Reporter at Large
Deutsche Bank’s $10-Billion Scandal
How a scheme to help Russians secretly funnel money offshore unravelled.
Almost
every weekday between the fall of 2011 and early 2015, a Russian broker
named Igor Volkov called the equities desk of Deutsche Bank’s Moscow
headquarters. Volkov would speak to a sales trader—often, a young woman
named Dina Maksutova—and ask her to place two trades simultaneously. In
one, he would use Russian rubles to buy a blue-chip Russian stock, such
as Lukoil, for a Russian company that he represented. Usually, the order
was for about ten million dollars’ worth of the stock. In the second
trade, Volkov—acting on behalf of a different company, which typically
was registered in an offshore territory, such as the British Virgin
Islands—would sell the same Russian stock, in the same quantity, in
London, in exchange for dollars, pounds, or euros. Both the Russian
company and the offshore company had the same owner. Deutsche Bank was
helping the client to buy and sell to himself.
At
first glance, the trades appeared banal, even pointless. Deutsche Bank
earned a small commission for executing the buy and sell orders, but in
financial terms the clients finished roughly where they began. To
inspect the trades individually, however, was like standing too close to
an Impressionist painting—you saw the brushstrokes and missed the
lilies. These transactions had nothing to do with pursuing profit. They
were a way to expatriate money. Because the Russian company and the
offshore company both belonged to the same owner, these ordinary-seeming
trades had an alchemical purpose: to turn rubles that were stuck in
Russia into dollars stashed outside Russia. On the Moscow markets, this
sleight of hand had a nickname: konvert, which means “envelope”
and echoes the English verb “convert.” In the English-language media,
the scheme has become known as “mirror trading.”
Mirror
trades are not inherently illegal. The purpose of an equities desk at
an investment bank is to help approved clients buy and sell stock, and
there could be legitimate reasons for making a simultaneous trade. A
client might want to benefit, say, from the difference between the local
and the foreign price of a stock. Indeed, because the individual
transactions involved in mirror trades did not directly contravene any
regulations, some employees who worked at Deutsche Bank’s Russian
headquarters at the time deny that such activity was improper. (Fourteen
former and current employees of Deutsche Bank in Moscow spoke to me
about the mirror trades, as did several people involved with the
clients. Most of them asked not to be named, either because they had
signed nondisclosure agreements or because they still work in banking.)
Viewed
with detachment, however, repeated mirror trades suggest a sustained
plot to shift and hide money of possibly dubious origin. Deutsche Bank’s
actions are now under investigation by the U.S. Department of Justice,
the New York State Department of Financial Services, and financial
regulators in the U.K. and in Germany. In an internal report, Deutsche
Bank has admitted that, until April, 2015, when three members of its
Russian equities desk were suspended for their role in the mirror
trades, about ten billion dollars was spirited out of Russia through the
scheme. The lingering question is whose money was moved, and why.
Deutsche
Bank is an unwieldy institution with headquarters in Frankfurt and
about a hundred thousand employees in seventy countries. When it was
founded, in 1870, its stated purpose was to facilitate trade between
Germany and other countries. It soon established footholds in Shanghai,
London, and Buenos Aires. In 1881, the bank arrived in Russia, financing
railways commissioned by Alexander III. It has operated there ever
since.
During the Nazi era,
Deutsche Bank sullied its reputation by financing Hitler’s regime and
purchasing stolen Jewish gold. After the war, the bank concentrated on
its domestic market, playing a significant role in Germany’s so-called
economic miracle, in which the country regained its position as the most
potent state in Europe. After the deregulation of the U.S. and U.K.
financial markets, in the nineteen-eighties, Deutsche Bank refreshed its
overseas ambitions, acquiring prominent investment banks: the London
firm Morgan Grenfell, in 1989, and the American firm Bankers Trust, in
1998. By the new millennium, Deutsche Bank had become one of the world’s
ten largest banks. In October, 2001, it débuted on the New York Stock
Exchange.
Although the bank’s
headquarters remained in Germany, power migrated from conservative
Frankfurt to London, the investment-banking hub where the most lavish
profits were generated. The assimilation of different banking cultures
was not always successful. In the nineties, when hundreds of Americans
went to work for Deutsche Bank in London, German managers had to place a
sign in the entrance hall spelling out “Deutsche” phonetically, because
many Americans called their employer “Douche Bank.”
