• Bank was victim of illegal scheme, report is said to conclude
  • Russia fine comes as U.S., U.K. probe Moscow-London trades

Russia’s central bank fined Deutsche Bank AG less than $5,000 for compliance failures in a probe into alleged trading violations, said people with knowledge of the matter, after the Russian regulator audited transactions at the lender’s Moscow office that are under broader scrutiny by U.K. regulators and U.S. prosecutors.

The Russian regulator’s probe cited no significant violations of anti-laundering controls connected with so-called mirror trades between Moscow and London, fining the bank for largely technical shortcomings in its procedures, the people said.

With the fine and findings, the Bank of Russia steps aside for now from a line of inquiry it helped set in motion: In October 2014, it asked Deutsche Bank to monitor several accounts for potentially suspicious transactions, people familiar with the matter said. Deutsche Bank said earlier this year that it was looking into trades from 2012 to early 2015 -- nearly $6 billion altogether, according to people familiar with the situation. The bank added in October that its own review turned up violations of its internal policies and deficiencies in controls. 

Deutsche Bank told investors that it had increased its litigation reserves by 1.2 billion euros ($1.3 billion), mainly to cover possible liabilities.

Illegal Scheme

The Russian central bank found that Deutsche Bank was victim of an illegal scheme and had already addressed the technical violations while disciplining the employees involved and avoiding a larger fine, said one of the people, who like the rest asked not to be identified because the matter is private. Deutsche Bank and the Russian regulator declined to comment.

The mirror trades have drawn regulatory scrutiny in the U.K. and a criminal investigation in the U.S., adding to an increasing list of legal woes for Germany’s biggest lender after multiple investigations and the departure of several top executives. The bank said earlier this year it had suspended a “small number” of people employed in its Moscow equities trading operation, pending the results of an internal review linked to the mirror trades.

Such trades, as described by the Russian central bank audit, involved clients buying Russian blue-chip stocks for rubles in Moscow and simultaneously selling them in London, usually for dollars, according to people familiar with the situation.

Banks widely conduct these transactions legally, including on behalf of investors such as mutual funds that have limits on where they can hold securities. Such trades can also be used to move funds out of the country, potentially facilitating capital flight and circumventing money-laundering controls.

Justice Department Asking

U.S. and U.K. officials are looking at more than three years of mirror trades, people familiar with the investigations have said. The U.S. Justice Department is asking whether Deutsche Bank followed proper anti-money laundering controls in vetting the trades, a person familiar with the U.S. situation has said.

Russia’s regulator looked at just over a year of trades -- $850 million in transactions from April 2014 to May 2015 -- according to people familiar with the audit. The central bank saw no need to probe the entire period of suspect activity, which dated back to 2012 one of the people said.

The Russian audit found the trades appeared to have been used to move money out of Russia and thus bore risks to Deutsche Bank’s reputation, according to the people.

Technical Violations

The only regulatory violations the central bank cited were technical, relating to such things as filing deadlines and the need for staffers to indicate their middle names on some documents. After the audit was completed in August, the central bank levied a fine of 300,000 (worth $4,570 at the time) and mandated Deutsche Bank tighten its internal controls, the people said. Deutsche Bank later paid the fine, according to two of the people.

The people familiar with the report say the audit sheds little light on the owners of accounts involved in the transactions. Many are recorded in the document only as offshore holding companies or as individuals working through brokers, these people said. The report said the regulator couldn’t trace the flow of funds because some of the entities involved are outside Russia, these people said. Other participants in the transactions deliberately concealed the identity of their clients, one person said.

Several close associates of Russian President Vladimir Putin may have benefited from Deutsche Bank mirror trades, Bloomberg News reported in October, citing people familiar with the situation. Accounts used for the trades were linked to brothers Boris and Arkady Rotenberg, who are longtime friends of Putin, as well as to a relative of the president, the people said.

Spokespeople for the Rotenbergs have denied any involvement. There’s no indication that the Rotenbergs or any other individuals allegedly linked to the accounts are under investigation for the trades. Deutsche Bank has said it is sharing the results of its internal review with authorities in the U.S. and Europe.

Deutsche Bank’s Investigation

Deutsche Bank told the Russian regulator that it had investigated transactions from January 2011 to February 2015 and found mirror trades only from 2012 to 2014, according to people familiar with the audit.

Deutsche Bank told Russian regulators its Moscow office wasn’t aware of all the details surrounding the trades, according to three people familiar with the situation.

Once Deutsche Bank’s central investigation unit in Germany took over the internal probe in February 2015, the bank was able match the Moscow and London legs of the trades, according to people familiar with the report. It identified about 2,300 suspect transactions worth a total of $5.9 billion, Deutsche Bank told Russian regulators in May, according to the people.

In October, Deutsche said it “has identified certain violations of Deutsche Bank’s policies and deficiencies in Deutsche Bank’s control environment” in the course of the investigation of the Russian trade.

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