BaFin, Germany's all-in-one financial regulator, has ordered Deutsche Bank to take appropriate internal safeguards and comply with general anti-money-laundering 'due diligence' obligations and has appointed a monitor to assess the bank's efforts.

To monitor the implementation of the ordered measures, BaFin has appointed a special representative in accordance with section 45c(1) in conjunction with section 45c(2) no 6 Banking Act (the Kreditwesengesetz or KWG). The special representative is to report on and assess the progress of the implementation. The regulator has not published any details of the internal reforms that it expects.

The measures that the regulator is taking are possibly the upshot of Deutsche Bank's involvement in the Latvian branch of Danske Bank. Compliance Matters asked Deutsche Bank a few days ago whether the American authorities (the Department of Justice, the US Treasury and/or the Securities and Exchange Commission) were probing the bank, as they are Danske Bank; the answer was negative. When asked whether the bank had acted or was acting as a correspondent bank for Danske, handling dollar wire transfers as reported in the Wall Street Journal, Deutsche declined to comment.

The order that BaFin has issued is based on section 51(2) sentence 1 Money Laundering Act (Geldwäschegesetz). Section 45(b) states that if an institution does not have a "proper business organisation" according to section 25a(1), which sets out the management board's responsibility for setting strategies, capital adequacy and internal controls to ensure compliance, BaFin can order it to take steps to reduce risks that have arisen from certain activities and products or through the use of certain systems or from the outsourcing of activities and processes to another undertaking. BaFin may also use this section to forbid the bank from setting up further branches without its approval and prohibit it from conducting certain types of business, in particular the acceptance of deposits, funds or securities of customers and lending.

Section 45(b) says that BaFin may appoint a special representative to do the following: (i) take over the activities and powers of one or more unqualified or untrustworthy senior managers; (ii) take over the activities and powers of governing bodies of the institution under certain conditions; (iii) set up and safeguard proper business organisation if the institution has persistently broken various laws; (iv) monitor the institution’s compliance with the orders issued by BaFin; (v) to monitor measures taken by the institution to avert some form of specified danger; (vi) to prepare a transfer order; and (vii) to check claims for damages against members of governing bodies. The institution must pay for the special representative, and BaFin sets the amount.

The Wall Street Journal has also reported that a two-year-old complaint from an informant or 'whistleblower' to the SEC said that Deutsche Bank and Citigroup (both of which are regulated by the SEC, thus creating the nexus that justifies an American investigation) were involved with transactions into and out of Danske’s Estonian branch. Its source also believes that Citigroup’s Moscow office was involved in some of the transfers through Danske Bank’s Estonian branch, but Citigroup did not reply to our request for comment last week.

Danske Bank's share price has dropped by one-third in the last six months, largely as a consequence of market worries about a US investigation of its money-laundering problems. Reuters has warned that although Danske does not have a US banking licence, "banning US correspondent banks from dealing with it would amount to shutting it out of the global financial network."

Earlier in the summer, the SEC docked Deutsche Bank nearly $75 million because two of its subsidiaries allegedly mishandled American Depositary Receipts.