Commerzbank money-laundering penalty shows value of listening to the regulator

18 June 2020 14:30 by Martin Coyle

MonMoney Laundering

Commerzbank’s multimillion-pound fine for money-laundering failings tells a familiar sorry tale of an under-resourced and stretched financial-crime department — but the case also raises questions as to whether the UK watchdog could have acted sooner.

The German investment bank’s London arm was hit with a 37.8 million-pound penalty ($47.3 million) by the UK’s Financial Conduct Authority yesterday, for a catalog of anti-money-laundering missteps stretching back to October 2012. The fine would have reached 54 million pounds, had the bank not settled the case early.

It's a salutary reminder to companies that they would do well to heed warnings from a financial services watchdog with a growing appetite for action to clamp down on illegal money flows. Commerzbank ignored a string of chances to fix the weaknesses in its compliance controls after issues were raised by the FCA.

At the same time, the penalty is the first AML-related fine handed out by the regulator since its swingeing 102 million-pound hit on Standard Chartered last year. And it's only the second AML fine from the authority since the 163 million-pound sanction imposed on Deutsche Bank, in January 2017.

The several years it took for the FCA to finally drop the hammer on Commerzbank, and the few AML fines, has turned the spotlight on how the regulator conducted this case.

High-risk clients

The FCA pointed to “shortcomings” in the lender’s financial-crime controls, including a failure to identify issues associated with high-risk clients — in particular, politically exposed persons, or PEPs. There was negligence in spotting the true ownership of client investment vehicles, and there was a “significant backlog” in know-your-customer, or KYC, checks for existing and new clients, it said.

In one instance, a high-risk client, who had been due a KYC check for five years, was allowed to enter into 16 transactions via the bank. This generated hundreds of thousands of pounds in revenue for the lender.

Commerzbank failed to act in London even as it was hit with a $1.45 billion fine by the US in March 2015, after billions of dollars of sanctioned money had flowed through the bank.

Understaffing was a significant contributory factor in the UK failings. In mid-2016, for example — almost four years after the FCA first warned the bank over the issues — there were only three people in Commerzbank’s financial-crime team. This was only rectified two years later, when the team headcount was increased to 42.

Plus, the lender appeared to ignore repeated warnings from the regulator, which may well reflect badly on the FCA’s ability to effectively curb compliance missteps. Weaknesses in the German bank’s systems and controls were flagged by FCA officials in the wake of supervisory visits in 2012, 2015 and 2017.

But it’s only now — eight years after issues were first flagged — that Commerzbank has been penalized.

For its part, the FCA did not wish to comment on whether it could have taken enforcement action sooner in the Commerzbank case. That said, the eight-year gap between issues being raised and action being taken is a long time — even taking into account the period in which the financial services watchdog was properly investigating the lender.

Unheeded warnings

MLex understands that the regulator provided feedback to Commerzbank in 2012 and 2015 on faults in its systems, but the lender showed no sign of rectifying the issues in response.

The FCA's patience appears to have snapped after it issued further warnings in 2017, which ultimately led to yesterday’s penalty. Commerzbank's failure to heed the previous two warnings is reflected in the size of the fine, MLex understands.

It was only in March 2017 that the bank started addressing the deficiencies seriously. In May that year, it was forced to appoint a “skilled person” to ramp up its financial-crime controls. As part of this overhaul, the bank temporarily stopped taking on new high-risk customers and ceased business with existing high-risk clients.

"The bank has taken the findings of the regulator very seriously. Commerzbank London has therefore undertaken a significant remediation exercise," the German bank told MLex, but declined to comment on specific points of the fine.

With a likely increased focus on money laundering by the regulator, it appears that banks that pay lip service to FCA concerns — as well as those that don't properly staff their compliance departments — might find themselves on the wrong end of its supervisory wrath, however long it might take.

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