Deutsche Bank Fined Over $10 Billion Russian “Mirror Trading” Money-Laundering Scheme

Summary

Deutsche Bank was fined by U.S. and UK regulators in 2017 after serious anti-money-laundering failures allowed approximately $10 billion to be transferred out of Russia through a complex system of securities transactions known as “mirror trades.” The scheme operated through Deutsche Bank's offices in Moscow, London and New York. Customers would purchase Russian blue-chip shares in Moscow using Russian rubles while a related counterparty would simultaneously sell the same quantity of the same securities through Deutsche Bank in London for foreign currency. The transactions had little apparent economic purpose beyond converting rubles into foreign currency and moving money from Russia into overseas bank accounts. New York Department of Financial Services – Deutsche Bank $425 million Russian mirror-trading enforcement action: https://www.dfs.ny.gov/reports_and_publications/press_releases/pr1701301 New York's Department of Financial Services found that approximately $10 billion was improperly transferred out of Russia through the broader trading activity. The regulator said Deutsche Bank missed numerous opportunities to detect, investigate and stop the scheme because of extensive failures in its anti-money-laundering compliance systems. According to the UK's Financial Conduct Authority, Deutsche Bank Moscow executed more than 2,400 pairs of mirror trades between April 2012 and October 2014. These transactions transferred more than $6 billion from Russia, through Deutsche Bank's UK operations, into overseas bank accounts, including accounts in Cyprus, Estonia and Latvia. The FCA identified another 3,400 one-sided trades, overwhelmingly sales, totaling approximately $3.8 billion. Regulators concluded that most or all of these were likely associated with mirror trading, bringing the total amount transferred out of Russia through the relevant activity to approximately $10 billion. UK Financial Conduct Authority – Deutsche Bank £163 million AML penalty: https://www.fca.org.uk/news/press-releases/fca-fines-deutsche-bank-163-million-anti-money-laundering-controls-failure The FCA found serious weaknesses throughout Deutsche Bank's anti-money-laundering framework. These included flawed customer and country risk-rating methodologies, deficient AML policies and procedures, inadequate AML technology, lack of automated systems capable of detecting suspicious trades and inadequate oversight of transactions conducted across different jurisdictions. Deutsche Bank also failed to obtain sufficient information about some customers to properly understand the purpose of their banking relationships or establish the source of their wealth and funds. The FCA concluded that these failures exposed the UK financial system to the risk of financial crime. The New York regulator separately concluded that Deutsche Bank had failed to maintain an effective anti-money-laundering compliance programme and had missed numerous opportunities to identify and stop the suspicious trading activity. New York DFS imposed a $425 million civil penalty and required Deutsche Bank to appoint an independent monitor to review its compliance programmes, policies and procedures. One day later, the UK's FCA imposed an additional £163,076,224 penalty. At the time, this was the largest AML-related financial penalty ever imposed by the FCA or its predecessor. Together, the U.S. and UK settlements amounted to approximately $630 million in penalties. Deutsche Bank – Company announcement regarding the settlements: https://www.db.com/news/detail/20170131-deutsche-bank-reaches-settlements-over-russian-securities-trades Company response: Deutsche Bank accepted the settlements and acknowledged that regulators had identified deficiencies in its historical anti-money-laundering controls. The bank said it had committed significant resources to improving those controls and cooperated with the investigations. The FCA specifically acknowledged Deutsche Bank's cooperation and said the bank had undertaken substantial remediation. Deutsche Bank also received a 30% reduction in the FCA penalty because it agreed to settle at an early stage of the investigation. Key facts: Approximately $10 billion was transferred out of Russia through the relevant trading activity; more than 2,400 pairs of mirror trades were executed between April 2012 and October 2014; more than $6 billion was moved through those paired transactions; regulators identified another approximately $3.8 billion of one-sided trades believed largely to represent additional mirror trading; transactions involved Deutsche Bank operations in Moscow, London and New York; regulators found serious deficiencies in customer due diligence, transaction monitoring, AML technology and management oversight; New York DFS imposed a $425 million penalty; the UK FCA imposed a £163 million penalty; and Deutsche Bank was required to strengthen its compliance programme and submit to independent monitoring. The case is particularly serious because this was not an isolated suspicious transaction that escaped detection. Regulators found systemic weaknesses across Deutsche Bank's anti-money-laundering controls that allowed thousands of transactions and billions of dollars to pass through the bank over several years. The FCA said the activity was conducted in a manner “highly suggestive of financial crime,” while New York regulators concluded that Deutsche Bank missed numerous opportunities to detect, investigate and stop it.