How ‘Mirror Trades’ Moved Billions From Russia: QuickTake Q&A

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“Mirror trades” are at the root of more than $670 million in penalties that Deutsche Bank AG has agreed to pay U.S. and U.K. regulators, and the bank may face even more sanctions. The U.S. Justice Department continues to look into trades emanating from the bank’s Moscow office. And other lenders may still come under scrutiny, after Russia’s central bank said that Deutsche Bank wasn’t the only financial institution that helped clients make the transactions.

1. What’s a mirror trade? 

It’s two stock transactions, in two separate locations, potentially amounting to one sleight of hand -- taking money out of one market and moving it to another. Deutsche Bank helped clients buy Russian blue-chip shares in Moscow with local currency; at around the same time, it helped them sell the same quantity of shares in London. Voila: Rubles in Russia became dollars abroad. The proceeds often wound up in Cyprus or another offshore banking center.

2. Is that illegal? 

Not necessarily. Mirror trades have legitimate uses, such as on behalf of mutual funds and other investors that have limits on where they can hold securities. But banks have to pay careful attention -- including when money crosses borders -- and follow the appropriate disclosure rules. Under U.S. law, for example, banks that operate there or conduct dollar transactions must have anti-money-laundering programs and flag suspicious transactions. Trades that don’t have an apparent economic purpose -- such as making money from a change in share prices -- may merit extra scrutiny.

3. What did Deutsche Bank do? 

The German lender allowed a “corrupt group of bank traders and offshore entities” to evade compliance programs and covertly transfer more than $10 billion out of Russia on behalf of about a dozen wealthy parties, New York’s Department of Financial Services and Deutsche Bank said this year in announcing a $425 million settlement on the matter. The consent order -- a set of facts signed by the bank -- also describes an apparent bribe to a Moscow supervisor at the bank, through payments of $250,000 routed through Deutsche Bank’s Wall Street operation to the banker’s wife. The U.S. Federal Reserve and the U.K.’s Financial Conduct Authority also faulted the bank for compliance failures.

4. Why Russia?

Hundreds of billions of dollars are believed to have exited Russia in the last two decades. In 2011, President Vladimir Putin warned Russians to stop stashing money outside the country. The mirror trading that’s now under scrutiny happened after that, with Putin associates reportedly among the sources of the money. Russian money has also entered the international financial system through Cyprus and via Moldova and Latvia in a scheme known as the Global Laundromat. The U.S. has attempted to seize real estate it says was purchased with such ill-gotten gains.

5. What’s next?

After settling with regulators and shutting large parts of its Moscow operation, Deutsche Bank’s chief executive officer, John Cryan, has at least one big legal challenge to resolve: the Justice Department criminal probe into the mirror-trade activities. The bank has said it’s cooperating. Other banks, too, could face questions: Russia’s central bank says it has concluded that $13.5 billion left Russia from 2014 to 2016 through mirror-trade transactions, including through the other international banks that it declined to name.

6. What are the political implications?

The U.S. criminal probe has taken on political shadings, because President Donald Trump is one of Deutsche Bank’s highest-profile clients. Democratic lawmakers have raised concerns about the need to guard the independence of investigators in the Justice Department who ultimately report to Trump appointees. The bank has pushed back against the lawmakers’ request to hand over its internal findings about the mirror trades and about Trump family finances, and lawmakers are pressing for more information.

The Reference Shelf

— With assistance by Greg Farrell, and Jake Rudnitsky

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