July Brings Regulatory Fireworks to Major Financial Institutions

? In January, Global RADAR detailed the findings of a highly-publicized report into the state of anti-money laundering (AML) efforts across the globe, one which revealed that the penalties issued against both domestic and international financial service providers for lapses in their money laundering defenses rose by more than 50% in 2022 as compared to the year prior. While talks of a ‘banking crisis’ amid a string of closures of once-heralded financial institutions dominated international headlines earlier this year, 2023 had been a relatively quiet year on the penalties for regulatory non-compliance front – that is up until recently. The month of July saw several major international firms find themselves in hot water with federal regulators over various AML/CFT failures, with these companies subjected to staunch financial penalties over their respective shortcomings.

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A name synonymous with financial scandal and subsequent penalties over the past several years was again targeted last week, this time by the Federal Reserve. Deustche Bank – the largest lender in all of Germany – and its U.S. affiliates were hit with a whopping $186 million penalty for failing to sufficiently address money laundering control problems and other shortcomings previously flagged by the U.S. central bank.2 The Fed found that Deutsche has failed time and again to make any significant progress with respect to improving its AML controls, customer due diligence (CDD) protocols, and in its ability to maintain adequate compliance with U.S. sanctions since these very shortcomings were first identified nearly a decade ago. The Federal Reserve had previously fined Deutsche a total of $99 million between 2015 and 2017 over issues highlighted in multiple consent orders stemming from deficient controls in Deutsche's relationship with the Estonian branch of Danske Bank – an entity that effectively allowed upwards of €200 billion worth of suspicious transactions originating from Russian, Latvian and other questionable international sources to flow through their doors between 2007 and 2015.2 The German multinational investment firm was also forced to pay more than $130 million to resolve a SEC investigation into their repeated violations of the Foreign Corrupt Practices Act (FCPA) and a separate investigation into a commodities fraud scheme dating back to 2021.

In its original order, the U.S. regulator said that although “some progress” had been made recently, Deutsche Bank’s U.S. operations remained exposed to increased compliance risks that included the risk of failing to detect money laundering activity and violations of U.S. sanctions. While the public relations department for the embattled bank has been working overtime to help shake their growing reputation as bad actors for some time, these latest allegations are not likely to help change the firm’s public perception. As the bank fought to stave off potential closure earlier this year, they shuffled the organizational deck, thinning their management board in an effort to “further sharpen its focus on clients’ needs, the bank’s areas of growth and operational excellence.”1 These changes also included naming a new chief of U.S. operations just three months ago, as Stefan Simon became the man tasked with the monumental job of trying to right the ship for Deutsche across America. The early results of these changes appear lackluster however.

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A major player on the American financial front was also forced to forfeit a significant amount of funds to settle claims made by the U.S. Consumer Financial Protection Bureau (CFPB) last week. Bank of America – the second largest bank in the United States in terms of total assets – was ordered to pay $250 million in collective penalties to the CFPB and the Office of the Comptroller of the Currency (OCC), while also being forced to pay back over $80 million directly to customers who were unfairly and repeatedly charged what have been deemed ‘junk fees.’ These penalties come on top of the $23 million that BofA had already paid to customers who were improperly denied their due credit card awards earlier this year.3 The CFPB’s investigation, one which came about as part of an industry-wide examination ordered by the Biden Administration in 2022, found that the banking staple repeatedly double-charged its customers overdraft and insufficient funds fees, knowingly withheld reward bonuses for card users, and went as far as to open new card accounts on customers’ behalf without their knowledge or consent. The CFPB found that these illicit practices affected thousands of customers across the United States over a multi-year period.

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???????????Topping off the run on big bank fines this month was a $12 million combined penalty paid by Merrill Lynch to the?Securities and Exchange Commission (SEC)?and Financial Industry Regulatory Authority (FINRA), respectively, over multiple identified AML failures. The most notable transgression saw Merrill failing to appropriately file more than 1,500 suspicious activity reports (SAR’s) with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) over a decade-long period. Under U.S. law, broker-dealers are required to file SAR’s on transactions exceeding a $5,000 threshold in efforts to better identify nefarious financial activity such as tax evasion and money laundering. The SEC ultimately discovered that the investment management giant utilized their own $25,000 threshold (rather than the proper $5,000 one) between 2009 and late 2019. The firm – which is now part of BofA’s American multinational investment banking division – ultimately paid $6 million to settle the SEC’s charged. FINRA – a private American corporation that?regulates?member?brokerage firms?and?exchange markets – received its own $6 million from Merrill over the company’s “longstanding anti-money laundering program failures.”4 The penalty comes just a few months after the regulator highlighted the lack of ongoing monitoring and reporting of suspicious transactions as one of the top areas of additional intervention required by American investment firms for limiting money laundering, fraud and sanctions evasion.

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These latest actions show that regulators are now trying to send a message that negligence on behalf of domestic and international lenders simply will not stand. Both Deutsche Bank and Bank of America have continued to violate federal regulations and laws that protect both consumers and the integrity of the global financial system as a whole. While major firms of this nature appear to be simply accepting these fines and penalties as nothing more than the cost of doing business, regulators are left with almost no choice but to continue to lay the hammer to set an example across the industry.

Citations

1.??????Gelsi, Steve. “Deutsche Bank Makes Upper Echelon Changes to ‘Sharpen Management Board’s Focus.’”?MarketWatch, 26 Apr. 2023.?

2.??????Schroeder, Pete, and Chris Prentice. “US Fed Fines Deutsche Bank $186 Million for Slow Progress against Money Laundering.”?Reuters, 19 July 2023.?

3.??????Son, Hugh. “Bank of America Fined $150 Million for Consumer Abuses Including Fake Accounts, Bogus Fees.”?CNBC, 11 July 2023.?

4.??????Sun, Mengqi. “Merrill Lynch to Pay $12 Million for Failing to File Hundreds of Suspicious Activity Reports.”?The Wall Street Journal, 12 July 2023.?

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