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story.lead_photo.caption Christian Sewing, chief executive officer of Deutsche Bank, speaks at the European Banking Congress in the Frankfurt Opera House in Frankfurt, Germany, on Nov. 16, 2018. Bloomberg photo by Alex Kraus.

The Federal Reserve is examining how Deutsche Bank handled $230 billion in suspicious transactions from Denmark's leading lender, according to people familiar with the matter.

The Fed's investigation is in an early stage as it scrutinizes whether Deutsche Bank's U.S. operations adequately monitored funds from an Estonian branch of Danske Bank, according to two people briefed on the situation, who asked not to be named because the inquiry isn't public. Danske, which used correspondent banks such as Deutsche Bank to move money abroad, has admitted that much of the $230 billion that flowed through the tiny Estonian outpost may have been dirty.

"There are no probes," Deutsche Bank said in an emailed statement, but the bank "received several requests for information from regulators and law enforcement agencies around the world. It is not surprising at all that the investigating authorities and banks themselves have an interest in the Danske case and the lessons to be learned from it. Deutsche Bank continues to provide information to and cooperate with the investigating agencies."

The United States requires banks operating under its jurisdiction to scrutinize clients and their dealings to detect potential money laundering and alert authorities to suspicious transactions. The Fed is among regulators that ensure banks have adequate systems in place to fulfill those duties.

A Danske Bank whistle-blower who outlined the illicit flow of cash through that firm has said much of it passed through Deutsche Bank in the United States, and one of the people said the Fed is focusing on the German lender's trust bank. Deutsche Bank has been cooperating with the Fed, the people said.

A Fed spokesman said it doesn't publicly discuss confidential investigations.

Deutsche Bank Chief Executive Officer Christian Sewing said last week that he has started a further internal investigation into the lender's role as a correspondent bank for Danske, even though he said he hasn't seen any evidence of wrongdoing. The bank had previously reviewed its actions in the case, Sewing said at an event in Berlin. He urged people not to "prejudge" the bank or its employees, presuming their innocence unless proved guilty.

The U.S. Department of Justice and criminal authorities from other countries have started investigations into Danske Bank's business in Estonia over accusations it became a European hub for money launderers from the former Soviet Union. The Danish bank was ordered by its domestic regulator to stockpile an extra $1.5 billion in capital to deal with the costs of potential penalties.

Danske relied on the global presence of Deutsche Bank, Bank of America and JPMorgan Chase to handle conversions of foreign currencies into U.S. dollars on behalf of its clients from 2007 to as recently as 2015, people familiar with the arrangement have said. Bloomberg reported in November that Deutsche Bank had been contacted by the Justice Department and was thought to have handled the bulk of the transactions under scrutiny. There was no sign at the time that the three firms were themselves targets of the Justice Department's investigation.

Deutsche Bank said that month that it has controls in place when acting as a correspondent for other banks, but its ability to know about their clients is limited. As a correspondent, "your only relationship is with the bank and the bank itself has the responsibility to check its own client to monitor the transaction and to do all these kinds of checks," a company representative said at the time.

The Frankfurt-based lender has been criticized before by its primary U.S. regulator. In 2017, the firm agreed to pay $41 million to settle allegations that its U.S. business failed to keep up sufficient money-laundering protections. The bank's faulty monitoring involved billions of dollars in "potentially suspicious transactions" processed between 2011 and 2015, the Fed said back then, adding that the transactions involved affiliates in Europe that failed to provide "accurate and complete information."

Deutsche Bank has also struggled with U.S. stress testing that's meant to measure a firm's ability to withstand another crisis, failing the Fed's annual exercise as recently as last year. The agency faulted "widespread and critical deficiencies" in the capital-planning abilities of the bank, which was alone among major domestic and foreign lenders in facing such an objection from the Fed.

Sen. Elizabeth Warren of Massachusetts and fellow Democrat Chris Van Hollen of Maryland have called for Senate Banking Committee Chairman Mike Crapo, R-Idaho, to investigate the company's correspondent banking business for vulnerability to money laundering.

Information for this article was contributed by Tom Schoenberg, Steven Arons and Dan Reichl of Bloomberg News.

Business on 01/24/2019

Print Headline: Fed looking at bank's ties to laundering scandal, sources say

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