Only four months after the the United Kingdom’s Office of Financial Sanctions Implementation (OFSI) issued a £20.47 million penalty against Standard Chartered Bank (SCB) for alleged violations of the U.K.’s Ukraine- and Russia-related sanctions (see our alert here), another bank is in the news for regulatory breaches. This time it is the London arm of Commerzbank AG (Commerzbank), which was hit by the United Kingdom’s Financial Conduct Authority (FCA) on 17 June with a fine of £37.8 million ($47.4 million) for failures in its anti-money laundering controls.

The FCA is the UK’s conduct regulator for financial services firms. Financial institutions operating in the UK are required to take steps to minimise their risk of being used to facilitate money laundering or terrorist financing. These include taking reasonable care to establish and maintain an effective, risk-based anti-money laundering (AML) control framework, and to comply with applicable Money Laundering regulations.

Commerzbank is a large international, commercial bank headquartered in Frankfurt, Germany, which operates in the UK through its branch, Commerzbank London. Commerzbank London acted as a hub for sales, trading and the due diligence process for a significant number of the bank’s global customers, and was required to have in place AML policies and procedures, comprehensive and proportionate to these activities, to enable it to identify, assess, monitor and manage money laundering risk. During the period from October 2012 to September 2017, the FCA identified a number of alleged shortcomings in Commerzbank London’s financial crime controls. These included alleged failures to:

  • Conduct timely periodic due diligence on its clients, which resulted in a significant number of existing clients not being subject to timely know-your-client (KYC) checks. By 1 March 2017, 1,772 clients were overdue for updated due diligence checks. A material number of these clients were able to continue to transact with the bank’s London branch due to the implementation of an exceptions process, which was not adequately controlled or overseen and which became “out of control” by the end of 2016;
  • Address long-standing weaknesses in its automated tool for monitoring money laundering risk on transactions for clients. For example, in 2015 Commerzbank London identified that 40 high-risk countries were missing from, and 1,110 high-risk clients had not been added to, the bank’s transaction monitoring tool; and,
  • Have adequate policies and procedures in place when undertaking customer due diligence (CDD) on clients.

The FCA therefore found Commerzbank London to have breached Principle 3 of its Principles for Businesses, which requires firms to have adequate risk management systems in place. The FCA stated that these failings created “a significant risk that financial and other crime might be undetected.”

The FCA found that the failings were particularly serious because they persisted following visits by the FCA to Commerzbank London in 2012, 2015 and 2017, in which the agency specifically pointed out these weaknesses. Further, they occurred against a backdrop of heightened awareness within Commerzbank of weaknesses in its global financial crime controls following action taken against the bank by US regulators in 2015.

Commerzbank London benefitted from a 30% discount on the original penalty of £54,007,800 because it agreed to resolve the matter at an early stage. It also undertook a significant remediation exercise to address the shortcomings in its AML control framework and increased the number of employees in the Financial Crime Team in Compliance from what had been just three full-time employees in London to 42.

This penalty is the second-largest to be imposed by the FCA following the penalty it imposed on Standard Chartered Bank last year of £102 million over breaches of AML regulations.

Practical Considerations

The FCA notice provides useful reminders for financial institutions about what they are required to do in order to manage their AML risks. These include:

  1. Ensuring that they have appropriate, risk-based procedures for applying CDD measures when establishing a business relationship or carrying out a transaction for a customer;
  2. Applying CDD at other appropriate times to existing customers on a risk basis;
  3. Applying scrutiny to transactions undertaken throughout the course of their relationship with a customer;
  4. Keeping documents, data or information obtained for the purposes of applying CDD measures up-to-date;
  5. Applying, on a risk basis, enhanced customer due diligence measures (EDD) and enhanced ongoing monitoring in any situation which by its nature presents a higher risk of money laundering or terrorist financing; and
  6. Establishing and maintaining appropriate and risk-based policies and procedures relating to the above.

It will also be important for financial institutions to ensure that, if they are given warnings by the regulator about weaknesses in their AML control frameworks, they take immediate remediative action. This may include pausing new customer onboarding until such time as appropriate CDD checks can be completed; ensuring that customers’ CDD information is updated on a periodic basis according to each customer’s risk profile, and increasing the headcount of financial crime control staff and/or engaging third-party vendors to ensure that KYC and other customer diligence can be carried out timely.

