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New Sheriffs in Town: Proxy Advisors Urge Bank’s Shareholders to Hold Senior Managers Accountable for AML Lapses

In the United States, banking laws and regulations treat banks asgatekeepersof financial system integrity. In exchange for the right to lawfully engage in the business of banking, banks are obligated to, among other things, put in place infrastructure adequate to detect, prevent, and report financial crime. The United States is not alone in its treatment of banks as gatekeepers. Other nations expect the same, as do prevailing international anti-financial crime standards, particularly those dealing with anti-money laundering.

At many financial institutions, the day-to-day task of implementing anti-money laundering controls falls on compliance units and their personnel. Along with officers, boards of directors have a role in AML compliance, such as initially approving anti-financial crime programs and conducting oversight. Ultimately, boards of directors are responsible for the effectiveness of anti-money laundering controls, the success or failure of which are– or should be viewed as– a measure of the quality of a bank’s overall operations and performance. Nevertheless, bank anti-financial crime compliance is not universally viewed as a matter of corporate governance, and current standards do not uniformly state, in practical terms, what is required (rather than just expected) of bank boards and senior management. [1]

The relationship between bank corporate governance and anti-financial crime compliance is being crystallized in the case of Deutsche Bank. Ahead of Deutsche’s annual meeting later this month, proxy advisor ISS is counseling Deutsche shareholders to hold senior management “accountable for many years of substantial monetary and representational costs,” particularly for failures of anti-money laundering controls that have led to substantial penalties and reputational harm. (Deutsche has been penalized by U.S. state and federal regulators and the UK’s Financial Conduct Authority for inadequate anti-money laundering controls and is now under scrutiny for connections to the Trump Organization, as well as to money laundering scandal-plagued Danske Bank).

According the Financial Times, ISS told Deutsche shareholders that “[w]e believe it is time for shareholders to hold the boards accountable for the many years of substantial monetary and reputational costs to the bank borne by shareholders as a result of the failing execution of AML (among other) policies and strategies.” ISS is not alone. European proxy advisor ECGS has “backed a shareholder protest vote against Deutsche Bank’s chairman and three of the lender’s senior executives.” One of the senior executives singled out by ECGS is Deutsche’s Chief Regulatory Officer (a member of the bank’s management board), because she has “obviously not managed to transform the bank’s anti money laundering system into a legally compliant state.”

The positions taken by ISS and ECGS are significant because they clearly connect anti-financial crime compliance to corporate governance and activate bank shareholders as powerful enforcers anti-money laundering expectations. Unlike regulators, bank shareholders are uniquely positioned to hold boards of directors and senior managers accountable on a regular basis by casting votes, rather than through legal and regulatory oversight and enforcement processes that, while mighty, can be protracted. In other words, the direct involvement of shareholders in enforcing bank anti-financial crime expectations  puts directors’ and officers’ skin in the game in a way that regulators cannot.

If Deutsche’s shareholders heed the calls of proxy advisors and vote against members of the bank’s management for AML lapses, they will set a cautionary precedent for other banks, particularly those that are publicly-owned. But even if Deutsche’s shareholders do not so vote, the proxy advice given by ISS and ECGS sends a clear clear message that bank anti-money laundering compliance is part and parcel of corporate governance, and is a measure of directors’ and senior officers’ overall performance.

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For more information about this article or MassPoint’s related regulatory counseling and compliance services, contact the author, Hdeel Abdelhady.

 

NOTES

[1] The Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act Anti-Money Laundering Examination Manual states, for example, that: “The board of directors has primary responsibility for ensuring that the bank has a comprehensive and effective BSA/AML compliance program and oversight framework that is reasonably designed to ensure compliance with BSA/AML regulation. Senior management is responsible for implementing the board-approved BSA/AML compliance program.” The New York Department of Financial Service’s regulations (effective as of January 2017) require boards of directors or senior managers of DFS-regulated banks to submit an annual certification attesting to adequate compliance with the DFS’ anti-money laundering (and OFAC sanctions) compliance requirements.

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