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Exclusive: Commerzbank may pay $600 million-$800 million to settle U.S. probe - sources

By Karen Freifeld

NEW YORK (Reuters) - Germany's second-biggest bank Commerzbank AG is expected to pay $600 million to $800 million to resolve investigations into its dealings with Iran and other countries under U.S. sanctions, sources familiar with the matter said.

The penalty, previously reported to be more than $500 million, includes a demand from New York's top banking regulator, Benjamin Lawsky, for more than $300 million from the bank, the sources said.

Other U.S. authorities, including the Department of Justice, the Treasury Department, the Federal Reserve and the Manhattan District Attorney, are also involved in the talks.

The German bank is the latest bank to enter into settlement negotiations with U.S. authorities. French lender BNP Paribas SA struck a record-breaking $8.9 billion deal last week to resolve investigations into violations of sanctions and related misconduct involving Sudan, Iran and Cuba. U.S. authorities are also investigating Italy's UniCredit SpA, France's Credit Agricole SA and Societe Generale, and Germany's Deutsche Bank AG for sanctions violations, sources said. Analysts expect that Commerzbank will have to book charges of up to 300 million euros ($409 mln) as a fine of $800 million would be about twice as much as the lender is estimated to have set aside for Iran.

Commerzbank had 934 million euros billion) at the end of 2013 as provision for litigation risks, including the U.S. investigation.

"An additional cost of 300 million euros would be a lot compared to Commerzbank's expected 2014 earnings," Metzler analyst Guido Hoymann said. "But breaking it down per share, the market may have over reacted."

Commerzbank is expected to post a pre-tax profit of 1 billion euros this year, according to estimates compiled by Thomson Reuters Starmine.

Additional litigation costs of 300 million euros translate to charges of 0.26 euros per share, while Commerzbank's shares have lost 0.77 euros since the start of the week.

Commerzbank shares closed down 2.04 percent on Thursday, underperforming the European banking sector, which was down 1.65 percent.

    Among the violations being investigated are Commerzbank's transactions for the Islamic Republic of Iran Shipping Lines, one of the sources said.

The state-sponsored shipping company was designated for economic sanctions by the United States in 2008 for allegedly supporting Iran's proliferation of weapons of mass destruction. The source said Commerzbank was alleged to have done business with the company despite knowing that it was sanctioned.

A Commerzbank representative declined to comment on the allegations and the size of any settlement.

A settlement could be reached in the next few weeks, one source said.

The Justice Department, Manhattan DA's office and the New York Department of Financial Services declined to comment. The other authorities could not immediately be reached for comment.

German paper Frankfurter Allgemeine Zeitung later reported, citing people familiar with the matter, that Commerzbank had fired staff in Hamburg "some time ago" for having concealed dealings with customers in countries such as Iran and Sudan.

Commerzbank could not immediately be reached for comment on the newspaper report on Thursday evening in Germany.

SIMILARITIES TO STANDARD CHARTERED

    Over the past five years, more than half a dozen foreign banks have settled with authorities over sanctions violations. They forfeited more than $12 billion, according to Manhattan District Attorney Cyrus Vance. 

For example, Standard Chartered Plc, which was accused of hiding 59,000 Iranian transactions worth $250 billion from regulators, paid $667 million to U.S. authorities in 2012.

One source said the number, volume and type of suspicious transactions at Commerzbank are in the same ballpark as those in the Standard Chartered case.

    Like Standard Chartered, many of Commerzbank’s transactions involved Iran, according to one source. Violations involving Iranian entities can lead to lower penalties than sanctions against other countries such as Sudan. That is because until 2008, U.S. law allowed Iranian transactions that originated and ended outside the United States, even if they were cleared through a U.S. bank.

The U.S. inquiry into Commerzbank's activities began in 2010. U.S. authorities have found that the bank stripped identifying information from incoming wires to avoid red flags that would have helped regulators police the transactions.

Commerzbank, which is 17 percent owned by the German government, is expected to enter into a deferred prosecution agreement that would suspend criminal charges in exchange for the financial penalty and other concessions, the sources said.

    Though other penalties against Commerzbank have not yet been determined, one source said they were not expected to be severe and might include installing an independent monitor at the bank. 

($1 = 0.7331 Euros)

(Additional reporting by Aruna Viswanatha and Arno SchuetzeEditing by Ross Colvin Jane Merriman and Jane Baird)

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