In
2007, the bank’s share price hit an all-time peak: a hundred and
fifty-nine dollars. But as it grew fast it also grew loose. Before the
housing market collapsed in the United States, in 2008, sparking a
global financial crisis, Deutsche Bank created about thirty-two billion
dollars’ worth of collateralized debt obligations, which helped to
inflate the housing bubble. In 2010, Deutsche Bank’s own staff accused
it of having masked twelve billion dollars’ worth of losses. Eric
Ben-Artzi, a former risk analyst, was one of three whistle-blowers. He
told the Securities and Exchange Commission that, had the bank’s true
financial health been known in 2008, it might have folded, as Lehman
Brothers had. Last year, Deutsche Bank paid the S.E.C. a
fifty-five-million-dollar fine but admitted no wrongdoing. Ben-Artzi
told me that bank executives had incurred a tiny penalty for a huge
crime. “There was cultural criminality,” he said. “Deutsche Bank was
structurally designed by management to allow corrupt individuals to
commit fraud.”
Scandals
have proliferated at Deutsche Bank. Since 2008, it has paid more than
nine billion dollars in fines and settlements for such improprieties as
conspiring to manipulate the price of gold and silver, defrauding
mortgage companies, and violating U.S. sanctions by trading in Iran,
Syria, Libya, Myanmar, and Sudan. Last year, Deutsche Bank was ordered
to pay regulators in the U.S. and the U.K. two and a half billion
dollars, and to dismiss seven employees, for its role in manipulating
the London Interbank Offered Rate, or libor, which is the
interest rate banks charge one another. The Financial Conduct
Authority, in Britain, chastised Deutsche Bank not only for its
manipulation of libor but also for its subsequent lack of
candor. “Deutsche Bank’s failings were compounded by them repeatedly
misleading us,” Georgina Philippou, of the F.C.A., declared. “The bank
took far too long to produce vital documents and it moved far too slowly
to fix relevant systems.”
In
April, 2015, the mirror-trades scheme unravelled. After a two-month
internal investigation, the three Deutsche Bank employees were
suspended. One was Tim Wiswell, a thirty-seven-year-old American who was
then the head of Russian equities at the bank. The others were Russian
sales traders on the equities desk: Dina Maksutova and Georgiy Buznik.
Afterward, Bloomberg News suggested that some of the money diverted
through mirror trades belonged to Igor Putin, a cousin of the Russian
President, and to Arkady and Boris Rotenberg. The Rotenberg brothers own
Russia’s largest construction company, S.G.M., and are old friends of
Vladimir Putin. They are on the U.S. government’s list of sanctioned
Russians, which was compiled in response to Putin’s aggression in
Ukraine. According to the U.S. Treasury, the Rotenbergs have “made
billions of dollars in contracts” that were awarded to their company by
the Russian state, often without a transparent bidding process. (Last
year, S.G.M. was awarded a contract worth $5.8 billion to build a
twelve-mile bridge between Russia and Crimea.)
In
June, 2015, with pressure from shareholders intensifying over the
mirror trades and other scandals, the co-C.E.O.s of Deutsche Bank, Anshu
Jain and Jürgen Fitschen, announced that they would resign. They were
replaced by John Cryan, whose remit was to clean up the bank. That
September, he announced the impending close of all investment-banking
activity in Russia. When the Moscow investment bank shut down, in March,
the remaining employees threw a “going out of business” dinner at a
restaurant near the office. By the end of the evening, bankers were
dancing on the bar.
Many
current and former employees of Deutsche Bank cannot quite comprehend
how the equities desk in a minor financial outpost came to taint the
entire institution. The ostensible function of the Moscow desk was
straightforward: it bought and sold stock for approved corporate
clients—mutual funds, brokerages, hedge funds, and the like. The desk
had about twenty employees, and included researchers, who analyzed
financial data; sales traders, who took calls from clients about buy and
sell orders; and traders, who executed the orders.
According
to a former employee, before the crash of 2008 the desk’s yearly profit
was nearly three hundred million dollars. In the years after the crash,
profits plunged by more than half. In this environment of diminishing
returns on normal stock-market activity, the Moscow equities desk was
looking to find fresh revenue streams.
