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Deutsche 'overwhelmed' by catch-up to anti-money laundering rules in the past

Catching up with the latest anti-money laundering rules has "overwhelmed" Deutsche Bank AG in recent years, but the German lender is on track to achieve new objectives around identifying high-risk clients, COO Frank Kuhnke said March 20.

AML became a topic of special attention for Deutsche's management board in the middle of 2018, with board oversight exercised on a monthly basis, Kuhnke said at the Morgan Stanley European financials conference in London on March 20.

Kuhnke, who took over as COO in May 2018, said he has spent "a good amount of time and effort in getting the tools right, catching up on the regulation," referring to the EU's latest AML directive.

AML woes

Announced June 19, 2018, the directive came into force on July 9, just a few days after a media report linked Denmark-based Danske Bank A/S to a widespread money-laundering scheme. Later in 2018, Deutsche was drawn into the scandal, when it emerged that it had acted as Danske's correspondent bank in some of the dubious transactions which saw billions flow through the Danish bank's Estonian branch.

Testifying in front of a European Parliament committee in February, Deutsche's AML head Stephan Wilken said the German group has reduced its correspondent banking business considerably.

Since 2016, Deutsche's correspondent banking portfolio has shrunk by 40% and the share of high-risk clients in that portfolio has dropped by 60%, he said.

With 40% of euro clearing, Deutsche is a major provider in Europe, acting as a correspondent bank to a large number of lenders in the area, Kuhnke said. However, it is important to note that the primary responsibility for know-your-customer controls lies with the banks that are actually facing the customer, he said.

"[A]ll indications are that we are absolutely within the rules and expectations of what the correspondent bank would have been expected to be doing," the COO added.

Tough investment bank KYC

Deutsche has struggled with building up know-your-customer, or KYC, controls in its investment bank because of the complex and interlinked product offerings, Kuhnke said.

The group has 40 booking locations with customers typically holding multiple products across asset classes. And customers are not necessarily single entities but can sometimes be "vast groups" with hundreds of subsidiaries, the COO said. This made the recognition of individual customers and coordination of KYC efforts a real challenge for the group, he said.

The latest European AML directive has increased the pressure on Deutsche, given the additional requirements it needs to meet by Jan. 10, 2020, the deadline for all EU member states to have transposed the new directive into national law.

"[T]hat catch-up has, frankly, overwhelmed us in the past," Kuhnke said.

But Deutsche is on track to meet its objectives relating to the remediation of high-risk clients by June 2019, he noted. Remediation involves working through portfolios to verify the identity of clients.

Kuhnke said the bank has achieved three out of eight objectives it set in the middle of 2018.

Deutsche has vowed to run a groupwide anti-financial crime and AML analysis; enhance controls; impose a "robust and strict" KYC program; impose special safeguards for correspondent banking relationships; train staff on AML recognition; introduce processes to ensure staff reliability; launch a "robust and strict" sanctions and embargoes program; and run a global anti-bribery, anti-corruption and anti-fraud program.

On top of internal reviews, the German financial regulator Bafin has tasked auditing firm KPMG to "look over shoulders" at Deutsche Bank, Kuhnke said. The auditors are also helping the bank to interpret some of the rules, he said.