Deutsche Bank ignored own red flags over Russia 'mirror-trading'

By Jason Corcoran in Moscow April 15, 2016

Deutsche Bank discovered "systemic" failure in its Russian trading activities only after ignoring their own red flags to do with possible money laundering violations.

A report by Bloomberg News showed red flags started popping up inside Deutsche Bank in early 2014 about billions of dollars in suspect trades from Moscow. The bank's back office also raised questions as well as the Central Bank of Russia (CBR) and a Cypriot counter-party lender.

Critical deficiencies, as the bank referred to them, allowed a "suspected money-laundering pattern" to channel as much as $10bn out of Russia from 2012 through 2014.

Deutsche Bank sensationally closed its Moscow investment bank last year amid an investigation by US and European regulators into so-called "mirror-trading'', which may have enabled the lender's clients to shift money offshore without alerting the relevant authorities over a period of four years.

The bank admitted in October it had discovered abuses of internal policies during an investigation. Tim Wiswell, Deustche's head of Russian equities, lost his job last year after 12 years at the lender amid the probe. He has denied any wrongdoing.

Some of the first warnings were ignored and others were dismissed, according to the April 14 report from Bloomberg. It wasn't until early 2015, when Russian authorities began interviewing bank employees in Moscow, that senior executives in Frankfurt were alerted and the bank began a full-scale internal probe.

Bloomberg reported that some funds moved out of Russia belonged to close associates of President Vladimir Putin, including an unnamed relative of the Russian leader and two of his longtime friends, Arkady and Boris Rotenberg.

Banking insiders told bne IntelliNews that Deutsche was forced to shut down the Moscow business after the CBR threatened to revoke its main banking license amid the furore over allegations.

Only the intervention by a senior German politician, believed to be Finance Minister Wolfgang Schaeuble, and a pledge to wind down the operation averted that course of action, according to a senior Moscow banker familiar with the central bank's dealings. Deutsche Bank rejected this version as untrue after it was reported.

A report by bne IntelliNews on April 7 showed that Deutsche Bank has started to transfer its Russian custody clients to VTB as it downsizes its operations in Moscow. A picture obtained by bne IntelliNews shows rows of Bloomberg terminals have been ripped out. 

Deutsche Bank hiked its litigation reserves by $1.3bn in the third quarter mainly to cover alleged violations at the lender's Russian unit. 

The Russian investigation found no significant abuse of anti-laundering controls connected with so-called mirror trades between Moscow and London and fined Deutsche a nominal amount for largely technical shortcomings, the newswire reported, citing unidentified sources.

The Frankfurt-based lender can expect far harsher treatment from US and British market watchdogs, who haven't shirked from slapping bulge bracket investment banks with seven-figure fines in the last four years.

The scandal is the biggest involving a foreign bank in Russia since Bank of New York agreed to settle a $22.5bn lawsuit in 2009 relating to a 1990s money laundering scandal. Lawyers for the Russian government had sought $1bn but the case was settled with the bank paying Russia's legal fees of $14mn as well as providing a loan on favourable terms of $400mn to Russian banks.

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