Many
businesses in the Russian Federation avoid taxes by using offshore
jurisdictions, such as Cyprus, for their headquarters. Rich Russians,
meanwhile, often funnel their private fortunes offshore, in an effort to
hide their assets from the capricious and predatory Russian state.
Frequently, this fugitive money is invested in assets such as property:
on Park Lane in London, or Park Avenue in New York. (Boris Rotenberg’s
wife, Karina, told the Russian edition of Tatler that the family has three main houses: one in Moscow, one in Monaco, and a “dacha” in Provence, where she keeps her horses.)
The
impact of this capital flight is felt at both ends of its journey.
Research published last year by Deutsche Bank’s own analysts suggested
that unrecorded capital inflows from Russia into the U.K. correlated
strongly with increases in U.K. house prices and, to a lesser extent,
with a strengthening of the pound sterling. Capital flight also has
weakened Russia’s tax base and its currency. In 2012, Putin began a
“de-offshorization” program, urging businesses and oligarchs to keep
their headquarters and their fortunes at home. Two years later, after
Russia’s incursion into Crimea led to sanctions from the European Union
and the U.S., Putin declared that offshorization was illegal. But as the
ruble and the economy foundered many Russians felt even more eager to
remove their money. Mirror trading was an ideal escape tunnel.
According
to people with knowledge of how mirror trades worked at Deutsche Bank,
the main clients who were engaged in the scheme came to the bank in 2011
through Sergey Suverov, a sales researcher. Suverov left the bank soon
afterward. (He has not been charged with wrongdoing.) Igor Volkov, the
Russian broker, became the clients’ primary representative. Initially,
the accounts that Volkov handled—funds based in Russia and overseas,
with such bland names as Westminster, Chadborg, Cherryfield, Financial
Bridge, and Lotus—placed conventional stock-market orders. But Volkov
soon made it clear to his contacts at Deutsche Bank that he wanted to
make a large volume of simultaneous trades. (He could not be reached for
comment.)
What
did Deutsche Bank know about the companies that Volkov represented?
Each new fund that wished to trade with Deutsche Bank, known as a
“counterparty,” was subjected to a “double check” by compliance
departments in London and Moscow, to insure that papers were in order.
Evidently, all the counterparties passed both internal reviews. The bank
was also required to complete a “know your client,” or “K.Y.C.,”
assessment, and determine if the client had any taint of criminality.
Deutsche Bank did little to interrogate the source of funds—including
those behind Westminster and other Volkov clients. According to people
who worked on the desk in 2011, the K.Y.C. procedure consisted of not
much more than sales traders asking counterparties to fill in a
paragraph stating the source of their funds. “Nobody asked any further
questions,” a former employee recalls.
The
Russian equities desk generally had four sales traders who took calls
from clients. Two were American, and two—Maksutova and Buznik—were
Russian. The sales traders reported to Tim Wiswell, the American in
charge of the Russian equities team, and to Carl Hayes, an executive in
London. Two other managers—Batubay Ozkan, in Moscow, and Max Koep, in
London—oversaw the desk.
Maksutova
and Buznik were allocated the equities desk’s Russian clients.
Maksutova was assigned the clients represented by Volkov. Colleagues say
that she knew few personal details about Volkov. (A former trading
colleague of Volkov’s said that Volkov is about forty years old and
heavyset, adding, “He likes beer.” Another former colleague said that
Volkov “wasn’t a great trader, but he was a good fisherman.”) Volkov
previously had worked at Antanta Kapital, a brokerage owned by Arcadi
Gaydamak, a Russian-Israeli billionaire. Antanta Kapital ceased trading
in 2008, and Gaydamak was later indicted in Israel for fraud and money
laundering. (He received probation, but he recently spent three months
in prison, in France, for illegal arms trading.)
In
2009, top managers at Antanta Kapital formed Westminster Capital
Management, which became one of the first major mirror-trade clients. As
a Deutsche Bank employee put it, Volkov was Westminster’s “execution
guy.” Volkov also began executing mirror trades for several other
companies.
Four employees at
Deutsche Bank in Moscow recall that nobody tried to hide the scheme.
