On December 14, 2023, the United States District Court for the Southern District of New York (the “Court”) granted an unusual ex parte application to serve third-party discovery subpoenas on U.S.-based Deutsche Bank entities. The subpoenas seek evidence to assist the Applicants’ ongoing litigation against Danske Bank, which is taking place in the City Court of Copenhagen. The Court granted this ex parte application without prejudice to the ability of the U.S.-based Deutsche Bank entities to move to quash the subpoenas on the basis of such grounds as relevance and proportionality.
As we will discuss, this discovery action raises interesting questions about the ability of private parties to obtain very sensitive anti-money laundering (“AML”) materials from financial institutions for the purposes of advancing civil litigation (either against the subpoena recipient itself or another financial institution). Likewise, this action highlights the bind which financial institutions and other businesses can face when private litigations attempt to obtain their prior, substantial responses to regulator and law enforcement document demands.
As we previously blogged, in 2022 Danske Bank admitted to an enormous, years-long AML scandal where billions of suspicious transactions allegedly were processed at the bank’s former Estonian branch. In January 2023, Danske Bank was sentenced in the Southern District of New York to three years of probation and forfeiture of $2.059 billion, based on a plea to bank fraud for allegedly defrauding U.S. banks about the extent of Danske Bank’s AML controls. Many investors and shareholder have subsequently brought separate suits for claims of fraud, but Danske Bank has had some initial success in defending against these claims (see here, here and here).
The Applicants in the current matter are investors in securities issued by Danske Bank, and are now trying to obtain evidence that would show Danske Bank’s alleged “knowledge, wrongdoing, and liability” in concealing years of money laundering activities. The Applicants point to a consent order issued in 2020 by the New York State Department of Financial Services (“NYDFS”) that alleged that certain Deutsche Bank entities had knowledge and concerns about money laundering at Danske Bank Estonia—as it identified 340 suspicious transaction between 2007 and 2015—but failed to act on those concerns. Interestingly, that consent order stemmed from the NYDFS investigating three different customers of Deutsche Bank: Jeffrey Epstein, the Federal Bank of the Middle East, and Danske Estonia. The full details of the connection between Deutsche Bank and Danske Bank have not yet been revealed, because NYDFS denied the Applicants’ freedom of information request and the New York appellate court upheld NYDFS’s decision.
The subpoenas at issue here seek to compel production of all documents related to NYDFS’s investigation of Deutsche Bank’s involvement with Danske Bank Estonia. The Applicants proceeded via 28 U.S.C. § 1782, which allows federal district courts to order that a person provide testimony or documents for use in a proceeding in a foreign or international tribunal.
The Court applied precedent from the Supreme Court to apply three statutory factors and four discretionary factors used to determine whether a subpoena can be granted for use in a proceeding in a foreign or international tribunal. While most of the factors were clearly met, the Court had misgivings about the final discretionary factor – which asks whether the request for discovery is too “intrusive or burdensome.” Specifically, the Court found that requesting all documentation relating to the investigation of Deutsche Bank’s involvement with Danske Bank Estonia would be overly broad.
Observing that “Applicants are likely mainly interested in the subset of documents that Deutsch Bank produced to [NY]DFS[,]” the Court stated that even this more narrow focus raised concerns. Allegedly, Deutsche Bank had produced approximately 90,000 pages of confidential materials to NYDFS in response to investigative demands. Importantly, when rejecting the Applicant’s prior freedom of information request, the NYDFS itself pointed out that this production “included sensitive and proprietary trade secret information concerning Deutsche Bank’s AML programs and its internal assessment of the flaws or failures in those programs, the disclosure of which could harm the bank as well as the public interest.” Not only are such internal Deutsche Bank documents unlikely to shed light on Danske Bank’s own knowledge of AML failures at its Estonia branch, but the Court also pointed out the following:
Nor is it immediately apparent how proof of Deutsche Bank’s knowledge of AML issues at Danske Estonia, or its communications about those issues with Danske Estonia, would help Applicants prove knowledge on the part of Danske Bank executives in Denmark. Applicants do not seek any communications between Deutsche Bank and Danske Bank itself (apparently because there is no reason to believe there were any), and instead argue that “[w]hat was known or knowable (indeed obvious) to Deutsche Bank and communicated by it to [Danske Estonia] was a fortiori within Danske’s own actual or constructive knowledge.” . . . . That strikes the Court as a potential but debatable ground for discovery here.
Nonetheless, the Court authorized the issuance of the subpoenas. However, the Court required the parties to meet and confer before raising any further discovery issues, with the express intent that “Applicants might choose to voluntarily limit the scope of their discovery requests” and that the parties will be able to cooperate and reach agreement on discovery. Thus, while the Court allowed the Applicants to proceed initially, the Deutsche Bank entities are not necessarily obligated to produce the documents at issue, and the Applicants may need to seek alternative routes to getting recourse from Danske Bank.
The authorization of the subpoenas, although only an initial step, raises potential concerns. Banks of course are motivated to provide fulsome responses to requests for documents by regulators or law enforcement – which is exactly what occurred here. However, in civil litigation involving private parties, discovery of AML compliance program materials is often hotly contested – and frequently denied or significantly limited due to confidentiality protections flowing from the Bank Secrecy Act, as well as by traditional discovery principles pertaining to relevance and burden (as noted by the Court here). Further, the federal bank examiner privilege – a privilege held by the bank regulator – apparently will not apply in this matter. Finally, there is always the specter that discovery obtained through a third-party subpoena will be used to fuel future litigation directly against the third party, in the absence of a strong protective order. For these reasons, it will be interesting to see if there is future litigation here regarding the scope of discovery sought.