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Sanctions: Deutsche Bank's US woes take a step closer to resolution.

Nigel Morris-Cotterill

Deutsche Bank will, in the not too distant future, become a cause of study in universities, colleges and business schools across the world. It will become the iconic example of how not to run a bank.

Starting with its aggressive expansionist stance in the 1980s, the bank bought bundles of trouble including bundles operating in the USA.

Little did anyone, at Deutsche or anywhere else, realise just how protectionist the USA would become. The USA was recognised for its military might and its willingness to go into small countries and launch attacks on those it decided it did not like. But, so far as much of the world was concerned, that happened far away and had no effect on them. But change was coming. The uncontrollable shipping of drugs into the USA was having a negative effect on the young and on crime rates generally. Middle America, much of which is in the South, started to worried and Middle America is what votes Republican. The party of laissez faire flexed its muscles as the party that protects America. Military methods might harm the short term interests of the increasingly powerful drugs barons in South America, the 'stans and Asia's Golden Triangle but they would find ways to get back into business. Attacking the business itself might be a better solution.

The USA's sanctions regime developed apace and within the largely politically motivated orders came the "Kingpin Act." As an attack on the wealth - or at least the ability to use it - of major characters in the drugs industry, it had popular support and, as popular support grew, so did the support for a broader range of sanctions, sold to the American public as an imperative for their own safety.

But the drugs trade was an inbound threat. The USA also wanted to protect its self-proclaimed position as the leader of the free world and to do that it needed both carrot and stick. The carrot came in the form of aid and "technical assistance" to countries which received money for certain projects on the understanding that the projects were carried out by American companies or their associates. The carrot also came in the form of mass market computerisation and the software that computers use. The USA created the concept of "software patents," which almost every country has rejected but which the USA continues to push at every opportunity. Software patents would render almost all processes performed on a computer subject to royalties to the USA no matter who wrote the programs and where. It is a very different animal to software copyright which most of the rest of the world sees as the right way to go.

But the USA's primary power was the US Dollar. If it could control its use, it could control a very large part of the world.

Which brings us to the latest episode on the long running saga of The USA v Deutsche Bank.

Leaving aside the dubious nature of settlement agreements and the hyperbole that characterise the announcements of such, the agreement between the US Department of the Treasury and Deutsche Bank Trust Company is a demonstration of how, once someone comes to the attention of the authorities, it gets passed around and beaten like a .. think of a suitable subject.

This (corrected for persistent grammatical errors and clarity) is the text of a statement by the US Treasury issued 9th September 2020.

"The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today announced two settlements totalling USD583,100 with Deutsche Bank Trust Company Americas (DBTCA). The settlements resolve OFACs investigations into apparent breaches of the Ukraine-Related Sanctions Regulations. Specifically, DBTCA agreed to pay USD157,500 for processing a large payment, related to a series of purchases of fuel oil, through the United States that involved a property interest of a designated oil company in Cyprus. At the time it processed the payment, DBTCA had reason to know of the designated oil company's potential interest but did not conduct sufficient due diligence to determine whether the designated oil company's interest in the payment had been extinguished. Separately, DBTCA agreed to remit USD425,600 for processing payments destined for accounts at a designated financial institution. DBTCA failed to stop the 61 payments because it had not included in its sanctions screening tool the designated financial institutions Society for Worldwide Interbank Financial Telecommunication (SWIFT) Business Identifier Code (BIC), and DBTCAs screening tool was calibrated so that only an exact match to a designated entity would trigger further manual review. OFAC determined that neither case was voluntarily self-disclosed to OFAC and that the apparent violations constitute non-egregious cases."

So, even without self-reporting and with a finding that these were not "egregious" (which is rare - the term is so overused by US authorities that it has become meaningless, like the boy crying wolf) the overall penalty is, in US terms, small. It's certainly a drop in the ocean against other penalties the bank has suffered.

But what is interesting about this case is that it relates to similar issues that faced Deutsche in the case brought by the New York Department of Financial Services. The failures were simple but are symptomatic of a bigger problem: the failure to properly design and implement a "screening" system and, worse, a tendency to do the business even when warnings are apparent - and to turn a blind eye instead of asking more questions.

The 61 payments were as a result of a single failure - it did not include all the relevant information within its so-called "screening tool." The information that was not included was, in effect, the address of a sanctioned bank. It's difficult to feel sorry for Deutsche - that's just plain stupid.

But there are other, even more disturbing, details in the full enforcement release at https://home.treasury.gov/syst... .

" OFACwould have expected DBTCA take steps to corroborate independently the representations it received in order to assure itself that IPP did not have a present, future, or contingent interest in the payment it was requested to process,regardless of its time sensitivity."

In short, Deutsche did follow up but having received assurances that there wasn't a problem, it accepted them at face value.

This is a big lesson for all: when you are in a financial crime hole, keep digging. Get all the information you can possibly get. But it's a lesson that is unreasonable: there has to be a point where one says "I've got enough to approve it" or "we can't get enough to be reasonably sure it's OK."

That is placing a burden on regulated businesses which, because the case is always open to second guessing by regulators, means that the risk bar must be set ever lower.

Remember the thing about Deutsche's growth by acquisition? Part of that growth was the purchase of Bankers' Trust which was later renamed Deutsche Bank Trust Company. It's that specific unit that this action relates to. But that's only part of the story: Bankers' Trust was, in the early days of the USA's Bank Secrecy Act, the first US bank to be prosecuted. It wasn't for laundering. It was prosecuted for failing to file cash transaction reports.

Nature or nurture?