The UK watchdog the Financial Conduct Authority (FCA) has fined Deutsche Bank AG (Deutsche Bank) £163,076,224. This is the largest financial penalty for anti-money laundering (AML) controls failings ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA). The bank failed to maintain an adequate anti-money laundering (AML) control framework during the period between January 2012 and December 2015, the FCA found.
According to the regulator, Deutsche Bank failed to properly oversee the formation of new customer relationships and the booking of global business in the UK. Hence, Deutsche Bank was used by unidentified customers to transfer about $10 billion, of unknown origin, from Russia to offshore bank accounts in a manner that is highly suggestive of financial crime, the FCA says.
Mark Steward, Director of Enforcement and Market Oversight at the FCA, 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 FCA found significant deficiencies throughout Deutsche’s AML control framework. The FCA specifically found that the bank’s Corporate Banking and Securities division (CB&S) in the UK:
– performed inadequate customer due diligence
– failed to ensure that its front office took responsibility for the CB&S division’s Know Your Customer obligations
– used flawed customer and country risk rating methodologies
– had deficient AML policies and procedures
– had an inadequate AML IT infrastructure
– lacked automated AML systems for detecting suspicious trades; and
– failed to provide adequate oversight of trades booked in the UK by traders in non-UK jurisdictions
As a result Deutsche failed to obtain sufficient information about its customers to inform the risk assessment process and to provide a basis for transaction monitoring. The failings allowed the front office of Deutsche Bank’s Russia-based subsidiary (DB Moscow) to execute more than 2,400 pairs of trades that mirrored each other (mirror trades) between April 2012 and October 2014. The mirror trades were used by customers of Deutsche Bank and DB Moscow to transfer more than $6 billion from Russia, through Deutsche in the UK, to overseas bank accounts, including in Cyprus, Estonia, and Latvia. The orders for both sides of the mirror trades were received by DB Moscow, which executed both sides at the same time.
The customers on the Moscow and London sides of the mirror trades were connected to each other and the volume and value of the securities was the same on both sides. The purpose of the mirror trades was the conversion of roubles into US dollars and the covert transfer of those funds out of Russia, which as the FCA says is highly suggestive of financial crime.
A further $3.8 billion in suspicious “one-sided trades” also occurred. The FCA believes that some, if not all, of an additional 3,400 trades formed one side of mirror trades and were often conducted by the same customers involved in the mirror trading.
As a result, Deutsche breached Principle 3 (taking reasonable steps to organise its affairs responsibly and effectively, with adequate risk management systems) of the FCA’s Principles for Businesses. The bank also breached Senior Management Arrangements, Systems and Controls (SYSC) rules 6.1.1 R and 6.3.1 R.
Deutsche Bank agreed to settle at an early stage of the FCA’s investigation and qualified for a 30 per cent (stage 1) discount. This discount does not apply to the £9.1m in commission that Deutsche Bank generated from the suspicious trading, which has been disgorged as part of the overall penalty meaning that the firm has received no financial benefit from the breach. The regulator adds that Deutsche Bank was exceptionally cooperative and has committed significant resources to large scale remediation to correct the deficiencies in its AML control framework and customer files.
For the final notice visit the FCA website.
The bank also reached settlements with New York State Department of Financial Services (DFS); and is cooperating with other regulators and law enforcers, which have their own investigations into the securities trades.
