The New York Department of Financial Services has fined Deutsche Bank for its relationship with Jeffrey Epstein and entities related to him and with two dollar-clearing/correspondent banking relationships with foreign banks, FBME and Danske Bank.

Epstein, a US citizen, was arrested on charges of child sex trafficking at this time last year and subsequently lost his life in custody in mysterious circumstances, bringing campaigners' hopes of a revelatory prosecution to an end. Many of his rich and famous friends are thought to have felt relieved at the news.

Reputational damage before the onboarding process

At some point in 1982 Epstein, having left Bear Stearns where he was a trader, set up a wealth management firm called J Epstein & Co - still apparently operating at this time last year - which serviced people and families with US$1 billion or more to manage. Blizzards of accusations portray Epstein in charge of a sex-trafficking ring involving girls in their early teens. He allegedly forced them to have sex with the rich and famous. Other people have alleged that he raped them.

By his death Epstein had settled many lawsuits alleging that he had trafficked underage girls. In September 2007, he agreed to plead guilty to two state prostitution charges including the solicitation of a minor to engage in prostitution, in exchange for a very controversial deferred prosecution agreement (made public in 2009) with federal prosecutors that gave him immunity from extensive federal sex-trafficking charges. The deal included an 18-month sentence of which he ultimately served only 13 months with extensive day release. Everybody has spent the last 11 years wondering why the powers that be were so lenient towards him. In 2008 he appeared in a Palm Beach County courtroom and was required to register as a sex offender and report to jail.

This is the background against which Deutsche Bank 'onboarded' Epstein. It has been reported that JP Morgan had been his bank earlier but released him during the 'noughties because of bad press, no doubt on the supposition that he might want to launder money from any sex business that he might have. A spokesman for JP Morgan declined to comment on this when Compliance Matters called. The names of many of Epstein's alleged victims and helpers were to be found in the press by 2013, adding to the reputational problems that any financial firm might encounter while performing KYC ('know your customer') checks on him in line with the USA PATRIOT Act 2001.

Deutsche Bank maintained a relationship with Epstein and related individuals and entities between August 2013 and December 2018. At that point the bank decided to end their business relationship after another wave of bad press.

On 6 July 2019, Epstein was arrested on federal charges of child sex trafficking and conspiracy to commit the same. Prosecutors accused him in a grand jury indictment of paying dozens of girls as young as 14 to engage in sex acts with him at his New York and Florida properties from 2002 to 2005. He pled not guilty.

The bank's relationship with Epstein

Epstein was a prosperous financier with hundreds of millions of dollars in assets under management. The relationship between Deutsche Bank and Epstein came about through a Deutsche Bank relationship manager who had left his former employer-bank, where he had serviced Epstein's accounts, to join Deutsche’s private wealth department. The relationship manager joined in November 2012 and suggested the onboarding of Epstein shortly afterwards, dangling the prospect of millions of dollars of business before his superiors.

During the lengthy negotiations and onboarding process that followed, in April 2013 a junior relationship co-ordinator sent a memo to the co-head of the bank’s Wealth Management Americas group, referring to “[e]stimated flows of $100-300 [million] overtime [sic] (possibly more) w/ revenue of $2-4 million annually over time.” In the same email, the relationhip manager proposed that all Epstein-related accounts ought to be for “entities” affiliated with Epstein and not for “personal accounts.”

An executive wrote back, saying: “[I] spoke with [the Head of AML Compliance for Deutsche Bank Americas and the General Counsel for Deutsche Bank Americas, who at that time served as chair of the Bank’s Americas Reputational Risk Committee]. Neither suggest [that the Epstein relationship] requires rep risk and we can move ahead so long as nothing further is identified through KYC and AML client adoptions.” The NYDFS thought that this was a trifle complacent.

The relationship between Deutsche Bank and Epstein officially began on 19 August 2013 when the cank opened brokerage accounts for Southern Trust Company Inc, which styled itself as a “database company and services” and was founded in the US Virgin Islands in 2011, and Southern Financial LLC, a wholly-owned subsidiary of Southern Trust. According to the KYC record, the purposes of the brokerage accounts were to “hold marketable securities and cash” and “to invest long term [sic] with the bank,” respectively. Over the course of the relationship, Mr Epstein, his related entities, and associates would eventually open and fund more than 40 accounts at the bank. A bank AML compliance officer approved the relationship because of the memo of April.

Suspicious transactions by an “honorary PEP”

Epstein, according to the regulator, used Deutsche Bank accounts to engage in suspicious transactions. From the time of his onboarding, the relationship was classified by Deutsche Bank as “high-risk” and therefore subject to enhanced due diligence or EDD (i.e. checking of various kinds of information above and beyond the customary). Although the bank did not initially classify him as a politically exposed person (PEP), it did label him an “honorary PEP” because of his connections to prominent political figures. This led the bank to monitor his transactions to an abnormal degree, but the NYDFS does not believe that it did so properly. It says that he sent at least 18 wire payments of $10,000 (the Bank Secrecy Act 1970's transaction monitoring threshold) or more to alleged co-conspirators who had been the subject of past bad press reports.

