17 Feb 2017
At the end of January the UK’s Financial Conduct Authority announced its largest ever penalty for anti-money laundering failures. It fined Deutsche Bank £163 million ($204 million) for lacking ‘an adequate AML control framework’ between 2012 and 2015. US regulators levied an additional $425 million against the bank for the same issue.
Specifically, Deutsche is alleged to have facilitated $10 billion in Russian ‘mirror-trades’ which could have been used to launder money and evade Russian capital controls. The following infographic explains how mirror trading works. It uses the example of a Russian company with an owner who, for whatever reason, wants to get roubles out of Russia and exchange them for US dollars in a bank account in an offshore jurisdiction.
- The Russian company calls up a bank trading desk and buys a quantity of a blue-chip stock, paying in Russian roubles
- A company in an offshore jurisdiction calls up a trading desk at the same bank. It sells an equivalent amount of the same stock bought by the Russian company, in exchange for US dollars or another reserve currency
- The two companies are in fact owned by the same individual or parent company
This system offers an easy way to evade Russian or other capital controls. It can also be used to ‘layer’ the proceeds of crime once they have entered the financial system, disguising their criminal origins by hiding them beneath seemingly above-board transactions.
Buying a blue-chip stock, and conducting business through a trading desk at a reputable bank, give the transaction an air of legitimacy. The bank makes a small commission on the trade but it still represents a cost effective foreign exchange mechanism; the beneficial owner may even benefit for discrepancies between pricing in different currencies.
Advance your CPD minutes for reading this article, by signing up and using the CPD WalletFREE CPD Wallet