Manhattan U.S. Attorney And FBI Assistant Director-In-Charge Announce Filing Of Criminal Charges Against, And Deferred Prosecution Agreement With, Commerzbank AG New York Branch In Connection With Olympus Corporation’s Billion Dollar Accounting Fraud
The Olympus Accounting Fraud
Preet Bharara, the United States Attorney for the Southern District of New York, and Diego Rodriguez, the Assistant Director-in-Charge of the New York Office of the Federal Bureau of Investigation (“FBI”), announced today two major actions filed in federal court in the District of Columbia and Manhattan against COMMERZBANK AG (“COMMERZ”), and COMMERZBANK AG NEW YORK BRANCH (“COMMERZ NEW YORK”).
First, a criminal Information was filed today in federal court in the District of Columbia charging COMMERZ NEW YORK with felony violations of the Bank Secrecy Act, in connection with COMMERZ’s and COMMERZ NEW YORK’s relationship with the Olympus Corporation (“Olympus”) and COMMERZ NEW YORK’s failure to, among other things, maintain an effective anti-money laundering program, detect reportable transactions under U.S. law and prevent them from being processed by COMMERZ NEW YORK. The criminal BSA charges are contained in a four-count felony Information (the “Information”) which also charges COMMERZ with conspiring to violate the International Emergency Economic Powers Act (“IEEPA”) based on COMMERZ’s role in processing, from 2001 through at least 2008, $263 million of transactions that were prohibited under U.S. law. The case is assigned to United States District Judge Beryl Howell.
Second, the United States has entered into an agreement (the “Agreement”) with COMMERZ and COMMERZ NEW YORK (collectively, the “Company”) under which the Company agrees to accept responsibility for its conduct by stipulating to the accuracy of an extensive Statement of Facts; to pay a $300 million forfeiture amount to the victims of the Olympus fraud; to refrain from future criminal conduct and cooperate fully with the Government; and to continue reforms of its Bank Secrecy Act (“BSA”)/Anti-Money Laundering (“AML”) compliance program. Assuming the Company’s continued compliance with the Agreement, the Government has agreed to defer prosecution on the Information for a period of three years, after which time the Government will seek to dismiss the charges. The $300 million forfeiture amount to the victims of the Olympus fraud will be paid through a parallel civil forfeiture complaint filed in Manhattan federal court.
COMMERZ and COMMERZ NEW YORK will pay a total of $1.45 billion in penalties to resolve the Olympus-related AML charges, IEEPA violations, and payments to regulators.
Manhattan U.S. Attorney Preet Bharara said: “Today, Commerz New York stands charged with Bank Secrecy Act criminal offenses for its acute, institutional anti-money laundering deficiencies that made it a conduit for over a billion dollars of the Olympus fraud. These criminal charges follow a multi-year investigation and a guilty plea by a former Commerzbank Singapore employee who helped set up the structure that allowed for the Olympus fraud. Institutions, not just individuals, have an obligation to follow the law, and anti-money laundering laws in particular are critical for financial institutions to follow. With today’s resolution, the bank, as part of a deferred prosecution agreement, has accepted responsibility in a detailed statement of facts, agreed to continue reforming its anti-money laundering practices, and will pay $300 million that will go to victims of the Olympus fraud.”
FBI Assistant Director-in-Charge Diego Rodriguez said: “Today we announce more charges against yet another bank. Commerz New York violated the Bank Secrecy Act designed to prevent the movement of money, often with nefarious intent. Commerzbank enabled Olympus to evade detection for years. And worse yet, failed to create a process to prevent this criminal behavior. Management at banks and financial institutions should heed this warming: This behavior will be investigated, vigorously.”
According to the allegations in the criminal Information and other documents filed today in the United States District Court for the District of Columbia, and felony plea documents related to an Olympus executive filed previously in the District Court for the Southern District of New York:
Since 2008, and continuing until at least 2013, COMMERZ NEW YORK violated the BSA and its implementing regulations. Specifically, COMMERZ NEW YORK failed to maintain adequate policies, procedures, and practices to ensure its compliance with United States law, including its obligation to detect and report suspicious activity. As a result of the wilful failure of COMMERZ NEW YORK to comply with United States law, a multibillion-dollar securities fraud was operated through COMMERZ and COMMERZ NEW YORK.
