranian customers in the early 2000s, Commerzbank created internal procedures for processing U.S. dollar payments to enable those clients, which included state-controlled financial institutions such as Bank Sepah and Bank Melli, to clear U.S. dollar payments through the U.S. financial system without detection.
From at least May 2003 to July 2004, Commerzbank altered or stripped information from wire messages for payments involving Iranian parties subject to U.S. sanctions so as to hide the true nature of those payments and circumvent sanctions-related protections.
The Bank designated a special team of employees to manually process Iranian transactions – specifically, to strip from SWIFT payment messages any identifying information that could trigger OFAC-related controls and possibly lead to delay or outright rejection of the transaction in the United States. Bank employees circulated both formal written instructions and informal guidance via email directing lower-level staff to strip information that could identify sanctioned parties from wire messages before sending the payment messages to U.S. clearing banks.
Beginning in 2005, Commerzbank processed U.S. dollar payments for an Iranian subsidiary of the Islamic Republic of Iran Shipping Lines (“IRISL”) using the accounts of a different, non-Iranian IRISL affiliate in order to avoid detection by correspondents and regulators in the U.S. Later, after the Bank instituted a policy limiting its business with Iranian customers in 2007, Hamburg branch employees moved the accounts of two Iranian IRISL subsidiaries into sub-accounts under the account of one of IRISL’s European affiliates and also changed the country identification codes for certain IRISL affiliates in the Bank’s internal records so as to obfuscate these entities’ true Iranian relationship.
In addition, the Bank recognized that other international financial institutions declined to process Sudanese U.S. dollar transactions, due to U.S. sanctions, and therefore that Sudan represented a potentially profitable market. From at least 2002 to 2006, the Bank maintained U.S. dollar accounts for as many as 17 Sudanese banks, including five SDNs, and processed approximately 1,800 U.S. dollar transactions valued at more than $224 million through the U.S. using non-transparent methods for these clients and other Sudanese entities.
Commerzbank’s New York Branch also helped hide the true nature of the Bank’s U.S. dollar clearing activities by failing to act on numerous indications that payment requests were being submitted in a non-transparent manner; in 2004, an employee even called upon the Frankfurt office to “suppress” the creation of MT210s relating to payments ordered by Iranian banks because “authorities could view our handling of them as problematic.”
Termination of Commerzbank Employees under DFS Order
While several of the Bank employees who were centrally involved in the improper conduct discussed in this Consent Order no longer work at the Bank, several such employees do remain employed by the Bank.
The Department’s investigation has resulted in the resignation from Commerzbank of the employee then serving as the Head of AML, Fraud, and Sanctions Compliance for Commerzbank’s New York Branch, who played a central role in the improper conduct described in this Consent Order.
DFS also ordered the Bank to take all steps necessary to terminate four additional employees, who played central roles in the improper conduct but who remain employed by the Bank: a relationship manager in the Financial Institutions Department; a staff member in the Interest, Currency & Liquidity Management Department; and two members of the Cash Management & International Business Department.
Additionally, as previously noted, a Singapore-based Commerzbank executive who was involved both in Olympus matter pled guilty in the United States District Court for the Southern District of New York to conspiracy to commit wire fraud.
Superintendent Lawsky thanks U.S. Attorney Preet Bharara; Manhattan District Attorney Cy Vance, the U.S. Department of Justice, the Federal Reserve; and the U.S. Department of the Treasury for their work and cooperation in the Commerzbank investigation.
To view a copy of the DFS consent order regarding Commerzbank, please visit, link.