October 16, 2014 / 5:18 AM / 3 years ago

Exclusive: Commerzbank settlement with U.S. postponed amid probe

5 Min Read

The headquarters of the Commerzbank AG is pictured before the bank's annual news conference in Frankfurt February 13, 2014.Ralph Orlowski

NEW YORK (Reuters) - Commerzbank AG's (CBKG.DE) settlement with U.S. authorities over alleged sanctions violations has been postponed, possibly until the end of the year, as prosecutors seek to coordinate the resolution of a separate probe stemming from transactions at the German bank connected to the massive Olympus Corp 7733.T accounting fraud, according to people familiar with the matter.

Commerzbank had been primed to settle with U.S. regulators and prosecutors by the end of September over its dealings with Iran and other countries under U.S. sanctions, Reuters has reported.

The sanctions settlement was expected to cost the bank about $650 million, people familiar with the deal have told Reuters, and the bank had been expected to enter into deferred prosecution agreements with prosecutors that would suspend criminal charges.

But the accord was put on ice after the Manhattan U.S. Attorney's office, which is not involved in the sanctions deal, looked into the bank's records in connection with the $1.7 billion accounting fraud at Japan's Olympus, said two sources who did not want to be identified. Other people with knowledge of the matter did not dispute the reasons for the delay.

The total amount for a coordinated settlement is now expected to cost Commerzbank more than $650 million, one of the two sources said, but the person did not provide a new estimate.

Media outlets have previously reported that a probe related to lax money-laundering controls could delay Commerzbank's sanctions related settlement, but the Olympus connection has not been revealed, nor the new target for a settlement date.

Representatives for the Manhattan U.S. Attorney's office and Commerzbank declined to comment.

The Olympus fraud is considered one of the biggest corporate scandals in Japan's history. In 2011, the camera and medical equipment maker admitted the company used improper accounting to conceal massive investment losses over more than a decade and restated years of financial results.

Commerzbank handled hundreds of millions of dollars of transactions connected to the fraud, court filings show, and Manhattan U.S. Attorney Preet Bharara began to investigate the bank's records and compliance with the Bank Secrecy Act, the two sources said.

The Bank Secrecy Act (BSA) is the United States' prime anti-money laundering law and requires monitoring and flagging suspicious transactions.

Authorities have connected a former banker at Commerzbank, Chan Ming Fon, to the Olympus accounting scheme. Chan pleaded guilty in U.S. District Court in Manhattan last year to conspiracy to commit wire fraud.

Chan worked at Commerzbank in Singapore until 2000, was at Societe Generale until 2004 and then formed his own company where he continued to work for former Olympus executives, according to a report commissioned by Olympus in 2011.

Chan is cooperating with the government, court filings show. His lawyer declined to comment.

Commerzbank in recent years has already been focused on improving its controls after it entered into an agreement in 2012 with the Federal Reserve Bank of New York to improve compliance with BSA/anti-money laundering laws and regulations.

 The New York branch still failed to maintain adequate controls, the Federal Reserve found last year, and issued a cease and desist order. It is not clear if the Fed action was related to the bank's activities with Olympus.

A spokeswoman for the Federal Reserve declined comment.

Authorities involved in the sanctions settlement view the BSA probe as coming "out of left field," one of the two sources said. But from the government's perspective, it doesn't make sense to resolve one case and a couple of months later, have another against the same bank, the person said.

Authorities want to consider a joint settlement that could come by the end of the year, the source said.

The authorities involved in the sanctions settlement are the Department of Justice, the U.S. Attorney in Washington, D.C., the Treasury Department, the Federal Reserve, New York's Department of Financial Services, and the Manhattan District Attorney. All declined to comment on the settlement.

In addition to the $650 million, Reuters has reported that New York’s Department of Financial Services, which is expected to get a little less than half the money, wants Commerzbank to fire a handful of employees involved with the alleged sanctions-related wrongdoing.

The inquiry into Commerzbank's activities with sanctioned entities began in 2010 with the Manhattan District Attorney's office, a different source said. Authorities have found that the bank allegedly stripped identifying information from incoming wires to avoid red flags that would have helped regulators police the transactions, Reuters has reported.

Reporting by Karen Freifeld; Additional reporting by Aruna Viswanatha in Washington; Editing by Karey Van Hall and Lisa Shumaker

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