Wiswell, Buznik, and Maksutova all met with Volkov, and his orders were
discussed openly on the desk. Colleagues also remember that Hayes asked
both Buznik and Wiswell about the mirror trades. Few conversations
relating to the trades, however, were likely retained by Deutsche Bank’s
internal monitoring systems. Within the office, conversations about the
trades typically occurred face to face, and videoconferences with
colleagues in London were not recorded.
Several
Deutsche Bank employees in London knew about the mirror trades, even
though the orders were taken in Moscow. The London office executed half
the transactions. The trades were also documented by a computer system,
called DB Cat, which catalogued every trade made by the bank. Hayes and
Koep, the supervisors in London, could call up trading receipts on their
computers.
Although many people at
Deutsche Bank knew about the mirror trades, not everybody was happy
about them. In late 2012, Maksutova, the sales trader, went on maternity
leave, and Buznik temporarily worked with Volkov. Buznik became uneasy
that Volkov was executing identical buy and sell orders, and twice asked
to meet with Wiswell to discuss the propriety of mirror trading.
Wiswell, colleagues say, looked after Volkov’s accounts personally.
Wiswell assured Buznik that the trades were legitimate, and Buznik did
not share his concerns with other managers. (Neither Wiswell nor his
attorney responded to dozens of requests for comment.)
One
day in 2011, the Russian side of a mirror trade, for about ten million
dollars, could not be completed: the counterparty, Westminster Capital
Management, had just lost its trading license. The Federal Financial
Markets Service in Russia had barred two mirror-trade counterparties,
Westminster and Financial Bridge, for improperly using the stock market
to send money overseas. The failed trade was a problem for Deutsche
Bank. It had paid several million dollars for stock without receiving a
cent from Westminster. Employees at all levels of a financial
institution notice when a trading desk abruptly falls short by a few
million dollars. The episode should have raised serious
suspicions—especially given the revoking of Westminster’s license—but
apparently it did not.
Employees
recall that the failed trade was resolved in November, 2012, when
Westminster repaid Deutsche Bank. Volkov resumed calling in mirror
trades, on behalf of other counterparties. These companies were
supposedly subjected to a rigorous “client review” process, and all of
them were deemed satisfactory by a Deutsche Bank compliance team. But
there was a pattern suggesting malfeasance. Clients of the scheme
consistently lost small amounts of money: the differences between Moscow
and London prices of a stock often worked against them, and clients had
to pay Deutsche Bank a commission for every transaction—between ten
hundredths and fifteen hundredths of a percentage point per trade. The
apparent willingness of counterparties to lose money again and again, a
former manager at Deutsche Bank told me, should have “sounded an
air-raid alarm” that the true purpose of the mirror trades was to
facilitate capital flight.
Wiswell,
Buznik, and Maksutova also knew that there was a common interest among
the counterparties, because many of them were represented by Volkov. But
even Deutsche Bank employees who did not work on the desk could have
concluded, after a cursory examination, how closely aligned the funds
were. According to public documents, Chadborg Trade LLP, which was based
in the U.K., wholly owned Lotus Capital, which was based in Russia.
Another British mirror-trades entity, ErgoInvest, was registered in the
same office in Hertfordshire where Chadborg was registered. Westminster
Capital Management, meanwhile, was bought in 2010 by a man named Andrey
Gorbatov. In 2014, Gorbatov bought another Russian brokerage implicated
in mirror trades: Rye, Man & Gor. Clients of mirror trades told me
that the same people who established Westminster also established one of
the other counterparties: Cherryfield Management, in the British Virgin
Islands.
The
counterparties were not owned by Russian oligarchs. They were
brokerages run by Russian middlemen who took commissions for initiating
mirror trades on behalf of rich people and businesses eager to send
their money offshore. A businessman who wanted to expatriate money in
this way would invest in a Russian fund like Westminster, which would
then use mirror trades to move that money into an offshore fund like
Cherryfield. The offshore fund then wired the money, in dollars, into
the businessman’s private offshore account. A middleman who formed one
of the Russian counterparty funds told me that the cost of his services
depended upon the Russian authorities’ desire to stop the export of
capital. In 2011, when controls were lax, the fee was 0.2 per cent. In
2015, when sanctions were strong, and Putin was determined to retain as
much wealth as he could in Russia, the fee rose to more than five per
cent.
