The New York Department of Financial Services has fined Deutsche Bank for its relationship with Jeffrey Epstein and entities related to him and with two dollar-clearing/correspondent banking relationships with foreign banks, FBME and Danske Bank.

Epstein, a US citizen, was arrested on charges of child sex trafficking at this time last year and subsequently lost his life in custody in mysterious circumstances, bringing campaigners' hopes of a revelatory prosecution to an end. Many of his rich and famous friends are thought to have felt relieved at the news.

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 “[e]stimated flows of $100-300 [million] overtime [sic] (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: “[I] spoke with [the Head of AML Compliance for Deutsche Bank Americas and the General Counsel for Deutsche Bank Americas, who at that time served as chair of the Bank’s Americas Reputational Risk Committee]. Neither suggest [that the Epstein relationship] requires rep risk and we can move ahead so long as nothing further is identified through KYC and AML client adoptions.” The NYDFS thought that this was a trifle complacent.

The relationship between Deutsche Bank and Epstein officially began on 19 August 2013 when the cank opened brokerage accounts for Southern Trust Company Inc, which styled itself as a “database company and services” and was founded in the US Virgin Islands in 2011, and Southern Financial LLC, a wholly-owned subsidiary of Southern Trust. According to the KYC record, the purposes of the brokerage accounts were to “hold marketable securities and cash” and “to invest long term [sic] 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.