There
are more than a few arresting paragraphs in the New York State Department of
Financial Services report on Deutsche Bank’s “mirror trades,” which
was published this morning. But this one jumped off the page:
Furthermore,
a supervisor on the Moscow desk appears to have been paid a bribe or other
undisclosed compensation to facilitate the schemes. The supervisor’s close
relative, who apparently had a background in historical art, and not finance,
was also the apparent beneficial owner of two offshore companies, one each
located in the British Virgin Islands and Cyprus (both high-risk jurisdictions
for money laundering). In April and again in June 2015, one of the key counterparties
involved in the mirror-trading scheme made payments totaling $250,000 to one of
the companies owned by this close relative, allegedly pursuant to a “consulting
agreement.” Payments to one of these two companies, totaling approximately $3.8
million, were almost exclusively identified for the purported purpose of
“financial consulting,” and largely originated from two companies registered in
Belize.
I spent several months investigating Deutsche Bank’s mirror-trades scandal
for this magazine. Although the new report doesn’t say so, the supervisor in
question appears to refer to an American banker named Tim Wiswell, who
orchestrated the mirror-trades scheme, in which Russian clients clandestinely
moved money offshore—turning rubles into dollars and circumventing
anti-money-laundering controls—by buying and selling identical volumes of stock
through related entities in Moscow and London. More than ten billion dollars
was moved in this way, over nearly four years. Today, the Department of
Financial Services, in New York, working in conjunction with the Financial
Conduct Authority, in the U.K., detailed what it believes to be Deutsche
Bank’s failings in this matter, and took its pound of flesh—a settlement
of six hundred and thirty million dollars in total—from the lender’s haunch.
That sum is significant, and Deutsche Bank is
still concussed from the seven billion dollars it agreed to pay, in December,
for its role in selling risky mortgage-backed securities before the financial
crisis of 2008. But the new fine won’t break the bank. On Tuesday, I spoke to a
key institutional shareholder at Deutsche Bank who expressed his relief that
the lender had dodged a larger penalty from the regulators. There was even a
modest rally in the share price, which has since flattened. Deutsche Bank’s
chief administrative officer, Karl von Rohr, wrote to his staff about how this
settlement was another step on the road to resolving the bank’s “legacy” legal
issues.
That sense of relief may be premature. There
remains a Justice Department investigation into mirror trades. The language
used by the D.F.S. should light a zealous fire under those at the F.B.I. and
other agencies conducting that investigation. Tim Wiswell was the head of a
Russian equities desk at Deutsche Bank’s Moscow Branch—a desk that, like the
rest of Deutsche Bank’s Moscow division, was shuttered in the wake of the
scandal. He spent many months after his dismissal from the bank in Bali, with
his wife, Natalia, who appears to be the “close relative” of the report. The
suggestions of bribery in the report are particularly interesting. I was told that
Russian clients of mirror trades—professional money launderers—sometimes paid
Wiswell in his wife’s offshore account and sometimes delivered payment in
Moscow, in cash, in a bag. The idea, one such operative in Russia said, was to
“hook” Wiswell, so that he would not do “unexpected things.” The D.F.S. now has
quantified the amounts placed into offshore accounts; that will no doubt
intrigue criminal investigators.
The bribery allegations may be the most
explosive detail of the consent order. The bigger picture is more shocking.
Mirror trades were used to ship billions out of Russia. They were used because
they bypassed currency, anti-money-laundering, and, possibly, tax controls.
Representatives of Deutsche Bank have said that they’ve never uncovered the “actual
purpose” of mirror trades. I like to imagine a look of lamb-like bafflement on
the face of the lawyer who related this position to the New York regulator. In
any event, the D.F.S. report makes short work of this faux naïveté. The
transactions, the report says, “lack obvious economic purpose and could be used
to facilitate money laundering or other illicit conduct.” As such, “they are
highly suggestive of financial crime.”
It’s not the job of the Department of
Financial Services to criminally prosecute individuals or corporate entities,
and the language of the D.F.S. stops short of calling this business what it is.
But the story it tells is damning: a scheme existed with no economic logic
other than to facilitate capital flight from Russia; the users of that scheme
moved their money in a clandestine fashion; the key facilitator of that scheme,
an American citizen, took bribes from clients to keep the gravy flowing. This
chain of events isn’t “highly suggestive of financial crime”; rather, it’s
something more straightforward and concerning, particularly when one considers
that some of the ultimate clients of the scheme, as it was reported to me, were
Chechens with connections to the Kremlin.
For all the
power of these investigations, the reports compiled by the F.C.A. in London and
the D.F.S. in New York leave some questions unanswered. For instance,
there is no indication of how the regulators arrived at their conclusions. For
seven months last year, I spoke to many people with intimate knowledge of mirror
trades, including fourteen people who had worked for Deutsche Bank’s Moscow
branch. Since the article was published, in August, I have continued to ask
these sources whether they have spoken to anybody from the F.C.A., the D.F.S.,
or other agencies. I checked again today. As far as I can ascertain, only one
person with knowledge of how the trades worked day to day has been interviewed
by the regulators—and the interview was not conducted in person. Most of the
people who would know the most about mirror trades say they have never been
approached by a regulator.
So where does the regulators’ information
come from? One must assume it is almost entirely gathered from the bank itself.
The F.C.A. notes that Deutsche Bank has been “extremely cooperative,” but declined
to tell me how its report was compiled, who was interviewed, or how much
material had been provided to them by the subject of its investigation. Nobody
from the D.F.S. wished to be quoted on this issue, but I understand that most
of the material for the investigation came from trading receipts and electronic
records of internal communications provided by Deutsche Bank. The obvious
problem with that approach is that the most interesting conversations do not
take place over e-mail or on a work phone.
The other, more significant question raised
by the reports is this: Why has Deutsche Bank’s management in London been given
a pass by the Financial Conduct Authority? In its report, the F.C.A. bends over
backward to exonerate Deutsche Bank London, saying, “There is no evidence that
senior management at Deutsche Bank or any Deutsche Bank employee in the U.K.
was aware of or involved in the suspicious trading, including the mirror
trades.”
The F.C.A. must know that this sounds
inconceivable. The facts are simple. Even if Moscow employees operated the
scheme, half the mirror trades were booked in London. They appeared on the
London balance sheet. At least two managers with direct control over the Moscow
equities desk sat in London. Moreover, Moscow employees told me about
conversations between London managers and the desk in Moscow specifically
regarding this trading activity. The F.C.A. would know about those
conversations if they had conducted more interviews with current and former
employees of the bank. (For its part, the D.F.S. has been much tougher in its
analysis; it admonishes senior management at Deutsche Bank for what amounts to
their willful blindness in failing to arrest the scheme once it had begun.)
The final questions about Deutsche Bank’s
mirror trades relate to President Donald Trump and the future of the D.O.J.
investigation. Last night, the acting Attorney General, Sally Yates, was fired
because she advised Justice Department lawyers not to enforce Trump’s executive
order on immigration. A new acting Attorney General, more amenable to the will
of the President, is in place. Businesses belonging to Donald Trump and his
son-in-law, Jared Kushner, owe Deutsche Bank several hundred million dollars.
Various government agencies have investigated Trump for his potentially
compromising business relationships with Russia. Whatever his deals with
Russian government or business interests, Trump has indicated he’s considering
an end to sanctions against Russia. In this environment, we should watch how
aggressively the Department of Justice pursues allegations that an American
citizen, working in Russia for a European bank, enriched himself while
spiriting billions of dollars of dubious provenance out of Russia—and their
investigation into who, at the bank, knew what he was doing.