Based on recent enforcement actions, regulators in the UK are beginning to police and enforce financial crime regulations more stringently and successfully. This is in line with the recent, more aggressive approach to AML enforcement taken by other EU regulators in recent years such as those in Denmark and Sweden. With the departure of the UK from the EU and following the end of the transition period on 31 December 2020, how the UK proceeds in relation to implementation of any further EU AML legislation will depend on what, if any, withdrawal agreement applies. If there is “no deal”, the UK will have to decide whether to remain aligned with the EU or not. Whatever the position on new legislation, it seems doubtful that the UK will weaken its enforcement approach.

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Photo of Nicola Phillips Nicola Phillips

Nicola Phillips guides her clients in all areas of commercial litigation. From providing crisis management and legal advice to clients facing cyberattacks to pursuing injunctive relief for victims of fraud, Nicola’s practice has a strong focus on urgent and critical support.

Nicola has

Nicola Phillips guides her clients in all areas of commercial litigation. From providing crisis management and legal advice to clients facing cyberattacks to pursuing injunctive relief for victims of fraud, Nicola’s practice has a strong focus on urgent and critical support.

Nicola has a diverse practice, advising on all aspects of civil litigation, and vast experience with high court litigation as well as alternative dispute resolution. She manages large compliance investigations and has experience acting for both regulators and large financial institutions responding to governmental enforcement enquiries. Nicola also has significant experience with large, complex civil frauds and regularly obtains injunctive relief to assist with asset preservation. Her other practice areas include asset-based lending, trade finance, infrastructure, energy, insurance, and employment-related disputes.

Photo of Carlton Greene Carlton Greene

Carlton Greene is a partner in Crowell & Moring’s Washington, D.C. office and a member of the firm’s International Trade and White Collar & Regulatory Enforcement groups. He provides strategic advice to clients on U.S. economic sanctions, Bank Secrecy Act and anti-money laundering…

Carlton Greene is a partner in Crowell & Moring’s Washington, D.C. office and a member of the firm’s International Trade and White Collar & Regulatory Enforcement groups. He provides strategic advice to clients on U.S. economic sanctions, Bank Secrecy Act and anti-money laundering (AML) laws and regulations, export controls, and anti-corruption/anti-bribery laws and regulations. Carlton is the former chief counsel at FinCEN (the Financial Crimes Enforcement Network), the U.S. AML regulator responsible for administering the Bank Secrecy Act.

Photo of Erik Woodhouse Erik Woodhouse

Erik Woodhouse is a partner in Crowell & Moring’s Washington, D.C. office and a member of the firm’s International Trade and Financial Services groups, where he provides in-depth experience and practical solutions on sensitive economic sanctions and anti-money laundering matters, informed by his

Erik Woodhouse is a partner in Crowell & Moring’s Washington, D.C. office and a member of the firm’s International Trade and Financial Services groups, where he provides in-depth experience and practical solutions on sensitive economic sanctions and anti-money laundering matters, informed by his experience in private practice and in government at the Department of the Treasury and the Department of State.

Erik works with U.S. and foreign clients operating across borders on all aspects of these regimes, including developing and assessing compliance programs, advising on complex statutory and regulatory requirements, and leading companies through internal and government investigations. He has worked with major manufacturing and tech companies with global operations, multinational banks, investment funds and other financial services firms, and digital assets and virtual currency companies, collaborating with Crowell’s cross-disciplinary team that comprises former senior regulators, federal prosecutors, and in-house counsel.

Prior to joining Crowell, Erik served as Deputy Assistant Secretary of State for Counter Threat Finance and Sanctions at the Department of State, where he played a key role in the Department’s policy development and implementation related to all U.S. country-based sanctions programs and a range of global programs. Erik worked with counterparts across the executive branch to establish and implement new sanctions programs, coordinated U.S. sanctions policy with foreign governments, and engaged with private sector stakeholders on a range of U.S. sanctions priorities. Erik’s prior government experience also includes service at the Department of the Treasury’s Office of International Affairs.

Earlier in his career, Erik worked as a project finance attorney and litigator, as a law clerk for the Honorable M. Margaret McKeown of the U.S. Court of Appeals for the Ninth Circuit, and as a research fellow at Stanford University’s Program on Energy & Sustainable Development.