Another Criminal Scandal At Deutsche Bank
There is a fascinating story in last week’s issue of the New Yorker about Deutsche Bank essentially helping Russians expatriate over $10 billion dollars over a four year period through a fairly simple scheme known as mirror trades. Deutsche Bank (DB) is another serial offender global bank, having been implicated and/or fined for violating US sanction, defrauding mortgage companies, manipulating the price of gold and silver, manipulating the LIBOR rate and then essentially lying to regulators about that, hiding vast losses during the financial crisis, criminally rigging the foreign exchange markets, and now this money laundering for wealthy Russians. In addition, according to the article, the lawyer who was brought in to upgrade the bank’s controls and investigate former illegal activity was forced out because, according to a DB board member, he had been “overzealous” in showing that senior executive were well aware of the illegal activity that was occurring. And all this illegal activity has been uncovered just since 2008, a mere eight years.
The money laundering scheme worked like this. A wealthy Russian would open an offshore account in some tax haven and then invest in a Russian based fund. A broker for the Russian fund would by a Russian stock with rubles from Deutsche Bank. That same broker would then sell the same Russian stock for an offshore fund at exactly the same time to DB but this time for dollars, euros, or pounds. Then the offshore fund would transfer those monies into the wealthy Russian’s offshore account, essentially converting rubles to the other currencies and moving the money from Russia offshore. Deutsche Bank would pick up a commission on both of these trades, meaning that the trades almost inevitably always lost money for the customers but enriched DB. Technically there is nothing illegal about mirror trades and there are occasions where they serve a legitimate attempt to exploit some inconsistencies in the market. But the willingness of these clients to continually sustain losses on these trades should have been a red flag. And any minimal amount of research would have also show that the funds involved in the trades had the same beneficial owner, another red flag. But DB made no effort to investigate their clients in clear violation of the “know-your-customer” rules that govern trading firms. It seems pretty clear that people in the DB Moscow office where the trades originated as well as a few people in the London office that executed these trades knew exactly what these trades were intended to do. But they did nothing to stop them, preferring to pick up the easy revenue instead. Finally, in 2015, an internal investigation into the mirror trades resulted in three members of the Moscow office being suspended. But please read the whole story, as my recap just covers of the most egregious actions at the bank.
In 2015, two researchers in the Deutsche Bank London office decided to look at capital movements that were not included in the normal balance of payments reporting number for individual countries. What they found in the UK was somewhat shocking – at least $1.5 billion per month in “unreported” capital was flowing into the UK economy every month and much of that money was coming from Russia. When the mirror trade scandal was finally revealed later that year, it became apparent that DB itself was responsible for about 20% of that capital movement. As anyone in London can tell you, foreigners have bought up tons of real estate in the city and it has become unaffordable for most average Londoners – I have a number of friends who have been forced to move out of the city. And a lot of the money used to buy London property is clearly money expatriated illegally from Russia as well as other countries.
Once again, the wealthy use their illegal gains at the expense of workers and families and banks and governments do virtually nothing to stop it. Deutsche Bank will again probably only receive a manageable fine for these mirror trades which it will just treat as the cost of doing business. All I can say, if any individual had wracked up the record of criminality that Deutsche Bank has managed in the last eight years, they would be looking at some serious jail time. It is really time we treated these serial offender companies exactly the same way.