1. Deutsche Bank reaches a $7.2 billion settlement over US mortgage-backed securities
2. Deutsche Bank Fined £163 million by FCA for Anti-Money Laundering Failings.
2.7 BILLION SETTLEMENT OVER US MORTGAGE-BACKED SECURITIES
1. In January 2017, the Justice Department announced a $7.2 billion settlement with Deutsche Bank resolving federal civil claims that Deutsche Bank misled investors in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) between 2006 and 2007.
2. The settlement requires Deutsche Bank to pay a $3.1 billion civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and also provide $4.1 billion in relief to underwater homeowners, distressed borrowers and affected communities.
STATEMENT OF FACTS
1. In the settlement, Deutsche Bank agreed to a detailed Statement of Facts describing how Deutsche Bank knowingly made false and misleading representations to investors on the mortgage loans it securitized issued by the bank between 2006 and 2007. Below are the summary:-
2. Deutsche Bank represented to investors that loans securitized in its RMBS were originated generally in accordance with mortgage loan originators’ underwriting guidelines. However “aggressive” revisions were made to the loan originators’ underwriting guidelines allowing for loans to be underwritten to anyone. Deutsche Bank knew, based on the results of due diligence that more than 50 percent of the loans subjected to due diligence did not meet loan originators’ guidelines for some securitized loan pools.
3. Deutsche Bank also knowingly misrepresented that loans had been reviewed to ensure the ability of borrowers to repay their loans. As Deutsche Bank acknowledges, the bank’s own employees recognized that Deutsche Bank would “tolerate misrepresentation” with “misdirected lending practices” as to borrower ability to pay, accepting even blocked-out borrower pay stubs that concealed borrowers’ actual incomes.
4. Deutsche Bank concealed from investors that significant numbers of borrowers had second liens on their properties and instructed their team to tell them verbally but not to mention in the prospectus as these second liens increased the likelihood that a borrower would default on his or her loan.
5. Deutsche Bank purchased and securitized loans with substantial defects to provide “flexibility” to the mortgage originators on whom Deutsche Bank’s RMBS program depended for a continued supply of loans. Deutsche Bank’s diligence team was instructed, on three separate occasions, to clear and approve loans it previously determined should be rejected.
6. While Deutsche Bank conducted due diligence on samples of loans it securitized in RMBS, Deutsche Bank knew that the size and composition of these loan samples frequently failed to capture loans that did not meet its representations to investors.
7. Deutsche Bank knowingly and intentionally securitized loans originated based on unsupported and fraudulent appraisals. Deutsche Bank concealed its knowledge of pervasive and consistent appraisal fraud, instead representing to investors home valuation metrics based on appraisals it knew to be fraudulent.
8. Deutsche Bank knew that there was an increasing trend of overvalued properties being sold to Deutsche Bank for securitization. Deutsche Bank nonetheless purchased and securitized such loans because it received favorable prices on the fraudulent loans.
9. However, Deutsche Bank knowingly represented borrowers’ FICO scores as of the time of the origination of their loans despite the bank’s knowledge that these scores had often declined materially by the cut-off date.
ACTION TAKEN
1. Apart from the settlement, Deutsche Bank will pay a $3.1 billion civil penalty, and provide an additional $4.1 billion in relief to homeowners, borrowers, and communities harmed by its practices.
2. The $3.1 billion civil monetary penalty resolves claims under FIRREA, which authorizes the federal government to impose civil penalties against financial institutions that violate various predicate offenses, including wire and mail fraud.
3. Deutsche Bank will provide loan modifications, including loan forgiveness and forbearance, to distressed and underwater homeowners throughout the country.
4. It will also provide financing for affordable rental and for-sale housing throughout the country.
5. Deutsche Bank’s provision of consumer relief will be overseen by an independent monitor who will have authority to approve the selection of any third party used by Deutsche Bank to provide consumer relief.
