WASHINGTON (BLOOMBERG) – The Federal Reserve is examining how Deutsche Bank handled billions of dollars in suspicious transactions from Denmark’s leading lender, according to people familiar with the matter, further intensifying what could be one of the biggest money laundering scandals ever.

The Fed’s probe is in an early stage as it scrutinizes whether Deutsche Bank’s US operations adequately monitored funds from an Estonian branch of Danske Bank, according to two people briefed on the situation, who asked not to be named because the inquiry isn’t public.

Danske, which used correspondent banks such as Deutsche Bank to move money abroad, has admitted that much of about US$230 billion (S$312.77 billion) that flowed through the tiny Estonian outpost may have been dirty. A Wall Street Journal report in November said Deutsche Bank may have handled about US$150 billion of the total amount of potentially suspicious transactions tied to Danske.

The US requires banks operating under its jurisdiction to scrutinize clients and their dealings to detect potential money laundering and alert authorities to suspicious transactions. The Fed is among regulators that ensure banks have adequate systems in place to fulfill those duties.

A Danske Bank whistle-blower who outlined the illicit flow of cash through that firm has said much of it passed through Deutsche Bank in the US, and one of the people said the Fed is focusing on the German lender’s trust bank. Deutsche Bank has been cooperating with the Fed, the people said.

A spokeswoman for Deutsche Bank declined to comment on talks with regulators, and a Fed spokesman said it doesn’t publicly discuss confidential probes.

ACTING AS CORRESPONDENT

Deutsche Bank chief executive officer Christian Sewing said last week he’s launched a further internal investigation into the lender’s role as a correspondent bank for Danske, even though he said he hasn’t seen any evidence of wrongdoing. The bank had previously reviewed its actions in the case, Mr Sewing said at an event in Berlin. He urged people not to “prejudge” the bank or its employees, presuming their innocence unless proven guilty.

The US Department of Justice and criminal authorities from other countries have launched investigations into Danske Bank’s business in Estonia amid accusations it became a European hub for money launderers from the former Soviet Union. The Danish bank was ordered by its domestic regulator to stockpile an extra US$1.5 billion in capital to deal with the costs of potential penalties.

Danske relied on the global presence of Deutsche Bank, Bank of America Corp and JPMorgan Chase & Co to handle conversions of foreign currencies into US dollars on behalf of its clients from 2007 to as recently as 2015, people familiar with the arrangement have said. Bloomberg reported in November that Deutsche Bank had been contacted by the Justice Department and was thought to have handled the bulk of the transactions under scrutiny. There was no sign at the time that the three firms were themselves targets of the Justice Department’s investigation.

Deutsche Bank said that month it has controls in place when acting as a correspondent for other banks, but its ability to know about their clients is limited. As a correspondent, “your only relationship is with the bank and the bank itself has the responsibility to check its own client to monitor the transaction and to do all these kinds of checks,” a company representative said at the time.

‘CRITICAL DEFICIENCIES’

The Frankfurt-based lender has been criticized before by its primary US regulator. In 2017, the firm agreed to pay US$41 million to settle allegations its US business failed to keep up sufficient money-laundering protections. The bank’s faulty monitoring involved billions of dollars in “potentially suspicious transactions” processed between 2011 and 2015, the Fed said back then, adding that the transactions involved affiliates in Europe that failed to provide “accurate and complete information.”

Deutsche Bank has also struggled with US stress testing that’s meant to measure a firm’s ability to withstand another crisis, failing the Fed’s annual exercise as recently as last year. The agency faulted “widespread and critical deficiencies” in the capital-planning abilities of the bank, which was alone among major domestic and foreign lenders in facing such an objection from the Fed.

Senator Elizabeth Warren – who already took a first step to enter the race to become the Democratic nominee for president in 2020 – and fellow Democrat Chris Van Hollen have called for Senate Banking Committee Chairman Mike Crapo to probe the company’s correspondent banking business for vulnerability to money laundering.

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