Germany’s financial regulator, BaFin, is on Deutsche Bank’s case, big time. After the unprecedented appointment last fall of an auditor to monitor Germany’s largest bank, the regulator now is imposing eight new requirements, including a review of 20,000 customer accounts deemed high-risk for possible money laundering.
The regulator is not happy with the bank’s controls for detecting suspicious activity and is ready to levy fines if Deutsche does not meet the timetable for the new measures.
The deadline for reviewing these thousands of accounts hosted by its corporate and investment banking divisions is the end of June. Missing documentation must be completed and the accounts evaluated according to tightened guidelines to crack down on money laundering.
Accounts for clients considered moderately risky are to be reviewed by June of next year, and the least risky clients by summer 2021. The account review in the divisions formerly managed by Garth Ritchie, head of Deutsche's investment bank, are the core of the BaFin requirements. But deficits in know-your-customer procedures (KYC) exist in the transaction bank as well as in securities trading.
It's up to you, Frank
BaFin has already fined Deutsche Bank €40 million ($46 million) for insufficient money-laundering controls. In the meantime, rules have become tougher. In a worst-case scenario, the watchdog could also force executive board members to quit.
Responsibility for fulfilling the new requirements rests with executive board member Frank Kuhnke, who enjoys the confidence of both Deutsche’s board and the regulatory agency. Kuhnke has been put in charge of the bank’s internal anti-financial crime team.
Separately, media reports said prosecutors found a list of 900 clients when they raided Deutsche Bank's Frankfurt headquarters in November for evidence of money laundering through a former wealth management unit in the British Virgin Islands.
Hello, profitability?
Even if Deutsche emerges from these latest imbroglios without paying further penalties, the damage to its already battered reputation is reflected in the stock price, which fell 0.5% to €7.37 by midday Thursday. The shares have rebounded only slightly from an all-time low of €6.75, plumbed in December.
The barrage of bad news comes as Chief Executive Christian Sewing tries to chart a new course for the bank and restore it to sustainable profitability. The new investigations divert top management time and energy from that task.
Kuhnke has already assigned an account manager to each client who has to stand up for the customer and get all the required documents by mid-April. Clients who don’t get a manager or don’t get the documents in on time will be cut off.
It’s uncertain how many customers the bank will lose through this process. For the KYC process, Deutsche has adopted a model that draws from external as well as internal sources.
Oh wie schön ist Panama!
Bank supervisors have been critical of Deutsche over the years for blaming its slow progress in compliance on personnel transfers and bottlenecks. That came back to haunt the bank last year with the first-ever appointment of an outside auditor to monitor activities and then the November raid with 170 officials searching headquarters on the basis of a lead from the Panama Papers.
In the meantime, Deutsche was also drawn into the biggest European money-laundering scandal as its New York unit acted as correspondent bank to process $150 billion of the $230 billion laundered through Danske Bank’s Estonian branch.
The convergence of these factors led to a sharp downturn in Deutsche’s investment banking business in December. The bank is still likely to report a net profit for 2018, which analysts on average currently project at €456 million, but with a loss of €207 million in the fourth quarter.
All the more reason the bank doesn’t want to be irritating its remaining customers with repeated KYC questions. There have already been complaints about contacts from various bank staffers regarding the process. To counter this, the bank has simplified its marketing by making account managers responsible for all product groups.
No bonuses for you
In the midst of all this, CEO Sewing is trying to walk a tightrope on bonuses, cutting the bonus pool by 10 percent in view of the bank’s parlous condition but leaving these payouts high enough to avoid wholesale departures. That bonuses are being paid at all has come under sharp criticism.
Also, Handelsblatt’s sister publication, Die Zeit, is reporting that some €31 million from laundered Danske Bank money landed in accounts in Germany, usually to pay for exports to Russia. The firms receiving the exports were not always the ones paying for them.
Yasmin Osman covers banking for Handelsblatt. Darrell Delamaide adapted this story into English for Handelsblatt Today. To contact the author: [email protected]
