“If I asked what is the most corrupt place on Earth, you might say ‘it’s Afghanistan’, maybe Greece, Nigeria, the south of Italy? I would say, the UK.”
When it comes to regulatory penalties, Deutsche Bank is not what one might call a first-time offender. Last year, jitters in the financial press about a possible bail-out escalated to open speculation after the bank, the biggest financial institution in Germany, settled with the US Department of Justice for $14 billion over its trade in mortgage-backed securities. The fine of £163 million levied by the UK’s Financial Conduct Authority (“FCA”) at the end of January is, by comparison, pretty small change.
What makes the FCA’s fine noteworthy is not its size but the behaviour that earned it. £163 million is the largest sum ever levied by the FCA (or its predecessor, the Financial Services Authority) for failings in a firm’s anti-money laundering control framework. In its statement, the FCA emphasised that the bank “exposed the UK financial system to the risks of financial crime by failing to properly oversee the formation of new customer relationships and the booking of global business in the UK”. Amongst its shortcomings were due diligence failures, inadequate detection systems and outdated policies for the prevention of financial crime.
Deutsche Bank’s failings are reflective of a wider problem in the UK financial system: the huge and growing problem of money-laundering. The Hay Festival, Britain’s annual literary event in the quiet Welsh town of Hay-on-Wye, is not generally a hangout for financial journalists hunting headlines. But last May, Roberto Saviano, an Italian journalist, drew extensive media attention when he used a talk at the festival to announce an unexpected contender for the title of the most corrupt country in the world.
“If I asked what is the most corrupt place on Earth, you might say it’s Afghanistan, maybe Greece, Nigeria, the south of Italy. I would say it is the UK,” he told his audience. This is a striking statement from a man who has spent his career exposing collusion between Italian authorities and organised crime—and evading mafia attempts to assassinate him. He explained: “[the issue is] not UK bureaucracy, police, or politics … what is corrupt is the financial capital.”
The scale of the problem in the City is far bigger than the UK’s strikingly low position (tenth least corrupt) on Transparency International’s Corruption Perception Index would imply. David Little, head of money laundering at the National Crime Agency (“NCA”), said in a speech last January that money laundering in the City ran to “a truly terrifying number,” in the “tens or hundreds of billions”. The NCA itself assesses that “the proceeds of virtually all serious and organised crime in the UK, as well as the proceeds of a significant amount of international serious and organised crime (including corrupt Politically Exposed Persons seeking to launder the proceeds of their corruption and hide stolen assets in the UK) is believed to be laundered into and through the UK.
The Deutsche Bank case is one example of how this laundering happens. The FCA states that “Deutsche Bank was used by unidentified customers to transfer approximately $10 billion, of unknown origin, from Russia to offshore bank accounts in a manner that is highly suggestive of financial crime.” In essence, Deutsche Moscow made ‘mirror trades’ with Deutsche UK, converting roubles to US dollars and covertly transferring those funds out of Russia (for an explanation of how such trades work, see KYC360’s infographic). The traders used Deutsche Bank’s operations in London to sell Russian assets to themselves, shifting the location of money rather than making a profit. In Russia itself, according to Ed Caesar of the New Yorker, the practice is known as konvert, enabling individuals to evade anti-money laundering protocols, taxation and even international economic sanctions.
[Editor’s note: This article was originally posted on KYC360 on 21st Feb 2017]
Richard Nicholl (@rtrnicholl) is Legal Editor for a leading provider of corporate legal intelligence. He also works as a freelance political commentator and investigative journalist.