At least three foreign financial institutions, including Deutsche Bank AG, breached regulations requiring them to identify the people behind money transfers from a Cypriot bank notorious for catering to high-risk clients, in a practice that helped FBME Bank Ltd. to launder money before authorities closed it down, documents obtained by S&P Global Market Intelligence show.
The documents reveal that three employees at FBME described an "oral" deal between their bank and Deutsche Bank, one of the world's biggest payment processors, to wave through hundreds of millions in dollar transactions from high-risk FBME client accounts without requiring the names of the beneficiaries to be disclosed on electronic transfer forms, in contravention of international rules at the time. The most senior employee of the three, then head of compliance, alleged that Austria's Raiffeisen Bank International AG, and Germany's Commerzbank AG also allowed FBME to omit the names of beneficiaries from messages, although there is no suggestion that the two had a specific arrangement with the Cypriot bank to do so.
FBME had an "oral agreement with Deutsche Bank. We didn't want to give UBO info to Deutsche Bank because of confidentiality," FBME's head of compliance, Lilit Khachatryan, told external lawyers hired by the bank to contest U.S. sanctions imposed in 2014, according to internal memos leaked to S&P Global Market Intelligence, whose authenticity has been verified by two independent sources with knowledge of the matter. "[The] arrangement wasn't documented," she added.
The UBO, or ultimate beneficial owner, is the person whom banks are obligated by European and U.S. law to identify when opening accounts and handling transactions in the names of companies.
The notes were prepared in late summer 2014 by lawyers from a well-known international firm hired by FBME, who interviewed employees and reported to the bank's top management. Interviewees were warned that the discussions could be disclosed to regulators, according to the notes.
Khachatryan told the lawyers that an unspecified Deutsche employee agreed to this deal to speed up transfers from FBME clients who were based in high-risk or internationally sanctioned countries, such as Russia, Iran and Syria. Concealing beneficiaries was a violation of regulations and industry norms at the time and remains so today.
Follow the links below to read Matei Rosca's previous coverage of the transgressions at FBME Bank.
How Russian criminals used FBME Bank in Cyprus to pay firms tied to Syrian sarin
FBME: A hive of financial crime that spanned the globe
Rogue banking: Inside FBME's haywire compliance department
FBME was named a financial institution of primary money laundering concern in 2014 by the U.S. Treasury's financial crime bureau, known as the Financial Crimes Enforcement Network, or FinCEN. The designation isolated the bank from global markets and eventually led to its being taken over by the regulator and wound up.
At the peak of FBME's money laundering activity between 2010 and 2013, Deutsche Bank was its main correspondent bank, processing the majority of transfers issued by the Cypriot lender.
FBME's customer list was later revealed to include many high-risk shell companies incorporated in secretive jurisdictions such as Belize and the British Virgin Islands, often owned by politicians and tax avoiders from impoverished countries, and by sanctioned state entities from the likes of Syria and Iran. FinCEN said the latter used the bank to engage in the proliferation of terrorism and weapons of mass destruction.
EU regulations demanded the identification of UBOs on money transfers as early as 2005, and most banks invested heavily in compliance and risk assessment to uphold the new rules.
"UBO requirements were very much included in the third Money Laundering Directive of 2005. These requirements were strengthened progressively by the fourth and fifth directives," said Chrisol Correia, a director at LexisNexis Risk Solutions in London, a consultancy specializing in money laundering prevention. "The omission of beneficiary information in a payment would typically see the message returned to the originator," he added in an interview in July 2018.
All three banks might have been privately reprimanded by their regulators for the failures reported in this article, but the details of their contraventions relating to FBME's account beneficiaries have not been previously reported publicly.
Deutsche did not respond to detailed questions from S&P Global Market Intelligence regarding the verbal deal FBME employees referenced. Instead, a New York-based spokesman, Troy Gravitt, told S&P Global Market Intelligence in an email in July: "We severed our relationship with FBME in 2014. We have increased our anti-financial crime staff and controls in recent years and take our responsibilities under the [anti-money laundering] laws very seriously."
Frankfurt-based Commerzbank and Vienna-based Raiffeisen Bank International, two of FBME's other correspondent banks, "never raised the issue of the UBO name not being disclosed throughout the duration of the relationship," Khachatryan said in 2014, in response to questions about other banks that accepted anonymous transfers from FBME. "No one complained, neither DB nor Commerzbank nor Raiffeisen," the lawyers' memos quote her as saying, although there is no indication that Commerzbank or Raiffeisen ever cut an explicit deal to overlook the missing data.
"Commerzbank takes compliance very seriously and is committed to ensuring that its business fully complies with legal and regulatory requirements," spokesman Max Bicker said in an email responding to detailed questions about FBME, adding that it does not comment on "client relationships."
"RBI has systems in place to make sure that we are not processing payments that do not contain all required information," Vienna-based spokeswoman Ingrid Krenn-Ditz said in an email, also responding to questions about FBME. "Especially originators and beneficiaries are a necessity in a transaction because otherwise banks would not be in the position to credit the money accordingly and the funds would be returned by the beneficiary bank," Krenn-Ditz added, saying the bank was never fined for breaches "in this regard."
FBME and the three counterparties were simply ignoring the guidelines from EU and local regulators calling for transparency in payments and transfers, Khachatryan added. "[The] first case of actually providing UBO name was post-FinCEN. We just didn't type the name and send it to them," she said.
Khachatryan told the lawyers that FBME took the acceptance of unnamed wire transfers by its correspondent banks — chiefly Deutsche — as a sign that concealing the beneficiary was in fact acceptable practice, although it has since emerged that, on occasion, the UBO was linked to companies involved in the development of deadly sarin gas for the Syrian government.
