Cost of Compliance v. Cost of the Fine: The Case of Commerzbank

On 17 June, the Financial Conduct Authority fined German based Commerzbank almost £38 million.

The fine came as a result of an early settlement resolution between the bank and the FCA, which qualified Commerzbank for a 30% discount on the headline fine of £54,007,800. The fine resulted from consistent failures in putting in place adequate anti-money laundering (AML) systems between October 2012 and September 2017.

FCA Executive Director of Enforcement and Market Oversight, Mark Steward, said:

‘Commerzbank London’s failings over several years created a significant risk that financial and other crime might be undetected. Firms should recognise that AML controls are vitally important to the integrity of the UK financial system.’

Commerzbank’s failings related to due diligence, know your customer (KYC) checks and weak automated transaction monitoring.

Commerzbank’s second-largest shareholder, Cerberus (A US-based private equity fund), has since launched an attack on the German lender’s leadership and called for two seats on its supervisory board to “prevent Commerzbank’s demise”. Shares in Commerzbank have dropped by close to 60 per cent since Cerberus bought 5% of the company in 2017. According to calculations by the Financial Times, Cerberus is sitting on €400m of losses.

What have we learned?

Unfortunately, the lesson is an old one: if you scrimp on compliance in the short term, you will pay for it in the long run. When I see fines of such largesse landing on financial institutions, my thoughts of course go to how this could have happened; and the actions or inactions leading to the fine. A few thoughts:

Cost

It is hard to see (with the benefit of Harry Hindsight) how the cost savings of continually breaching regulation could be justified.

With just a fraction of the fine’s cost, we could have provided one of the best financial crime teams in the world.

Leadership

Compliance can only be effective if key leaders are driving compliance culture.

Supporting compliance teams with adequate resources and backing them when they make recommendations, or find issues, is essential. This can only really work if the senior leaders of the organisation are driving, and seen to be driving, a compliance culture.

Signs of Broader Problems

From the commentary surrounding Commerzbank’s underperformance over the past few years, it looks like failed strategies and burgeoning costs were endemic. The compliance breaches were the tip of the iceberg.