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From Securities Regulation Daily, January 31, 2017

Deutsche Bank to pay $425M for Russian mirror-trading scheme

By Charles A. Menke, J.D.

Deutsche Bank AG and its New York branch will pay $425 million to settle charges brought by the New York State Department of Financial Services (DFS) that the bank violated New York anti-money laundering (AML) laws by engaging in suspicious security trading schemes among the bank’s Moscow, London, and New York offices. The trading schemes, which the DFS termed as "mirror trades," allowed a group of traders and entities to launder over $10 billion out of Russia through Deutsche Bank’s subsidiary, Deutsche Bank Trust Company of the Americas (DBTCA). Under a consent order entered into with the DFS, Deutsche Bank also agreed to engage the services of an independent monitor to conduct a comprehensive review of the bank’s existing BSA/AML compliance programs, policies, and procedures pertaining to or affecting activities conducted by or through DBTCA and the New York branch.

DFS Superintendent Maria T. Vullo said that the "mirror-trading scheme occurred while the bank was on clear notice of serious and widespread compliance issues dating back a decade." She added that the trading "lacked economic purpose and could have been used to facilitate money laundering or enable other illicit conduct" and stressed that this type of conduct will not be tolerated by the DFS.

DFS findings. A DFS investigation found that clients of Deutsche Bank’s Moscow branch office issued orders to purchase Russian blue chip stocks. These clients paid in rubles. Thereafter, 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 trades were routinely cleared through DBTCA. The selling counterparty was typically registered in an offshore territory and would be paid for its shares in U.S. dollars. At least 12 entities were involved, and none of the trades demonstrated any legitimate economic rationale, according to the DFS.

The DFS further found that Deutsche Bank "missed numerous opportunities to detect, investigate and stop the scheme due to extensive compliance failures, allowing the scheme to continue for years." Based on its investigation, the DFS determined, among other things, that:

  • Deutsche Bank conducted its banking business in an unsafe and unsound manner by failing to maintain an effective and compliant anti-money laundering program, including failing to maintain and make available true and accurate books, accounts, and records reflecting all transactions and actions;
  • a DBTCA senior compliance employee who supervised special investigations was unresponsive to inquiries regarding the trading scheme and failed to take any steps to investigate the basis for the inquiries;
  • Deutsche Bank’s "Know Your Customer" processes were weak;
  • Deutsche Bank failed to accurately rate its country and client risks for money laundering and lacked a global policy benchmarking its risk appetite, resulting in material inconsistencies and no methodology for updating ratings; and
  • Deutsche Bank’s anti-financial crime, AML, and compliance units were ineffective and understaffed.

Consent order. In addition to the $425 million civil monetary penalty, the consent order addresses a number of Deutsche Bank compliance deficiencies identified by the DFS in its investigation. The independent monitor required by the consent order must be approved by the DFS and is charged with reviewing and reporting on the following:

  • elements of the Deutsche Bank’s corporate governance that contributed to or facilitated the conduct described in the consent order and that permitted it to go on;
  • relevant changes or reforms to Deutsche Bank’s corporate governance that have been made since the time of the 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.

Deutsche Bank must additionally submit a written action plan to improve and enhance its current global BSA/AML compliance programs that pertain to or affect activities conducted by or through DBTCA and the New York Branch.

Companies: Deutsche Bank AG; Deutsche Bank AG New York Branch; Deutsche Bank Trust Company of the Americas

MainStory: TopStory Enforcement Derivatives NewYorkNews

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