FINED £163 MILLION FOR ANTI-MONEY LAUNDERING FAILINGS
1. In January 2017, The Financial Conduct Authority (FCA) fined Deutsche Bank AG (Deutsche Bank) £163,076,224 for failing to maintain an adequate anti-money laundering (AML) control framework during the period between 1 January 2012 and 31 December 2015.
2. Deutsche Bank Fined £163 million by FCA for Anti-Money Laundering Failings.
2.7 BILLION SETTLEMENT OVER US MORTGAGE-BACKED SECURITIES
1. In January 2017, the Justice Department announced a $7.2 billion settlement with Deutsche Bank resolving federal civil claims that Deutsche Bank misled investors in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) between 2006 and 2007.
2. The settlement requires Deutsche Bank to pay a $3.1 billion civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and also provide $4.1 billion in relief to underwater homeowners, distressed borrowers and affected communities.
STATEMENT OF FACTS
1. In the settlement, Deutsche Bank agreed to a detailed Statement of Facts describing how Deutsche Bank knowingly made false and misleading representations to investors on the mortgage loans it securitized issued by the bank between 2006 and 2007. Below are the summary:-
2. Deutsche Bank represented to investors that loans securitized in its RMBS were originated generally in accordance with mortgage loan originators’ underwriting guidelines. However “aggressive” revisions were made to the loan originators’ underwriting guidelines allowing for loans to be underwritten to anyone. Deutsche Bank knew, based on the results of due diligence that more than 50 percent of the loans subjected to due diligence did not meet loan originators’ guidelines for some securitized loan pools.
3. Deutsche Bank also knowingly misrepresented that loans had been reviewed to ensure the ability of borrowers to repay their loans. As Deutsche Bank acknowledges, the bank’s own employees recognized that Deutsche Bank would “tolerate misrepresentation” with “misdirected lending practices” as to borrower ability to pay, accepting even blocked-out borrower pay stubs that concealed borrowers’ actual incomes.
4. Deutsche Bank concealed from investors that significant numbers of borrowers had second liens on their properties and instructed their team to tell them verbally but not to mention in the prospectus as these second liens increased the likelihood that a borrower would default on his or her loan.
5. Deutsche Bank purchased and securitized loans with substantial defects to provide “flexibility” to the mortgage originators on whom Deutsche Bank’s RMBS program depended for a continued supply of loans. Deutsche Bank’s diligence team was instructed, on three separate occasions, to clear and approve loans it previously determined should be rejected.
6. While Deutsche Bank conducted due diligence on samples of loans it securitized in RMBS, Deutsche Bank knew that the size and composition of these loan samples frequently failed to capture loans that did not meet its representations to investors.
7. Deutsche Bank knowingly and intentionally securitized loans originated based on unsupported and fraudulent appraisals. Deutsche Bank concealed its knowledge of pervasive and consistent appraisal fraud, instead representing to investors home valuation metrics based on appraisals it knew to be fraudulent.
8. Deutsche Bank knew that there was an increasing trend of overvalued properties being sold to Deutsche Bank for securitization. Deutsche Bank nonetheless purchased and securitized such loans because it received favorable prices on the fraudulent loans.
9. However, Deutsche Bank knowingly represented borrowers’ FICO scores as of the time of the origination of their loans despite the bank’s knowledge that these scores had often declined materially by the cut-off date.
ACTION TAKEN
1. Apart from the settlement, Deutsche Bank will pay a $3.1 billion civil penalty, and provide an additional $4.1 billion in relief to homeowners, borrowers, and communities harmed by its practices.
2. The $3.1 billion civil monetary penalty resolves claims under FIRREA, which authorizes the federal government to impose civil penalties against financial institutions that violate various predicate offenses, including wire and mail fraud.
3. Deutsche Bank will provide loan modifications, including loan forgiveness and forbearance, to distressed and underwater homeowners throughout the country.
