Ukrainian Law Blog: Deutsche Bank fined $630m over Russia money laundering claims

Authorities in US and UK issue fine after saying bank used offices in Moscow and London to move $10bn out of country

Deutsche Bank has been fined after New York and UK authorities found pervasive weakness in its money laundering safeguards. Photograph: Kai Pfaffenbach/Reuters

Deutsche Bank has been fined more than $630m (£506m) for failing to prevent $10bn of Russian money laundering and exposing the UK financial system to the risk of financial crime.

The UK’s Financial Conduct Authority imposed its largest ever fine – £163m – for potential money laundering offences on Germany’s biggest bank, which it said had missed several opportunities to clamp down on the activities of its Russian operations as a result of weak systems to detect financial crime between 2012 and 2015.

A US regulator, the New York Department of Financial Services (DFS), also fined the bank $425m as it listed problems at Deutsche including one senior compliance officer stating he had to “beg, borrow, and steal” to get the resources to combat money laundering. As part of the settlement, the DFS has imposed a monitor, who will police the behaviour inside the bank for two years.

The latest run-in with regulators comes as Deutsche’s chief executive, John Cryan, tries to clean up the bank. Last month it paid $7.2bn to settle a decade-old toxic bond mis-selling scandal with the US Department of Justice .

The German bank admitted that the investigations into its Russian operations over so-called “mirror trades” had not yet finished. It said it was “cooperating with other regulators and law enforcement authorities”. The DoJ is reported to be among them.

Deutsche’s share price has been extremely volatile in recent months over concerns about the bank’s ability to pay fines, at one point dipping to less than €11 last autumn . Its share price before the financial crash was €117.

As the latest penalties were announced, the shares fell by 0.5% to €18.52 – valuing the bank at €25bn, which is less than half that of the UK’s Lloyds BankingGroup, for example.

In a memo to staff Karl von Rohr, chief administrative officer of Deutsche,said: “We deeply regret the bank’s role in the issues cited.” He added that the number of staff employed to fight crime had risen 30% in 2016 and now stood at 700. Another 450 will be hired this year.

The FCA said Deutsche’s anti-money laundering (AML) controls were not tough enough to stop the bank being used by unidentified customers to transfer approximately $10bn from Russia to offshore bank accounts “in a manner that is highly suggestive of financial crime”. Money was moved via Deutsche Bank in the UK, to obank accounts overseas, including onesin Cyprus, Estonia, and Latvia, the FCA said.

Mark Steward, director of enforcement and market oversight at the regulator, 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.”

The penalties relate to the bank failing to obtain information about its customers involved in mirror trades – ones which “mirror” each other and have no economic purpose – which allowed Deutsche Bank’s Russia-based subsidiary (DB Moscow) to execute more than 2,400 pairs of trades between April 2012 and October 2014.

Shares in major Russian companies were paid for in roubles through the Moscow office and then the same stock would be sold through London, sometimes on the same day, for a related customer, the New York regulator said. The sellers were registered in offshore locations and received payment for the shares in dollars. A dozen entities were identified.

The FCA said the purpose of $6bn 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 regulators found almost $3bn in 3,400 suspicious“one-sided trades” also occurred. The FCA believes that some, if not all, of these formed one side of mirror trades. They were often conducted by the same customers involved in the mirror trading.

“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,” said New York’s financial services superintendent, Maria Vullo.

The FCA described Deutsche Bank as being exceptionally cooperative and having committed to solve the problems in its AML systems. The bank received a 30% discount for its cooperation. This is a contrast to 2015 when the bank was fined for rigging Libor and accused of being obstructive towards regulators in their investigations into the global manipulation of the benchmark rate.

Last year, Deutsche said, it had “taken disciplinary measures with regards to certain individuals in this matter and will continue to do so with respect to others as warranted”.