Crucially, the footprint of
individual mirror trades was small. One Deutsche Bank employee recalls
that, in 2014, the Moscow equities desk traded seventy to ninety million
dollars’ worth of stock daily. Mirror trades never exceeded twenty
million dollars a day, and were normally in the region of ten million
dollars. (Deutsche Bank claims that some of the suspicious trades were
“one-way,” meaning that another bank picked up the mirror order—a more
laborious but less traceable transaction.)
Whose
fortunes were being hidden? In April, I met a broker in Moscow who had
worked with clients of the Deutsche Bank mirror trades. He told me that
mirror trading was not a new scheme. It was invented, in the late
aughts, by other banks in Russia, to help importers avoid heavy taxes on
their products. The scam was ingeniously simple. A Russian importer
would claim on his invoices that he had bought, say, ten rubber ducks
rather than the true figure of ten thousand rubber ducks, in order to
pay tax on only ten rubber ducks. Of course, the importer still needed
to pay his supplier overseas for the remaining rubber ducks. He did this
by expatriating money using mirror trades. Instead of paying a large
tax to the Russian treasury, the importer paid a much smaller fee to
money launderers.
The broker found
it hard to believe that the wealthiest Russians, such as the Rotenberg
brothers, would have used mirror trades. After all, there were so many
ways for Putin’s friends to send their money offshore, including through
Russian government-owned banks, like Gazprombank, which have branches
overseas. Other people I spoke with disputed the broker’s assessment:
U.S. and E.U. sanctions have made it increasingly difficult for Russian
billionaires to expatriate money, and mirror trades had the advantage of
being a quiet method, because of the relatively small amounts involved
in each transaction.
Another Russian
banker, who helped to set up the mirror-trade scheme, told me that much
of the money belonged to Chechens with connections to the Kremlin.
Chechnya, the semi-autonomous region in the North Caucasus, is ruled by
the exuberantly barbarous Ramzan Kadyrov, who is close with Putin.
Chechnya receives huge subsidies from Russia, and much of the money has
ended up in the pockets of figures close to Kadyrov.
The
Deutsche Bank mirror-trades operation appears to be linked to an even
bigger attempt to expatriate money: the so-called Moldovan scheme.
Starting in 2010, fake loans and debt agreements involving U.K.
companies helped funnel about twenty billion dollars out of Russia to a
Latvian bank, by way of Moldova. When the Moldovan scheme unravelled, in
late 2015, several people were arrested. One was Alexander Grigoriev, a
Russian financier who controlled Promsberbank—a now defunct
institution, based in a Russian backwater called Podolsk, which counted
Igor Putin as a board member. Two of Promsberbank’s major
shareholders—including Financial Bridge—have been accused of making
mirror trades. The Russian news agency RBC has reported that “the
criminal dealings of Promsberbank” and the mirror trades at Deutsche
Bank are connected.
Deutsche Bank
has not commented on whose money was expatriated through the mirror
trades, although John Cryan, the C.E.O., has said that the bank has not
knowingly assisted Russians on the sanctions list. In the deadening
argot of finance, Deutsche Bank’s Russian fiasco has frequently been
called a “failure of controls.” In an interview in March, 2016, Cryan
said, “To our knowledge, the individual transaction steps in themselves
were innocuous. However, the case raises questions about how effective
our systems and controls were, especially with regard to the onboarding
of new clients, an area where we experienced difficulties in collecting
sufficient information.”
This
passive language is hard to square with the blatant nature of the
scheme. Roman Borisovich, a former investment banker at Deutsche Bank in
London, who focussed on Russian businesses, told me, “ ‘Fucking
Obvious’ is the middle name of Russian corruption.”
Deutsche
Bank’s myopia has been noticed by regulators. In March, the Financial
Conduct Authority of the U.K. sent a letter to Deutsche Bank, saying
that the company’s U.K. branch had “serious A.M.L. (anti-money
laundering), terrorist financing and sanctions failings which were
systemic in nature.” A month later, Georg Thoma, a lawyer who sat on
Deutsche Bank’s integrity committee, and who was brought to the bank
specifically to improve controls and analyze the bank’s former
misconduct, was forced out. He had just argued with executives at a
board meeting. The deputy chairman of the board, Alfred Herling, told
the Frankfurter Allgemeine Sonntagszeitung that Thoma had been “overzealous” in probing links between senior executives and misconduct at the bank.
