Deutsche Bank Agrees Settle Russian Mirror Trade Probe

German banking major Deutsche Bank AG has agreed to pay a total of $630 million as penalty in order to end investigations by U.K. and U.S. regulators into a suspect equity trading scheme that resulted in shifting of $10 billion out of Russia between 2011 and 2015.

The bank will pay $425 million to U.S. regulators while $200 million will be levied as penalty by Britain's regulator, the Financial Conduct Authority (FCA). In addition, the bank has agreed to appoint an independent overseer to review its compliance programs.

Termed as mirror trading, under this scheme Deutsche Bank clients purchased Russian stocks in Moscow in rubles while another party sold the same stock at exact same price and quantity through its London or New York office in dollars. According to investigations by the New York Department of Financial Services (DFS), the bank had acted in an unsafe manner, repeatedly violating state banking regulations. It said that the bank had failed to put in controls for vetting clients and for detecting suspicious trades.

Sky News

In a statement the DFS said

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

Deutsche Bank carried out over 2,400 pairs of such trades between 2012 and 2014 according to the UK regulator. Investigation by the regulators revealed that the trades enabled the bank’s clients to move out billions of dollars from Russia to banks situated in countries such as Cyprus, Latvia and Estonia. The bank has said that it hasn’t been able to identify the true purpose of the scheme although it could have served as a means for tax evasion and capital flight.

Deutsche Bank said that the $630 million settlement was already accounted for it in its litigation reserves. The fine however does not resolve a separate probe by the U.S. Justice Department into the same questionable Russian equity trades. The regulators have confirmed that the bank has been cooperating with the investigations adding that significant improvements had been made to its controls for money laundering. The bank also announced last year that it had initiated disciplinary action against the involved employees.

These settlements follow Deutsche Bank’s $7.2 billion settlement with the Justice Department for financial misconduct related to selling mortgage-backed securities ahead of the 2008 financial crisis. Investors are now concerned about the bank’s rising legal costs as they await its fourth-quarter results scheduled for release later this week.

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