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 “ (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: “ 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 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.