4. It will also provide financing for affordable rental and for-sale housing throughout the country.
5. Deutsche Bank’s provision of consumer relief will be overseen by an independent monitor who will have authority to approve the selection of any third party used by Deutsche Bank to provide consumer relief.
FINED £163 MILLION FOR ANTI-MONEY LAUNDERING FAILINGS
1. In January 2017, The Financial Conduct Authority (FCA) fined Deutsche Bank AG (Deutsche Bank) £163,076,224 for failing to maintain an adequate anti-money laundering (AML) control framework during the period between 1 January 2012 and 31 December 2015.
2. Deutsche Bank failed to properly oversee the formation of new customer relationships and the booking of global business in the UK.
3. As a result, Deutsche Bank was used by unidentified customers to transfer approximately $10 billion, of unknown origin, from Russia to offshore bank accounts.
ISSUES NOTED
1. The FCA found significant deficiencies throughout Deutsche Bank’s AML control framework. The FCA found that, during the relevant period, Deutsche Bank’s Corporate Banking and Securities division (CB&S) in the UK were lacking in following areas:
2. Inadequate customer due diligence.
3. Lack of oversight on its front office on conducting Know Your Customer obligations on behalf of CB&S division.
4. Customer and country risk rating methodologies were flawed
5. Deficient AML policies and procedures
6. Inadequate AML IT infrastructure
7. Lacked automated AML systems for detecting suspicious trades
8. Failed to provide adequate oversight of trades booked in the UK by traders in non-UK jurisdictions
FINDINGS
1. The failings allowed the front office of Deutsche Bank’s Russia-based subsidiary (DB Moscow) to execute more than 2,400 pairs of trades that mirrored each other (mirror trades) between April 2012 and October 2014.
2. The mirror trades were used by customers of Deutsche Bank and DB Moscow to transfer more than $6 billion from Russia, through Deutsche Bank in the UK, to overseas bank accounts, including in Cyprus, Estonia, and Latvia.
3. The orders for both sides of the mirror trades were received by DB Moscow, which executed both sides at the same time.
4. The mirror trades were connected to each other and the volume and value of the securities was the same on both sides. The purpose of the mirror trades was the conversion of Roubles into US Dollars and the covert transfer of those funds out of Russia indicating financial crime activities.
5. FCA noted a further $3.8 billion in suspicious “one-sided trades” with an additional 3,400 trades formed one side of mirror trades and were often conducted by the same customers involved in the mirror trading.
ACTION TAKEN
1. Deutsche Bank agreed to settle at an early stage of the FCA’s investigation and therefore qualified for a 30% (stage 1) discount.
2. £9.1 million in commission that Deutsche Bank generated from the suspicious trading has been disgorged as part of the overall penalty ensuring that the firm has received no financial benefit from the breach.
THOUGHTS ON MIRROR TRADES
1. Customers bought stocks in Russia and sold them in London with both legs through a Deutsche Bank trading desk. The result was that they had less money in Russia and more in London. What about the residual problem of moving stock?
2. How would they closed out their short positions in London? Were stock certificates couriered to London? There are gaps in the process of mirror trading not reported by the FCA.
3. Another interesting cross country money transfer can observed in international IP taxes.
4. The core process of international tax is to build intellectual property and place the IP in a subsidiary in a low-tax jurisdiction. Arrange all subsidiaries in higher-tax jurisdiction to pay the low-tax jurisdiction subsidiary a licensing fee for the IP. Finally to make the licensing fee equal to revenue.
5. Regulators in Europe and the U.S. say that the value placed on the technology varies radically depending on which side of the country its on and which appraisal will lower its tax bill.
6. Institutions would justify that the intellectual property is immensely valuable, justifying the tax-free revenue it has collected since moving its technology assets to tax-friendly jurisdiction. However in the U.S., institutions would downgrade the value of those same assets to explain why it pays so little in taxes for licensing them.
(Source: Financial Conduct Authority, Bloomberg, The Justice Department )
