Deutsche fined US$630m in Russian money laundering probe

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Deutsche fined US$630m in Russian money laundering probe

Deutsche Bank has been fined a record £163,076,224 (about US$204m) by the UK regulator and has agreed to settle with New York’s Department of Financial Services (about US$630 in total), for failing to maintain an adequate anti-money laundering controls linked to a series of Russian ‘mirror’ trades.

The Financial Conduct Authority (FCA), announced in a statement today that it has today fined Deutsche Bank AG (Deutsche Bank) £163,076,224 (about US$204m) for the anti-money laundering (AML) control framework failings during the period between 1 January 2012 and 31 December 2015.  This is the largest financial penalty for AML controls failings ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA).

New York’s Department of Financial Services (DFS), a state banking regulator, also announced via a statement that Germany’s biggest bank would pay US$425m, bringing the total up to US$630m.

The DFS issued its fine through a Consent Order on Monday evening, with the UK regulator issuing the fine through a Final Notice. This also revealed that the penalty would have been 30% higher (£229,076,224), but Deutsche Bank agreed to settle at an early stage of the FCA’s investigation and therefore qualified for a 30% (stage 1) discount.

In its statement, The UK regulator said that Deutsche Bank “exposed the UK financial system to the risks of financial crime”, by failing to properly oversee the formation of new customer relationships and the booking of global business in the UK. As a consequence of its inadequate AML control framework, Deutsche Bank was used by unidentified customers to transfer approximately US$10bn, of unknown origin, from Russia to offshore bank accounts in a manner that, the regulatory said is “highly suggestive” of financial crime.

‘Simply unnacceptable’

Mark Steward, director of enforcement and market oversight at the FCA, said: “Financial crime is a risk to the UK financial system. Deutsche Bank was obliged to establish and maintain an effective AML control framework.  By failing to do so, Deutsche Bank put itself at risk of being used to facilitate financial crime and exposed the UK to the risk of financial crime.

“The size of the fine reflects the seriousness of Deutsche Bank’s failings. We have repeatedly told firms how to comply with our AML requirements and the failings of Deutsche Bank are simply unacceptable. Other firms should take notice of today’s fine and look again at their own AML procedures to ensure they do not face similar action,” Steward warned.

The alleged ‘mirror’ trades involved Russian clients buying securities in roubles through Deutsche’s Moscow office and then selling identical ones for foreign currency, including US dollars, through the bank’s London office. The trades had no economic purpose, both UK and US regulators allege, and could be used to launder money. A number of the sellers, which were based offshore in Cyprus or the British Virgin Islands, were paid in US dollars that were then re-routed through Deutsche’s New York office.

Deutsche also still faces a US Department of Justice criminal investigation into  trading. Last month, as reported, Deutsche finalised a US$7.2bn deal with the DoJ to settle allegations that it mis-sold mortgage-backed securities before the financial crisis. The German banking giant has said the settlements were already reflected in its litigation reserves and that it was co-operating with other investigations, as it looks to minimise the affect of the fines on its share price and reputation. 

‘Missed numerous opportunities’

The DFS alleged in its statement that Deutsche had “missed numerous opportunities to detect, investigate and stop the The alleged Russian mirror trading scheme scheme due to “extensive compliance failures”. As part of the settlement announced by Maria Vullo, the DFS superintendent, Deutsche has agreed to an independent monitor to review its anti-money-laundering programme.

The FCA found significant deficiencies throughout Deutsche Bank’s AML control framework.  The FCA specifically found that, during the relevant period, Deutsche Bank’s Corporate Banking and Securities division (CB&S) in the UK:

  • performed inadequate customer due diligence;
  • failed to ensure that its front office took responsibility for the CB&S division’s Know Your Customer obligations;
  • used flawed customer and country risk rating methodologies;
  • had deficient AML policies and procedures;
  • had an inadequate AML IT infrastructure;
  • lacked automated AML systems for detecting suspicious trades; and
  • failed to provide adequate oversight of trades booked in the UK by traders in non-UK jurisdictions.

Russia-based subsidiary

As a result of these failings Deutsche Bank the front office of Deutsche Bank’s Russia-based subsidiary (DB Moscow) was allowed to execute more than 2,400 pairs of trades that mirrored each other (mirror trades) between April 2012 and October 2014.

The mirror trades were used by customers of Deutsche Bank and DB Moscow to transfer more than US$6bn from Russia, through Deutsche Bank in the UK, to overseas bank accounts, including in Cyprus, Estonia, and Latvia. The orders for both sides of the mirror trades were received by DB Moscow, which executed both sides at the same time, the FCA said.

‘Highly suggestive’

The customers on the Moscow and London sides of the mirror trades were connected to each other and the volume and value of the securities was the same on both sides.  The purpose of the mirror trades was the conversion of Roubles into US Dollars and the covert transfer of those funds out of Russia, which, the FCA said is highly suggestive of financial crime.

A further US$3.8 billion in suspicious “one-sided trades” also occurred. The FCA believes that some, if not all, of an additional 3,400 trades formed one side of mirror trades and were often conducted by the same customers involved in the mirror trading.

The FCA emphasises the importance of having a strong AML control framework through its proactive supervisory programmes on AML. Firms are regularly reminded of the importance of safeguarding the UK financial system from financial crime.

It added that Deutsche Bank was “exceptionally cooperative” during this investigation and has committed significant resources to a large scale remediation programme to correct the deficiencies in its AML control framework and customer files.

Author spotlight

Gary Robinson

Commercial Director, Head of Video at International Investment.