Olympus was a Japan-based manufacturer of medical devices and cameras. Its common stock is listed on the Tokyo Stock Exchange, and its American Depository Receipts trade in the United States. From at least the late 1990s through 2011, Olympus perpetrated a massive accounting fraud designed to conceal from its auditors and investors hundreds of millions of dollars in losses. In September 2012, Olympus and three of its senior executives pled guilty in Japan to inflating the company’s net worth by approximately $1.7 billion.
Olympus used COMMERZ and COMMERZ NEW YORK to perpetrate its fraud. COMMERZ, through its branch and affiliates in Singapore, both loaned money to off-balance-sheet entities created by or for Olympus to perpetrate its fraud, and transacted more than $1.6 billion through COMMERZ NEW YORK in furtherance of the fraud.
The Suspicions at COMMERZ
COMMERZ and COMMERZ NEW YORK were used in furtherance of the Olympus fraud during two different time periods. From approximately 1999 through 2000, Olympus perpetrated its fraud primarily through COMMERZ and its Singapore branch and affiliates. Among other things, Olympus used special purpose vehicles to facilitate the fraud, some of which were created by COMMERZ – including several executives based in Singapore – at Olympus’s direction, using funding from COMMERZ. One of those Singapore-based executives, Chan Ming Fon, was involved in creating the Olympus structure in 1999 while at Commerzbank (Southeast Asia) Ltd., and later managed an Olympus-related entity in 2005-2010 on behalf of which he submitted false confirmations to Olympus’s auditors. In September 2013, Chan pled guilty in Manhattan federal court to conspiracy to commit wire fraud.
From 1999 through 2000, Olympus executives asked COMMERZ executives to provide certain false documents to Olympus’s auditors, which would have failed to disclose that certain Olympus assets were pledged as collateral for loans from a COMMERZ affiliate. COMMERZ obtained a legal opinion, which, in the words of one COMMERZ executive written to an Olympus executive, “ma[de] clear that our bank could be subject to both civil and criminal penalties if we are seen to be assisting or facilitating you in the non-disclosure.” Although COMMERZ ultimately declined to provide the false documents, its executives suggested a variety of ways Olympus could nonetheless fail to disclose the pledge.
In 2000, Olympus took its business away from COMMERZ and transferred it to another bank. In 2005, however, Olympus – and its fraud – returned to COMMERZ. From that point until at least 2010, COMMERZ executives expressed strong suspicions about the Olympus transactions and structure. One senior executive worried that Olympus would have to “write off [the] full amount” of the relevant transactions, and wondered about the effects on COMMERZ if “any negative news is splash[ed] on the front page.” A senior legal and compliance officer responsible for COMMERZ’s Singapore branch and affiliates wrote at the time that he was “concerned” about fraud, asset stripping, market manipulation, and tax offenses, and that “[i]f the [Olympus] structure and transactions can not [be] explained we must file Suspicious Transaction report as a matter of law and [COMMERZ] policy.”
The New York Wires
In March 2010, two wire transfers in the amount of approximately $455 million and $67 million, respectively, related to the Olympus scheme were processed by COMMERZ NEW YORK through the correspondent account for the Singapore branch of COMMERZ. Those wires caused COMMERZ NEW YORK’s automated AML monitoring software to “alert.”
At the time, COMMERZ NEW YORK had conducted no due diligence on the Singapore branch and affiliates of COMMERZ, consistent with COMMERZ’s policy of not conducting due diligence on its own branches. In response to the alerts, however, COMMERZ NEW YORK sent a request for information to COMMERZ in Frankfurt and COMMERZ’s Singapore branch, inquiring about the transactions. The Singapore branch responded in a brief e-mail, dated April 20, 2010, referring to the Olympus-related entities involved in the wires:
GPA Investments Ltd. ist [sic] a Caymen [sic] Islands SPV, Creative Dragons SPC-Sub Fund E is a CITS administered fund both of which are part of an SPC structure to manage securities investments for an FATF country based MNC.
According to the Relationship Manager the payment reflects the proceeds from such securities investments to be reinvested.
COMMERZ’s Singapore branch did not relay any of the concerns about the Olympus-sponsored structures and transactions.