On 24 January 2014, Deutsche Bank opened current/checking and money-market accounts for an Epstein-related trust named the Butterfly Trust. Among the beneficiaries of this trust were some of these alleged conspirators and some additional women with Eastern European surnames. Epstein described some of them as employees and some as friends. The KYC records state that the purpose of the money market account was “to pay all expenses/disbursements related to the trust [such as] taxes, trust fee [sic], etc.” The regulator says that the bank should have decided that Epstein might use these accounts to further criminal activity and endanger more young women.

Bank staff did notice that one of these people had been named as a conspirator but the compliance department approved the relationship on the basis of an enthusiastic note from the aforementioned executive. Epstein then used the trust account and other accounts to send more than 120 wire transfers totalling $2.65 million to beneficiaries of the Butterfly Trust, including some to alleged co-conspirators or to Eastern European women, for the stated purpose of covering hotel expenses, tuition and rent.

Fresh allegations surfaced in 2015 and the bank asked Epstein about them and appeared to be satisfied by his response. The NYDFS says that the bank told it that it has no contemporaneous records of the meeting with Epstein and is not aware of any other steps taken at the time to investigate the veracity of the allegations beyond speaking to Epstein. On 30 January the bank's Americas Reputational Risk Committee met to discuss the Epstein relationship, but the department says that "despite the fact that Deutsche Bank’s policies and procedures mandate that detailed minutes of such meetings be kept, the bank has represented to the Department that there are no recorded minutes from that particular meeting." Later that day, a member of the committee emailed the executive to say, without explanation, that the committee was  “comfortable with things continuing.”

A later email from the committee placed three restrictions - all quite mild - on the relationship with Epstein. The NYDFS complains that several senior bankers, right up to and including the bank’s CEO of the Americas, were told about these conditions, but that the relevant relationship managers were not told and consequently kept on dealing with Epstein in exactly the same way. The NYDFS adds that a compliance officer then 'purportedly' misinterpreted the restrictions when telling the transaction monitoring team what to do. One subsequent message from someone on the team consequently said of a payment to a Russian model: “[s]ince this type of activity is normal for this client it is not deemed suspicious.” The bank kept up its relationship with Epstein despite the appearance of other warnings or 'red flags.'

Correspondent accounts

The department has also accused Deutsche Bank of failing to monitor and manage two of its correspondent banking relationships - with FBME and Danske - properly.

In 1982, FBME was established in Cyprus as a subsidiary of the Federal Bank of Lebanon, which was founded in 1952. In January 1984, FBME opened a correspondent banking account with Bankers Trust, which Deutsche Bank acquired in 1999.

Due to Cypriot laws that placed restrictions on domestic financial institutions that primarily provided offshore banking services, FBME was incorporated in the Cayman Islands in 1986, though it kept its headquarters and staff in Cyprus. In 1987, FBME’s Cyprus branch was granted a licence to operate.

After the terrorist attacks on New York on 11 September 2001, the US Congress passed the USA PATRIOT Act and pressurised the Cayman Islands into requiring all banks registered there to establish a physical local presence. FBME's response was to relocate to Tanzania, where it was reincorporated in 2003.

Deutsche Bank was therefore obliged to keep an eye on FBME's compliance effort and over a period of years (2005-10) found it to be underwhelming. At the beginning of this period, it deemed it to be a "high risk" customer. Its North American Client Screening Committee knew that it had been, in the DFS's words, "associated with money laundering linked to Russian organised crime."

On 15 July 2014, the US Treasury’s Financial Crimes Enforcement Network (FinCEN) called FBME a "foreign financial institution of primary money laundering concern" in accordance with s311 USA PATRIOT Act. This at last caused Deutsche to end its relationship with FBME. The NYDFS thinks that it was rather slow off the mark in doing so.

The correspondent relationship between Deutsche and Danske Bank began in 2007. It counted this relationship as a "high risk" one as well, solely because the bank operated in the highly risky jurisdiction of Estonia, where its customers had generated a high number of "alerts and cases." By June 2008, Deutsche Bank was aware of problems at Danske Estonia concerning its non-resident customer accounts which have by now ballooned into a scandal of international proportions. (See here and here and here and here and here and here.) In September 2010 it gave Danske its highest AML risk rating. It still maintained the relationship with Danske, however, even after visiting the Estonian branch and professing unhappiness at the results. The relationship ended in October 2015, Deutsche Bank having identified another flurry of suspicious transactions.

In its consent order, the NYDFS has therefore decided that Deutsche Bank conducted business in an unsafe and unsound manner and thereby broke New York Banking Law § 44. It also says that the bank failed to maintain an effective and compliant anti-money laundering regime, in breach of 3 NYCRR § 116.2.