31 January 2017
Reporter: Stephanie Palmer

UK and US regulators round on Deutsche Bank

Deutsche Bank is set to pay a total of around $628.1 million to the UK’s Financial Conduct Authority (FCA) and the New York State Department of Financial Services (DFS) to settle charges around failings in its anti-money laundering (AML) framework.

The bank will pay the UK regulator a penalty of £163.1 million ($203.1 million), the largest ever imposed by the FCA, or its predecessor the Financial Services Authority, for failings in AML controls.

The New York DFS will receive $425 million (£339.1 million) to settle the investigation into violation of New York AML laws, and Deutsche Bank has also agreed to a consent order

The charges relate to ‘mirror trades’ executed between April 2012 and October 2014, which involved orders being placed for both sides of a trade, which were then executed by Deutsche Bank’s Russia-based subsidiary DB Moscow at exactly the same time.

Customers on both sides of the trade were already connected, and the volume and value of the securities were the same. This allowed Russian roubles to be converted into US dollars and transferred out of Russia in a manner that the FCA said is “very suggestive of financial crime”.

In total, almost $10 billion of unknown origin was transferred from Russia to overseas accounts in Cyprus, Estonia and Latvia.

According to the FCA, Deutsche Bank did not properly oversee the formation of new customer relationships for global business in the UK, thereby exposing the UK financial system to the risk of financial crime

The mirror trades were routinely cleared through the Deutsche Bank Trust Company of the Americas unit in New York. The DFS investigation found that “None of the trades demonstrated any legitimate economic rationale”.

It added that Deutsche Bank “missed numerous opportunities to detect, investigate and stop the scheme due to extensive compliance failures”.

The FCA investigation noted, specifically, that Deutsche Bank performed inadequate customer due diligence, and did not ensure that its front office took responsibility for the corporate banking and securities division’s know-your-customer (KYC) obligations.

Deutsche Bank used flawed customer and country risk rating methods, deficient AML procedures and an inadequate AML IT infrastructure, the FCA found. The bank also lacked automation in its AML system for detecting suspicious trades, and failed to adequately oversee trades booked in the UK by traders in other jurisdictions.

This means the bank did not have enough information on its customers to inform the risk assessment process, or to provide a basis for transaction monitoring, the FCA said.

Similarly, the DFS investigation found that Deutsche Bank conducted business in an “unsafe and unsound” manner, failing to maintain an effective and compliant AML programme or a true record of transactions.

The DFS added that the bank’s KYC processes were weak. The bank failed to accurately rate its country and client risks for money laundering and lacked global benchmarking in its risk appetite, which resulted in “material inconsistencies and no methodology for updating the ratings”.

The statement on the DFS investigation said: “Deutsche Bank was not in line with peer banks, which rated Russia as high risk well before Deutsche Bank did in late 2014.”

Finally, the DFS noted that anti-financial crime, AML and compliance units were ineffective and understaffed, and that a senior compliance employee had failed to respond to a query regarding contradictory information on one of the companies involved in the scheme.

The statement added: “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.”

Deutsche Bank agreed to settle at early stages of both investigations. In the UK, this meant it qualified for a 30 percent discount on the penalty.

The discount does not apply to $9.1 million in commission generated from the suspicious trading, which was disgorged as part of the overall penalty. Including this, and without the 30 percent discount, the total penalty paid to the FCA would have been £229.1 million.

The FCA noted that Deutsche Bank was “exceptionally cooperative” throughout the investigation, and that it has “committed significant resources to a large-scale remediation programme” to correct the shortcomings in its AML control framework.

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.”

As part of its settlement with the DFS, Deutsche Bank has entered into a consent order to engage an independent monitor, approved by DFS, for up to two years. According to the DFS, the penalty also acknowledges the bank’s cooperation and remediation efforts.

Financial Services Superintendent Maria Vullo said: “In today’s interconnected financial network, global financial institutions must be ever vigilant in the war against money laundering and other activities that can contribute to cybercrime and international terrorism.”

She added: “This Russian mirror-trading scheme occurred while the bank was on clear notice of serious and widespread compliance issues dating back a decade. 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.”

According to Deutsche Bank, the settlement amounts are already reflected in litigation reserves. The bank is also cooperating with other regulators and law enforcement authorities that have ongoing investigations relating to the same matter.

Karl von Rohr, chief administrative officer of Deutsche Bank, said in a memo to employees: “While we are pleased to have resolved these matters, the FCA and the DFS were critical of our client onboarding and KYC procedures, AML monitoring and organisational clarity among the businesses and control functions involved in these securities trades. We deeply regret the bank’s role in the issues cited.”

He continued: “We have some way to go until we can put our major legacy legal matters behind us, but we continue to pursue their resolution step-by-step.”

Deutsche Bank’s onshore investment banking business in Russia closed in 2016.

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