➞ Bank of Russia found $13.5 billion in mirror trades in 2014-16
➞ Regulator declines to name other foreign banks seen in trades
Deutsche Bank AG was not the only international lender found to have conducted “mirror trades” to circumvent regulations and send money out of Russia in the last few years, the Bank of Russia said, declining to name other institutions involved.
The regulator said in a statement to Bloomberg that it had found about 750 billion rubles ($13.5 billion at average exchange rates over the period) in the transactions from 2014 to 2016, but didn’t break down the figure by individual banks. Deutsche Bank’s internal investigation found about $10 billion in trades through its Moscow office from 2011-2015.
Though the new data suggest Deutsche Bank may have been the largest user of such transactions, the central bank’s statement that other foreign institutions were also involved highlights how pervasive illicit dealings are in Russia, where hundreds of billions of dollars have flowed out of the country in the last two decades.
After an internal investigation into the mirror trades found “systemic” failures in its internal controls, Deutsche Bank agreed early this year to pay $630 million to the U.K. and New York State over lax anti-money laundering procedures. A Department of Justice investigation remains open.
A consent order between the bank and New York’s Department of Financial Services found serious compliance deficiencies that “allowed a corrupt group of bank traders and offshore entities to improperly and covertly transfer more than $10 billion out of Russia.”
The transactions, conducted through its Moscow office, allowed wealthy Russians to move billions out of Russia by buying blue-chip shares for rubles on the local market and simultaneously selling the same stocks for dollars or Euros through Deutsche Bank’s London office. The beneficiaries of the scheme included some wealthy members of Vladimir Putin’s inner circle, Bloomberg reported in 2015.
In 2011, business associates of one of those billionaires approached people at the Moscow office of Zurich-based UBS Group AG to do mirror trades for them, a person familiar with the situation said at the time. The bank turned down the business, this person said. A spokesman for UBS declined to comment.
The Bank of Russia said Deutsche Bank’s role in the mirror trading became public as a result of its internal probe, which the lender also shared with the regulator. Deutsche Bank paid a fine of 300,000 rubles ($4,200) to the Bank of Russia for violations found in the investigation.
The regulator said that its efforts to crack down on the deals have “minimized” their use at present, with less than 800 million rubles in the trades detected in the first quarter of this year. That was down sharply from 600 billion rubles in all of 2014. By 2016, the flow had dropped to 17 billion rubles, the regulator said.
The Bank of Russia said it revoked the licenses of “more than 100” local brokers involved in the mirror trading, but didn’t identify them. The regulator is continuing to monitor for the transactions, though other agencies are responsible for any criminal investigations that might arise. Mirror trades are legal under some circumstances, although the central bank said it was referring to those that bypassed regulations.
The regulator didn’t specify whether it tracked the trades before 2014. Early the next year, Deutsche Bank’s internal probe found the transactions and those results were shared with the Bank of Russia.
Oleg Vyugin, a former senior official at the central bank and finance ministry and a veteran banker, said the trades were widely considered part of normal business. “It’s not surprising that other international banks conducted ‘mirror trades,’” he said. “I think they did it without any intent.”
Foreign banks are particularly attractive to those seeking to move money out because of their reputations, according to Tom Adshead, chief operating officer at the Moscow-based consultancy Macro Advisory. “If you can get your money through a Western institution, it’s much more effective. They wash whiter,” he said.
“If people weren’t trying to launder money, you wouldn’t need compliance,” he added. “There has been a tension at investment banks between what makes money and what risks are acceptable since time immemorial.”
Mirror trades rank among the largest mechanisms for pumping money out of Russia identified by regulators, the Bank of Russia said. Another was the so-called Moldovan scheme, involving fraudulent debts and court decisions from that former Soviet republic, through which about $21 billion flowed out of Russian in 2013-2014, before regulators shut it down in mid-2014, the Bank of Russia said.
A similar mechanism involving orders from Russia’s Federal Bailiff Service remains operative, the central bank said, though flows are much smaller at about 16 billion rubles last year and 6 billion rubles in the first half of 2017.
Fraudulent import deals and contracts for services are two other major mechanisms for taking money out of Russia illicitly, the bank said, accounting for more than 200 billion rubles in outflows in 2015 and 98 billion rubles in 2016.
By Evgenia Pismennaya, 27 June 2017 08:00 am Updated on 27 June 2017 05:20 pm