Failures in AML & risk-based approach cost Deutsche over half a billion


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‘Mirror trade’ scheme helps Russians launder billions in New York, London, & Moscow

Deutsche Bank made headlines again in Compliance news—to the tune of more than half a billion dollars in fines paid to New York state regulators and Britain’s Financial Conduct Authority. The fines—totalling $629M—settle stinging charges that Deutsche Bank helped Russian investors launder upwards of $10 billion through Deutsche Bank branches in New York, London, and Moscow.

The New York Times reported on Jan. 30 that a New York state Department of Financial Services (DFS) investigation determined that “between 2011 and 2015, a group of Deutsche Bank executives based mainly in Moscow and London helped wealthy Russians send money overseas by arranging stock trades that had no economic purpose other than disguising what the client was doing.”

DFS superintendent Maria T. Vullo described the operation as a money-laundering scheme using “mirror trades.”

“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,” Vullo said in a DFS press release.

According to the release, Deutsche Bank and various senior managers missed key opportunities to detect, intercept and investigate the mirror scheme.

The release provided the following details of the operation: “Operating through the equities desk at Deutsche Bank’s Moscow branch, certain companies that were clients of the Moscow equities desk issued orders to purchase Russian blue chip stocks, always paying in rubles. Shortly thereafter, sometimes on the same day, 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 counterparties involved were always closely related, often linked by common beneficial owners, management or agents. The trades were routinely cleared through the bank’s Deutsche Bank Trust Company of the Americas (DBTCA) unit. 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.”

DFS details violations of Risk-based Approach to AML/CFT

In addition to the fines paid to New York State and Britain’s FCA, Deutsche Bank is under a consent order that includes an independent monitor. The DFS release provided further details and rationale in the context of its commitment to risk-based anti-terrorism and anti-money laundering (AML) enforcement, which was further cemented in new regulations that took effect at the start of this year. In fact, the DFS’s bulleted points read like the syllabus of an introductory course on the Risk-based Approach to AML/CFT:

  • “The bank has conducted its banking business in an unsafe and unsound manner, failing to maintain an effective and compliant anti-money laundering program. The bank failed to maintain and make available true and accurate books, accounts and records reflecting all transactions and actions.
  • When contacted by a European financial institution about contradictory information about one of the companies involved in the trading scheme, a senior compliance employee who supervised special investigations at the DBTCA never responded. In addition, the senior compliance employee did not take any steps to investigate the basis for the European Bank’s inquiry, later explaining that the employee had “too many jobs” and “had to deal with many things and had to prioritize.”
  • The bank’s Know Your Customer (KYC) processes were weak, functioning merely as a checklist with employees mechanically focused on ensuring documentation was collected, rather than shining a critical light on information provided by potential customers. Virtually all of the KYC files for the companies involved in the scheme were insufficient, and a Moscow employee who oversaw the illicit mirror trading was also actively involved in the onboarding and KYC documentation of companies involved in the scheme. In addition, certain staff members experienced hostility and threats on several occasions when it appeared they had not moved quickly enough to facilitate transactions.
  • The bank failed to accurately rate its country and client risks for money laundering throughout the relevant time period and lacked a global policy benchmarking its risk appetite, resulting in material inconsistencies and no methodology for updating the ratings. Deutsche Bank was not in line with peer banks, which rated Russia as high risk well before Deutsche Bank did in late 2014.
  • The bank’s anti-financial crime, AML and compliance units were ineffective and understaffed. A senior compliance staffer repeatedly stated that he had to “beg, borrow, and steal” to receive appropriate resources, leaving existing personnel scrambling to perform multiple roles. 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.”

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