It looked as if Martin Blessing, the chief executive of Germany’s second-largest bank, was off to a good start this year.
His new retail strategy was beginning to pay off. Net income from retail banking in 2014 was at its highest in four years, and Mr. Blessing even considered paying a dividend – for the first time in his seven years in office.
But now the bank in Frankfurt must deal with its past once again.
Commerzbank is under pressure to reach a costly financial settlement with U.S. authorities — estimated to be $1.45 billion (€1.35 billion) — for allegedly doing business with an Iranian shipping company in violation of U.S. sanctions.
If the bank agrees, the fine would be the highest in the bank’s history. The potential fine comes at a bad time for Commerzbank, which was saved from bankruptcy during the financial crisis through an €18 billion cash injection from the German government, which still owns an 18 percent stake in the institution and is its largest single shareholder.
Although Commerzbank has disclosed no details, participants in the talks say an agreement is imminent.
For the five American agencies involved, the fine is intended as punishment for Commerzbank having allegedly violated U.S. sanctions on doing business with Iran. The allegations involve business relationships between the bank and the Iranian shipping company IRISL from 2002 to 2007. The bank is also accused of violating money-laundering rules.
Money alone isn’t enough for the U.S. authorities, however.
Benjamin Lawsky, the head of the New York Department of Financial Services, or DFS, wants Commerzbank to dismiss several executives as well. According to sources, the bank already released two managers in its shipping division amid U.S. investigations a few years ago.
Mr. Lawsky also wants to send members of his team as overseers to ensure Commerzbank sticks to the rules.
Benjamin Lawsky has quickly developed a reputation as the banking industry's worst nightmare.
In 2014, the bank reported a €602 million ($648 million) in net income. This profit, however, could now be reduced by several hundred million euros because the bank will have to post the fine in the 2014 fiscal year without having made sufficient provisions.
The bank will need to decide which steps to take. Because of its poor financial figures, Mr. Blessing chose not to receive a bonus last year, and it’s unclear whether he will receive one this year. The chances have probably declined.
Mr. Lawsky has quickly developed a reputation as the banking industry’s worst nightmare. The 44-year-old lawyer who keeps a portrait of himself on his office wall has been in charge of DFS since 2011.
The DFS can deprive banks of their licenses. This gives the agency substantial influence, which can be measured precisely.
The agency will reportedly receive $610 million of the estimated $1.45 billion fine from Commerzbank. This amount is more than what all the other government agencies, including the New York Federal Reserve Bank, the Department of Justice and the Office of the New York Attorney General, will receive.
Since Mr. Lawsky has been involved in investigations, fines and sanctions against financial institutions have risen considerably.
“Lawsky is a total politician and knows that he can boost his image by imposing high fines against banks,” said a source who knows him personally but asked to remain anonymous.
French bank BNP Paribas recently felt the effects of Mr. Lawsky’s approach when it was ordered to pay a record fine of just under $9 billion and had to fire 13 managers, including several senior executives.
Commerzbank is also expected to dismiss a few managers but most likely no top-level executives, according to sources.
In addition to financial and personnel-related sanctions, Mr. Lawsky wants to see more oversight at the affected banks.
Mr. Lawsky is not squeamish. He makes an example of anyone who fights back. He threatened to withdraw British bank Standard Chartered’s license when he felt the bank was not being sufficiently cooperative.
His practices are controversial among financial institutions. Some banks have complained that their business practices, which allegedly violated sanctions, are legal under European law.
Many cases, for instance, have involved money transfers from one non-American bank to another non-American bank. But because many of the transactions were made in U.S. dollars, American banks were involved in such cases, at least indirectly.
This is how it works: European bank A wishes to transfer a sum in dollars to European bank B. But because the two European banks can’t conduct this transaction directly with each other, bank A sends the money to a U.S. correspondence bank, which transfers the funds to bank B’s U.S. correspondence bank, which in turn transfers it to bank B. This circuitous process is referred to as a U-turn transaction.
The practice was banned in November 2008. “Before that, our rules allowed foreign parties to complete U.S. dollar transactions with non-U.S. banks under certain conditions,” the U.S. Treasury Department wrote to the British government in 2012.
In recent years, however, U.S. government agencies have changed their position on these money transfers and are also prosecuting banks for transactions that took place between 2002 and 2007.
No bank wants to openly complain about the practice.
“Those who fight back are given particularly severe treatment,” said an attorney who wished to remain anonymous.
This is likely one of the reasons why Commerzbank has been so tight-lipped about its legal problems in the United States.
Yasim Osman is a financial editor with Handelsblatt’s banking team in Frankfurt. To contact the author: firstname.lastname@example.org