The Federal Reserve told Deutsche Bank AG in recent weeks that the lender is failing to address persistent shortcomings in its anti-money-laundering controls, according to people familiar with the matter.
The Fed’s frustration has escalated to a point that the bank could be fined, the people said.
Deutsche Bank has poured massive resources into addressing repeated shortcomings and penalties related to allowing suspect transactions. The Fed told Deutsche Bank that instead of making progress, the German lender with a large Wall Street presence is backsliding. The regulator has said that some of the anti-money-laundering control problems require immediate attention, according to the people.
A spokesman for Deutsche Bank said the bank doesn’t comment on dialogue with regulators. A spokesman for the Fed declined to comment.
The Fed’s harsh words contrast with the bank’s message that it has worked diligently to improve its systems and has put most of its legal troubles in the past.
The Fed’s latest warning comes four years after it classified Deutsche Bank’s U.S. operations as being in "troubled condition," a rare rebuke for a major bank. In May 2020, it issued a fresh admonishment over the bank’s money-laundering controls.
In 2020, Deutsche Bank also settled with New York’s Department of Financial Services over the bank’s role as a correspondent bank in one of Europe’s largest money-laundering scandals and for failing to properly monitor its dealings with late financier and convicted sex offender Jeffrey Epstein.
In 2017, the Fed fined Deutsche Bank $41 million for failing to maintain an effective anti-money-laundering program.
Deutsche Bank is Germany’s largest lender and as a dollar clearing bank regulated by the Fed, is a major player in global financial transactions.
Banks are required to police how money flows through their networks to guard against proceeds from criminal activities moving around the economy. They are required to know who their customers are and to flag transactions that indicate potentially illegal activity to authorities.
Deutsche Bank’s financial situation has improved after it began an overhaul in 2019 to sharply cut costs and exit some operations, including equities trading in the U.S. This year it posted its strongest quarter in seven years.
On Thursday, Deutsche Bank officials struck a bullish tone at the bank’s annual shareholder meeting, saying the lender has found its footing and is regaining trust in the market. It also said it wants to play an active role in banking consolidation in Europe.
"There has been a fundamental change in the way people see our bank," Chief Executive Officer Christian Sewing said in a speech.
Sewing told shareholders that the bank has "significantly strengthened our control systems," but added that "we are also aware of the areas in which we need to improve," including its anti-financial crime efforts.
The bank has struggled to shake off its reputation for loose controls. In April, BaFin, Germany’s financial regulator, ordered the bank to take further steps to safeguard against money laundering. BaFin said Deutsche Bank needed to comply with due diligence obligations, in particular over regular customer reviews. It expanded the role of a monitor it appointed in 2018 to look over implementation.
After the BaFin order, Deutsche Bank said it had significantly improved its controls, spending about $2.4 billion and increasing its anti-money-laundering team to more than 1,600 over the past two years. It acknowledged that it had more work to do.
Deutsche Bank also remains under the watch of outside monitors appointed in 2017 by New York’s Department of Financial Services as part of the settlement of a "mirror trades" case, in which the bank moved $10 billion of Russian client money out of the country.
The Wall Street Journal reported last November that the monitors grew alarmed at a possible expansion of the bank’s activities in Russia. In October, they told the bank that efforts to improve its operation weren’t enough to make up for the large risks of doing business with Russian clients, and that the bank should shut its business there instead.
Earlier this month, the bank appointed Joe Salama, its U.S. general counsel who was responsible for negotiating recent regulatory settlements with U.S. authorities, to head its global anti-financial-crime unit. The move was meant to improve the bank’s relationship with regulators, according to people familiar with the situation.
Unlike his predecessor, who was based in Frankfurt, Salama will split his time between Germany and the U.S.