By Erica Orden and Jenny Strasburg
Deutsche Bank AG will pay $425 million to settle an investigation by New York's financial-services watchdog into violations of the state's anti-money-laundering laws through a so-called "mirror trading" scheme that transferred $10 billion out of Russia, the Department of Financial Services said Monday.
The bank "missed key opportunities to detect, intercept and investigate" the scheme, according to DFS, in which companies that were clients of its Moscow equities desk issued orders to purchase Russian blue-chip stocks in rubles, while a related party would sell the same stock for the same price in the same amount through the bank's London branch.
A Justice Department investigation into the Russian trades has been ongoing, and it is unclear if or when a settlement might be reached.
Deutsche Bank said the settlement amount is already "materially reflected" in its litigation reserves, and it is cooperating with ongoing investigations into the trades by other regulators.
The average size of each order was between $2 million and $3 million, according to the consent order, and the trades took place between 2011 and 2015. By using the mirror trades, the traders allegedly could covertly transfer more than $10 billion out of Russia, and do it while bypassing Deutsche Bank's compliance regulations. Those alleged actions violated New York anti-money-laundering laws.
"By converting rubles into dollars through security trades that had no discernible economic purpose, the scheme was a means for bad actors within a financial institution to achieve improper ends while evading compliance with applicable laws," the consent order says.
The trades were cleared through Deutsche Bank's Trust Company of the Americas unit, according to DFS, which conducted the investigation with the bank's U.K. regulator, the Financial Conduct Authority.
"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," DFS Superintendent Maria Vullo said.
"This Russian mirror-trading scheme occurred while the bank was on clear notice of serious and widespread compliance issues dating back a decade."
The investigation also found flaws in the bank's anti-financial crime, anti-money-laundering and compliance units. One compliance staffer said he had to "beg, borrow, and steal" to obtain suitable resources, according to DFS.
Additionally, the bank's Moscow branch's head of compliance, head of legal and anti-money-laundering officer roles were all filled for a period by one individual, "an attorney who lacked any compliance background," DFS said.
Investigations into the Russian equity trades have counted among the biggest legal concerns weighing on Deutsche Bank. Earlier in January, the lender agreed to a $7.2 billion settlement with the U.S. Justice Department to resolve separate mortgage-securities probes related to precrisis activities.
The probes into the Russian trades, while involving more recent activity, haven't been expected to cost the bank as much as the mortgage matters. But investors and analysts have worried about the overall impact of mounting legal bills, and whether the bank has a firm grasp on where they end and whether it will need to raise capital. Executives have said they don't plan to raise capital.
The German lender's shortcomings in monitoring its Moscow-based trading operations, including oversight decisions and trades made in London, contributed to Deutsche Bank's decision to shut down its domestic trading and investment-banking business in Russia in 2015, according to people familiar with the matter. The bank announced the move in September 2015.
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