Based on its response, COMMERZ NEW YORK closed the alert without taking any further action other than to note that in March 2010 alone, GPA Investments had been involved in six transactions through COMMERZ NEW YORK totalling more than $522 million. In fact, between 1999 and 2010, a total of more than $1.6 billion in furtherance of the Olympus fraud was cleared through COMMERZ NEW YORK. COMMERZ NEW YORK failed to file a SAR in the United States concerning Olympus or any of the Olympus-related entities until November 2013 – more than two years after the Olympus accounting fraud was revealed.
COMMERZ NEW YORK’s Compliance Deficiencies
COMMERZ NEW YORK had the same designated BSA Officer continuously from approximately 2003 until early 2014. Over those years, she raised concerns about AML compliance, both to her superiors at COMMERZ NEW YORK, and with COMMERZ Frankfurt.
Under the BSA, a financial institution is required to detect and report suspicious activity. This is accomplished, in part, through conducting due diligence, and enhanced due diligence where appropriate, of the correspondent relationship – which COMMERZ NEW YORK failed to do – and by sending requests for further information to the correspondent bank when potentially suspicious transactions are detected. COMMERZ NEW YORK frequently had difficulties getting responses to requests for information generated in connection with automated transaction monitoring “alerts.” Because requests for information went unanswered for as long as eight months without SARs being filed, alerts were often closed without any response to the pending request. As a result of these deficiencies, COMMERZ NEW YORK cleared numerous AML “alerts” based on its own perfunctory internet searches and searches of public source databases but without ever receiving responses to its requests for information.
On June 24, 2010, a COMMERZ NEW YORK-based compliance officer who had primary responsibility for automated transaction monitoring wrote in an e mail to the BSA Officer and the Head of Compliance in New York (who had previously served as the Head of Compliance in Asia) that “we currently have 90 alerts a day,” with “808 alerts outstanding,” which “could lead to a possible back log.” He continued, “I also wanted to make you aware that we have currently over 130 Frankfurt RFIs [i.e., requests for information] outstanding,” noting “a decrease in response to the RFIs” from Frankfurt. The following day, the Head of Compliance in New York forwarded the e mail to COMMERZ’s Global Head of Compliance, adding that “things are not getting better with regards to th[ose] findings. (see below). I will forward you the DRAFT memo on potential revision of staffing needs.” Although the Global Head of Compliance thereafter instituted new procedures designed to increase the speed of responses to RFIs from New York, problems persisted with the timely flow of information from business units outside the U.S. to compliance officers in New York.
COMMERZ and COMMERZ NEW YORK also failed to conduct adequate due diligence or to obtain “know your customer” information with respect to correspondent bank accounts for COMMERZ’s own foreign branches and affiliates. These systemic deficiencies reflected a failure to maintain adequate policies, procedures, and controls to ensure compliance with the BSA and regulations prescribed thereunder and to guard against money laundering.
According to admissions contained in the deferred prosecution agreement, from 2002 to 2008, COMMERZ knowingly and willfully moved $263 million through the U.S. financial system on behalf of Iranian and Sudanese entities subject to U.S. economic sanctions. COMMERZ engaged in this criminal conduct using numerous schemes designed to conceal the true nature of the illicit transactions from U.S. regulators.
For example, in the deferred prosecution agreement, COMMERZ acknowledged that it used non-transparent payment messages, known as cover payments, to conceal the involvement of sanctioned entities, and also removed information identifying sanctioned entities from payment messages, in transactions processed through COMMERZ NEW YORK and other financial institutions in the United States. Specifically, in 2003, COMMERZ designated a group of employees in the Frankfurt back office to review and amend Iranian payments so that the payments would not be stopped by U.S. sanctions filters. In doing so, COMMERZ ensured that Iranian payment messages did not mention the Iranian entity, as transactions may have otherwise been stopped pursuant to the U.S. sanctions.
COMMERZ admitted that it hid these practices from COMMERZ NEW YORK. For example, in 2003, when two state-owned Iranian banks wanted to begin routing their U.S. dollar clearing business through COMMERZ, a COMMERZ back office employee emailed other COMMERZ employees directing: “If for whatever reason CB New York inquires why our turnover has increase[d] so dramatically, under no circumstances may anyone mention that there is a connection to the clearing of Iranian banks!!!!!!!!!!!!!.”
