"We have repeatedly told firms how to comply with our AML requirements and the failings of Deutsche Bank are simply unacceptable."

“We have repeatedly told firms how to comply with our AML requirements and the failings of Deutsche Bank are simply unacceptable.”

The UK’s Financial Conduct Authority (FCA) has fined Deutsche Bank £163 million for failing to maintain an adequate anti-money laundering (AML) control framework during the period between 1 January 2012 and 31 December 2015. This is the largest financial penalty for AML controls failings ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA).

The FCA says Deutsche Bank exposed the UK financial system to the risks of financial crime by failing to properly oversee the formation of new customer relationships and the booking of global business in the UK. As a consequence of its inadequate AML control framework, Deutsche Bank was used by unidentified customers to transfer approximately $10 billion, of unknown origin, from Russia to offshore bank accounts in a manner that is highly suggestive of financial crime.

Mark Steward, director of enforcement and market oversight at the FCA, says: “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 Bank’s AML control framework. The FCA specifically found that Deutsche Bank’s Corporate Banking and Securities division (CB&S) in the UK failed to performed inadequate customer due diligence, had an inadequate AML IT infrastructure, among other faults.

Mirror trades

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 Bank 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 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 Bank 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. In addition, Deutsche 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 therefore qualified for a 30% (stage 1) discount. This discount does not apply to the £9.1 million 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. Were it not for the 30% discount the financial penalty would have been £229 million.

Deutsche Bank was “exceptionally co-operative” with the FCA during the investigation and has committed significant resources to a large scale remediation programme to correct the deficiencies in its AML control framework and customer files.

@banking
techno