The DFS in New York and the FCA in London tracked down a complex money-laundering scheme that went undetected for four years.
Deutsche Bank will be paying $631.5 million in fines to U.S. and U.K. authorities for violations of anti-money laundering (AML) that were part of a “mirror trading” scheme that involved the German institution’s Moscow, London and New York branches, and resulted in the laundering $10 billion out of Russia.
The transactions in question occurred between 2011 and 2015.
The fine is a far cry from widely reported $7.2 billion settlement the bank reached with U.S. officials at the end of last year. In that case, Deutsche Bank and the U.S. Justice Department resolved civil claims related to the German bank’s issuance and underwriting of residential mortgage-backed securities (RMBS) and related securitization activities between 2005 and 2007.
For the Russian AML scheme, the trail in the U.S. involved Deutsche Bank A.G. and its New York branch, which will be required to pay a $425 million fine and to hire an independent monitor, according to a consent order from the New York State Department of Financial Services (DFS). The action was announced via the office of Maria T. Vullo, superintendent of financial services.
The DFS investigation “found that the bank missed numerous opportunities to detect, investigate and stop the scheme due to extensive compliance failures, allowing the scheme to continue for years,” according to the DFS, which worked on the investigation along with the U.K. regulator, the Financial Conduct Authority (FCA).
“This Russian mirror-trading scheme occurred while the bank was on clear notice of serious and widespread compliance issues dating back a decade,” Vullo says in a prepared statement. “The offsetting trades here lacked economic purpose and could have been used to facilitate money laundering or enable other illicit conduct, and today’s action sends a clear message that DFS will not tolerate such conduct.”
That conduct began with the equities desk at Deutsche Bank’s Moscow branch, where “certain companies that were clients of the Moscow equities desk issued orders to purchase Russian blue chip stocks, always paying in rubles,” according to the DFS. “Shortly thereafter, sometimes on the same day, a related counterparty would sell the identical Russian blue chip stock in the same quantity and at the same price through Deutsche Bank’s London branch. The counterparties involved were always closely related, often linked by common beneficial owners, management or agents.”
The trades were cleared through the Deutsche Bank Trust Company of the Americas (DBTCA) business unit, and the selling counterparty was “typically registered in an offshore territory and would be paid for its shares in U.S. dollars,” according to the DFS. “At least 12 entities were involved, and none of the trades demonstrated any legitimate economic rationale.”
The DFS investigation also uncovered that:
- Deutsche Bank conducted banking business “in an unsafe and unsound manner, failing to maintain an effective and compliant anti-money laundering program. The bank failed to maintain and make available true and accurate books, accounts and records reflecting all transactions and actions;”
- A senior compliance employee overseeing special investigations at the DBTCA never responded to inquiries from a European financial institution about “contradictory information about one of the companies involved in the trading scheme. In addition, the senior compliance employee did not take any steps to investigate the basis for the European Bank’s inquiry, later explaining that the employee had ‘too many jobs’ and ‘had to deal with many things and had to prioritize;’ ”
- Weak, insufficient Know Your Customer (KYC) processes at the bank essentially they functioned merely as a mechanical check list for employees who were more interested in collecting documentation “rather than shining a critical light on information provided by potential customers;”
- A Moscow employee overseeing the illicit mirror trading “was also actively involved in the onboarding and KYC documentation of companies involved in the scheme. In addition, certain staff members experienced hostility and threats on several occasions when it appeared they had not moved quickly enough to facilitate transactions.”
- And the bank “failed to accurately rate its country and client risks for money laundering throughout the relevant time period and lacked a global policy benchmarking its risk appetite, resulting in material inconsistencies and no methodology for updating the ratings.” For instance, peer banks had rated Russia as “high risk well before Deutsche Bank did in late 2014.”
Overall, DFS officials found the bank’s anti-financial crime, AML and compliance units “were ineffective and understaffed,” and staff members often had to take on multiple roles. “At one point, an attorney who lacked any compliance background served as the Moscow branch’s head of compliance, head of legal, and as its AML Officer — all at the same time,” according to the DFS.
Within two months of the start of the consent order, Deutsche Bank officials must have an independent monitor in place that has the approval of the DFS, officials say. The monitor will conduct “a comprehensive review of the bank’s existing BSA/AML compliance programs, policies and procedures that pertain to or affect activities conducted by or through its DBTCA subsidiary and the New York branch.”
In addition, the monitor, the bank, DBTCA and the New York branch have to submit an engagement letter to the DFS that reports upon:
- “The elements of the bank’s corporate governance that contributed to or facilitated the improper conduct and permitted it to go on;
- Relevant changes or reforms to corporate governance that the bank has made since the time of the improper conduct and whether those changes or reforms are likely to significantly enhance the bank’s BSA/AML compliance going forward;
- And the thoroughness and comprehensiveness of the bank’s current global BSA/AML compliance programs.”
The bank will also have to submit an action plan to improve its global BSA/AML compliance programs that affect activities conducted by or through DBTCA and the New York Branch, officials say.
Aside from the DFS consent order, the bank has been fined by the FCA £163 million ($206.5 million) for “serious anti-money laundering controls failings,” according to the U.K. regulator. The fine covers the period between Jan. 1, 2012 and Dec. 31, 2015. “This is the largest financial penalty for AML controls failings ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA),” according to FCA officials.
“As a consequence of its inadequate AML control framework, Deutsche Bank was used by unidentified customers to transfer approximately $10 billion, of unknown origin, from Russia to offshore bank accounts in a manner that is highly suggestive of financial crime,” according to the FCA.
Overall, many of the “significant deficiencies throughout Deutsche Bank’s AML control framework” that the FCA uncovered were similar to what the DFS found. This time, though, the FCA focused on Deutsche Bank’s Corporate Banking and Securities division (CB&S) in the U.K.
In particular, the FCA says the bank:
- Failed to ensure that its front office took responsibility for the CB&S division’s Know Your Customer obligations;
- Had an inadequate AML IT infrastructure; and 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.
These failings meant Deutsche Bank had sufficient information about its customers for the risk assessment process and for transaction monitoring, FCA officials say. “The failings allowed the front office of Deutsche Bank’s Russia-based subsidiary (DB Moscow) to execute more than 2,400 pairs of trades that mirrored each other (mirror trades) between April 2012 and October 2014,” officials add. “The mirror trades were used by customers of Deutsche Bank and DB Moscow to transfer more than $6 billion 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 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 FCA says. “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 is highly suggestive of financial crime.”
The FCA argues that “$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.”
Thus Deutsche Bank has settled “at an early stage of the FCA’s investigation and therefore qualified for a 30 percent (stage 1) discount,” FCA officials say. “This discount does not apply to the £9.1 million in commission that Deutsche Bank generated from the suspicious trading, which has been disgorged as part of the overall penalty meaning that the firm has received no financial benefit from the breach. Were it not for the 30 percent discount the financial penalty would have been £229,076,224 [$290 million].”
The FCA and DFS acknowledge that Deutsche Bank officials have been “exceptionally cooperative” during this investigation and that they have started a large-scale remediation program to undo its AML deficiencies.
In response, a Deutsche Bank press release acknowledges the actions of the regulators. “The settlement amounts are already materially reflected in existing litigation reserves,” according to the statement, which hints at more to come. “As previously disclosed, Deutsche Bank is cooperating with other regulators and law enforcement authorities, which have their own ongoing investigations into these securities trades.”
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