Reports
of Deutsche Bank’s internal investigation into mirror trades do not
inspire confidence. Mirror trades occurred for at least two years before
anyone raised any concerns, and when red flags appeared it was months
before anyone acted on them. According to Bloomberg News, the internal
report notes that, in early 2014, a series of inquiries about the
propriety of mirror trades had been logged by multiple parties,
including Hellenic Bank, in Cyprus, the Russian Central Bank, and
back-office staff members at Deutsche Bank itself. When Hellenic Bank
executives contacted Deutsche Bank and asked about the unusual trades,
they did not hear back from the compliance department. Instead, their
inquiry was fielded by the equities desk that was performing the mirror
trades. Deutsche Bank in Moscow reassured Hellenic Bank that everything
was in order.
Tim
Wiswell, the head of the equities desk, was known to his colleagues as
Wiz. He grew up in Essex, Connecticut. He has strong connections to
Russia. His father, George C. Wiswell III, worked for many years in the
oil-and-gas sector in Moscow. Tim spent a year of high school there.
Wiswell
graduated from Colby College, in Maine, in 2001. In his mid-twenties,
he arrived in Moscow. He already spoke Russian. His first job was at
Alfa-Bank, the private bank of Mikhail Fridman, the second-wealthiest
man in Russia. When a salaried position did not materialize, he moved to
a junior position in equities at United Financial Group, the Russian
investment bank co-founded by Charlie Ryan, an American pioneer in
post-Soviet Russian finance. In 2006, U.F.G. was bought by Deutsche
Bank. Within a few years, Wiswell had become the head of the Russian
equities desk.
Colleagues at U.F.G.
remember Wiswell as an all-American type who loved sailing and skiing.
His boss there, Martin Skelly, told me that Wiswell was an industrious,
well-liked employee, and compared him to Matt Damon’s character in the
Jason Bourne films—“the same kind of rugged, good-looking, composed,
thoughtful guy.” In 2010, Wiswell and Natalia Makosiy, an art historian
from Moscow, got married in Newport, Rhode Island; photographs of the
event, which featured a samovar filled with Russian moonshine, appeared
in a wedding magazine.
Many
young Americans were drawn to Moscow banks in the aughts. Will Hammond,
an American who worked with Wiswell at U.F.G., has been writing a
memoir of his time on the trading floors—and dance floors—of Moscow. He
remembers Russia at the time as “the wild, wild East”: “If you wanted to
be competitive, you had to do a lot of things that were not done in the
developed world, because it was Russia. It was a very aggressive sales
mentality, which was going on across the board across all the Russian
banks.” Others recall that it was common to engage in “front
running”—using knowledge of a pending trade from a client to make money
on a personal account. In America, the tactic would be considered
insider trading. (Insider trading did not become illegal in Russia until
2011.)
A former colleague of
Wiswell’s at Deutsche Bank says that, even before the mirror trades,
some of Wiswell’s activity as head of the equities desk was
questionable. In the late aughts, a fund called Lanturno sometimes
traded with Deutsche Bank “over the counter.” Such trades do not pass
through a stock exchange; a broker sets the price based on the market
value. (Many mirror trades were also over-the-counter.) The former
colleague recalls occasions in which Lanturno lost money on a trade,
either by buying too high or selling too low. The next morning, however,
bank records would indicate that Lanturno had not lost money on the
trade. When challenged by colleagues, Wiswell would say that he had
altered the entries for Lanturno to rectify an error made on his part.
The sums involved were small and easily ignored—the reversed losses were
between ten and twenty thousand dollars. The former colleague, however,
noted that Wiswell was later flown to Mauritius on a private jet by
Lanturno’s owner, Dmitry Perevalov, to celebrate Perevalov’s fortieth
birthday. Two photographs on Facebook show that the men also went skiing
together. (Perevalov denied that any trades were amended on his behalf,
and said that it was “impossible” to change an order once it had been
entered into Deutsche Bank’s systems. Former employees recall trades
being amended regularly.)