COMMERZ admitted that this conduct continued even though its senior management was warned that the bank’s practices for Iranian clients “raised concerns.” For example, in October 2003, the head of COMMERZ’s internal audit division stated in an email to a member of COMMERZ’s senior management that Iranian bank names in payment messages going to the United States were being “neutralized” and warned: “it raises concerns if we consciously reference the suppression of the ordering party in our work procedures in order to avoid difficulties in the processing of payments with the U.S.A.”
In another scheme designed to avoid U.S. sanctions, COMMERZ admitted that, in 2004, it agreed with an Iranian bank client that, rather than sending direct wire payments to the United States, the Iranian bank would pay U.S. beneficiaries with COMMERZ-issued checks listing only the Iranian bank’s account number and address in London with no mention of the Iranian bank’s name.
Additionally, COMMERZ admitted that in 2005, it created a “safe payment solution” for an Iranian shipping company client, which allowed the client to conduct transactions using the U.S. financial system. The safe payment solution involved routing payments through special purpose entities controlled by the Iranian company, which were incorporated outside of Iran and bore no obvious connection to the Iranian client. COMMERZ and its client switched use of such special purpose entities when COMMERZ NEW YORK’s sanctions compliance filters were updated to detect the use of a particular special purpose entity. COMMERZ continued to process payments on behalf the Iranian client even after the client had been designated by OFAC as an entity subject to U.S. sanctions for its involvement in weapons of mass destruction proliferation.
In addition, COMMERZ admitted that, from 2002 to 2007, it provided Sudanese sanctioned entities with access to the U.S. financial system by engaging in similar schemes to remove reference to Sudanese companies from the transaction records.
The Deferred Prosecution Agreement
As a result of the foregoing conduct, this Office has entered into a Deferred Prosecution Agreement with the Company which has been submitted today to Judge Howel1. Pursuant to the Agreement, the Company has agreed to the following terms and conditions. First, the Company has agreed to waive indictment and to the filing of the Information, charging the Company with violations of the Bank Secrecy Act. Count Two of the Information charges that the Company failed to maintain an effective anti-money laundering program, from in 2008 through in or about 2013, as required under the BSA. Count Three of the Information alleges that the Company violated the BSA by failing to file Suspicious Activity Reports with respect to correspondent banking transactions. Count Four of the Information charges that the Company failed to obtain adequate due diligence on foreign institutions owned by or affiliated with the Company, information that if collected and maintained would have reasonably allowed for the detection and reporting of instances of money laundering and other suspicious activity.
Second, pursuant to the Agreement, the Company agrees to acknowledge responsibility for its conduct by, among other things, stipulating to the accuracy of a detailed Statement of Facts.
Third, the Company agrees to a $300 million non-tax deductible payment, in the form of a civil forfeiture, which the Government intends to distribute to the victims of the Olympus fraud, consistent with the applicable Department of Justice regulations, through the ongoing remission process. To effectuate that forfeiture, the Office has today filed a parallel civil forfeiture complaint in the Southern District of New York, which has been assigned to United States District Judge Paul Gardephe.
Fourth, the Company agrees to various cooperation obligations, including (1) an obligation to report any criminal conduct by any employee acting within the scope of his employment at the Company; (2) reporting to the Offices any BSA-related investigation or proceeding in which the Company is involved; and (3) committing no subsequent federal crimes.
Fifth, the Company agrees to continue reforming its Bank Secrecy Act/Anti-Money Laundering compliance programs and procedures, as required under the prior formal enforcement actions taken by the Federal Reserve and the additional actions taken concurrently by the Federal Reserve and the New York State Department of Financial Services (“DFS”), and to provide quarterly reports and other information to this Office about its progress.
In consideration of these obligations, the Government has agreed to defer prosecution on the Information for a period of three years, after which time – assuming that the Company does not violate the Agreement – the Government will seek to dismiss the charges.
In separate actions, the Federal Reserve Board and DFS announced that they had also reached agreements with COMMERZ and COMMERZ NEW YORK with respect to its BSA crimes.
Mr. Bharara praised the work of the FBI. He also thanked the Federal Reserve Board, the Internal Revenue Service, Criminal Investigation, and DFS.
Today’s announcement is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF) which was created in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. Attorneys’ offices and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations. Since the inception of FFETF in November 2009, the Justice Department has filed more than 12,841 financial fraud cases against nearly 18,737 defendants including nearly 3,500 mortgage fraud defendants. For more information on the task force, visit www.stopfraud.gov.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorney Bonnie Jonas is in charge of the prosecution.