Deutsche Bank has agreed to pay $630m to settle US and UK investigations into alleged mirror trades used to launder $10bn out of Russia, taking a step towards resolving one of its biggest legal headaches.
New York’s Department of Financial Services, a state banking regulator, said late on Monday that Germany’s biggest bank would pay it $425m, while the UK’s Financial Conduct Authority said on Tuesday morning it had fined Deutsche £163m — or about $204m — the largest financial penalty it or its predecessor agency has handed out for anti-money-laundering controls failings.
Deutsche said the penalties were “materially reflected” in its litigation reserves. However, the bank still faces a criminal investigation into the affair from the US Department of Justice, and Karl von Rohr, Deutsche’s chief administrative officer, wrote in a note to staff that the bank “cannot say yet that this matter is closed”.
John Cryan, who has been chief executive of Germany’s biggest bank since summer 2015, has made dealing with the big legal issues facing Deutsche one of his priorities as he battles to restore investor faith in the lender whose performance in recent years has been blighted by a series of penalties.
Earlier this month, Deutsche finalised a $7.2bn deal with the DoJ to settle allegations that it mis-sold mortgage-backed securities before the financial crisis, which left the Russia investigation as one of the most prominent uncertainties for investors.
Although the FCA granted Deutsche a 30 per cent discount on what would have been a £229m fine for agreeing to settle in the early stages of the investigation, and both regulators acknowledged that Deutsche had co-operated with their probes, they were also highly critical of the bank’s controls.
“The size of the fine reflects the seriousness of Deutsche Bank’s failings. We have repeatedly told firms how to comply with our anti-money-laundering requirements and the failings of Deutsche Bank are simply unacceptable,” said Mark Steward, the FCA’s director of enforcement and market oversight. “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.”
The Russia settlements relate to an alleged trading scheme that operated from 2011 until early 2015. The DFS alleged that the German bank had “missed numerous opportunities to detect, investigate and stop the 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.
At the heart of the matter were trades that 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.
Regulators allege that the trades had no economic purpose, and could be used to launder money. Several of the sellers, which were based offshore in Cyprus or the British Virgin Islands, were paid in US dollars that were routed through Deutsche’s New York office.
“Typically, it made no difference to the counterparties the particular security to be bought or sold. All that mattered was that there was a matching trade available,” the DFS alleged in its consent order.
“In one instance, a counterparty representative, who was buying shares for one counterparty and selling the identical shares for a related counterparty, told a DB Moscow trader, “I have a billion rouble today . . . Will you be able to find a security for this size?”
According to the DFS, Deutsche officials saw the first of several red flags in 2011 when a trade with one of the counterparties to the alleged scheme failed to settle because that counterparty’s licence to operate had been suspended by Russian regulators.
Other red flags followed, the DFS claimed. On one occasion, a senior anti-financial-crime employee at Deutsche was contacted by a European bank concerned about a counterparty. “The senior compliance employee never responded to the European bank. Nor did the employee take any steps to investigate the basis for the European bank’s inquiry, later explaining this omission on the ground that the employee had ‘too many jobs’ and ‘had to deal with many things and had to prioritise’,” the DFS alleged.
Mr von Rohr told staff in his note that the bank “deeply” regretted its role in the affair, and added that Deutsche had taken a series of steps to improve its controls, hiring more anti-financial crime staff and closing its onshore investment banking business in Russia in 2016.
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