"If there had been a problem, you would expect to hear from your clearers, but they were happy," she said.
Private investigators hired by FBME found in late 2014 that Khachatryan used a forged Harvard degree to bolster her credentials as a highly trained professional leading the bank's compliance function, according to other internal and confidential files seen by S&P Global Market Intelligence.
The memos show that another then-employee of FBME, Andreas Panayides, who had the job title of group consultant, said he had personally struck the anonymity deal with an unspecified Deutsche Bank representative at a face-to-face meeting in Greece. He said he had promised that FBME would respond fully to all inquiries from Deutsche, except those related to UBOs, and the German bank's representative readily accepted.
"I had some conversations with Deutsche Bank in Greece that if you want the UBO, come here and I'll show it to you," he told lawyers, without specifying the date. "We came to an agreement. It wasn't in writing, but we said we'd give them anything they wanted. But if they wanted to see the UBOs, they could come and we'd give them the file," said Panayides, a former head of compliance at FBME, adding that his intention was to avoid "sending it in writing" in order to uphold FBME's characteristic secrecy, a big draw for clients all over the world.
A third FBME employee, George Rodger, who was a compliance officer under Khachatryan, confirmed that he knew about the unwritten pact Deutsche Bank had made with Panayides in Greece, the files reveal. He added that nobody at the bank, including himself, saw anything wrong with the deal.
A pattern of infringement
Deutsche Bank has incurred hundreds of millions in fines for failings related to money laundering compliance from regulators in Europe, the U.S. and elsewhere since FBME was closed. It is unclear if the bank has ever been fined specifically for failing to reject anonymous money transfers from FBME.
Various authorities in the U.S. fined Commerzbank $1.45 billion in 2015 for money laundering and sanctions violations, and the New York state financial regulator ordered several bank employees fired, although they were later reinstated after appealing under German employment law.
RBI, which does not have a significant presence in the U.S. market, was fined €2.75 million by its home regulator in March 2018 for breaches relating to identification of UBOs. The Austrian bank was among those named in the Panama Papers, a trove of leaked documents from offshore law firm Mossack Fonseca.
In its notice of finding against FBME, FinCEN said the rogue bank made at least 4,500 suspicious transfers totaling $875 million between November 2006 and March 2013 through its U.S. counterparties. Deutsche was the largest of those counterparties, although none is specifically named in the notice.
Although it is not known how much money was transferred between FBME and the other two banks mentioned by Khachatryan, a document obtained by S&P Global Market Intelligence says FBME still had €362.2 million in its correspondent account with Commerzbank on July 1, 2016, two years after FBME's initial designation. At the same date, RBI held €219.3 million for FBME and Deutsche €1.82 million.
The value of all cross-border correspondent banking payments between companies was $160 trillion in 2014, consultancy McKinsey has estimated. Deutsche Bank has consistently been in the top 10 in global transaction banking, according to Coalition, a research firm that is part of S&P Global Inc. The German bank was the fifth-largest transaction handler by revenue in 2017, Coalition said, without publishing the exact figure.
FBME marketing material highlighted its ability to protect client confidentiality, and it targeted wealthy foreigners who lived outside Cyprus, offering them a gateway to the EU and the dollar market. S&P Global Market Intelligence and other publications exposed the bank as having participated in client money laundering and sanctions evasion by opening shell companies and preparing fraudulent paperwork.
Rodger, Khachatryan and Panayides could not be located for comment, including via social media and through the Cypriot authorities.
One of Deutsche's directors of financial crime prevention, Douglas Sloan, warned the Cypriot bank in early 2014 that U.S. authorities were looking into its activity prior to FinCEN issuing its official decision, according to emails leaked to S&P Global Market Intelligence and other media outlets.
The emails between Sloan, Khachatryan and Charles Charalambous, FBME's head of deposits, show the three discussing the potential actions of U.S. law enforcement against the Cypriot bank, with Sloan expressing concern about any written mention of his warnings.
"During our recent meeting in Nicosia you mentioned about a number of accounts maintained with FBME which are on the radar of U.S. law enforcement authorities and you advised that you might be able to provide us with more information at a later stage," Khachatryan wrote to Sloan. "I would be grateful if you could at least disclose the accounts to us, if you are still not able to tell us the details of the law enforcement cases, in order for us to take appropriate action."
Sloan reacted with apparent alarm, saying:
"Please refrain from using such written references to law enforcement, as I have not provided any specific details and I would not want someone to get the wrong impression/interpretation were they to see your email." U.S. laws ban the tipping off of potential suspects of ongoing investigations.
The emails show that, prior to this conversation, Sloan handed FBME representatives a list of 61 accounts that were of concern to Deutsche's New York office, where he appears still to work. The files leaked to S&P Global Market Intelligence say he cut all communication with FBME after this exchange. He could not be reached for comment.
Although Deutsche Bank kept its correspondent relationship with FBME open until after the FinCEN notice in 2014, JPMorgan Chase & Co. ended its in 2009 because of concerns over potential money laundering, the records obtained by S&P Global Market Intelligence show, pointing to several occasions on which JPMorgan queried payments to high-risk countries and individuals.
Tim Maltin, a spokesman for the Saab brothers, FBME's former owners, denied any wrongdoing on the part of the Saabs or the bank. The brothers have previously denied all wrongdoing, and have called the allegations "slanderous."
No criminal charges were brought against FBME's owners or staff in connection with alleged money laundering.