Recently,
I received a photocopied trade blotter from a source within Deutsche
Bank. It showed that, between October 13, 2009, and October 27, 2009,
Wiswell made a series of curious over-the-counter trades on behalf of a
counterparty called Gigalogic Holdings, which, according to former
Deutsche Bank employees, was the personal investment fund of Stephen
Lynch, an American investor in Russia—and a friend of Wiswell’s. Because
a trader sets the price for over-the-counter trades based on a spread
of a few decimal points around a stock’s market value, there is scope to
create a margin. The blotter showed that Wiswell had repeatedly bought
low and sold high on Gigalogic’s behalf, effectively paying Lynch nearly
half a million dollars of Deutsche Bank’s money. According to
colleagues, when Wiswell was confronted about the transactions he said
that they had been approved by superiors. Lynch, Wiswell said, had been
helpful in a bankruptcy auction that Deutsche Bank had participated in,
and paying him through over-the-counter trades was “easier than writing
him a check.” (A lawyer representing Lynch denied that Lynch had been
paid by Wiswell, and also denied any connection between Lynch and
Gigalogic. When presented with company documents from Cyprus showing
that Lynch owned all the shares in Gigalogic between 2007 and 2012, the
representative declined further comment.)
When
the mirror trades began at Deutsche Bank, in 2011, revenues on
Wiswell’s desk were falling sharply, and Wiswell likely felt pressure to
improve performance. For Maksutova and Buznik, at least, there was no
obvious financial benefit to performing mirror trades: the extra volume
did not affect their bonuses. Many at Deutsche Bank, however, believe
that Wiswell profited personally from the scheme.
In
August, 2015, shortly after Wiswell was suspended from Deutsche Bank,
he was fired. He initiated a wrongful-dismissal suit. The court
hearings, in Moscow, were open to the press. On February 1, 2016, a
lawyer for Deutsche Bank called Wiswell “the mastermind of the scheme
for the withdrawal of billions of dollars from the country.” The lawyer
also said that Wiswell’s wife had received a quarter-million-dollar
payment, for “financial services,” into the bank account of a
corporation that is registered under her name. Wiswell lost the suit.
Deutsche
Bank refused to say whether it believes that Wiswell took bribes, and
declined to discuss the case further for this article, perhaps because
of the ongoing investigations into its Moscow office. According to
people within Deutsche Bank, however, senior executives have told
colleagues that Wiswell received bribes far in excess of the
quarter-million-dollar payment cited by the company’s lawyer.
Will
Hammond, Wiswell’s colleague at U.F.G., suggested to me that the
bribery allegations were part of an effort to place the blame solely on
Wiswell and save the jobs of Deutsche Bank supervisors. One of the
executives who oversaw the desk, Batubay Ozkan, plans to leave the bank
this year, by mutual agreement; Hayes and Koep—the supervisors who could
monitor the trades made by Wiswell’s desk—still work for Deutsche Bank
in London. (None of the three have been charged with wrongdoing.)
“Someone is going to an awful lot of trouble to make Wiz look guilty,”
Hammond said.
On an April evening
in Moscow, I met with a broker who had intimate knowledge of the
structure of the mirror trades. The city was emerging from the choking
cold of winter, and young people flirted outside Paveletskaya Station as
if it were high summer. As the broker and I walked across the square,
he characterized mirror trades as just one of a thousand ruses employed
by smart businessmen. But why, I asked him, would somebody with a
prominent position at a major bank get involved in such a scheme?
Wiswell’s annual compensation was in the region of a million and a half
dollars. The broker laughed. He said that Wiswell had been paid
handsomely by clients of the mirror trades. For the architects of the
scheme, the broker explained, it was worth it to bribe someone inside
the bank: “Guys always pay something. They think it will hook you, so
you are not going to do unexpected things.” In the estimation of the
broker, Wiswell was a useful functionary but hardly a criminal genius.
Sometimes, the broker said, money was transferred into an offshore
account maintained by Wiswell’s wife, and sometimes cash was delivered
to Wiswell in a bag.
Wiswell’s
current whereabouts are unclear. He recently launched a craft-beer
business, Barbell Brewery, in Moscow, but some months ago he left the
country with his wife and their two children for a trip to Southeast
Asia. In March, his wife posted a request on Facebook for a nanny,
noting that her family was on an extended stay in Bali, in the resort
town of Seminyak. She later told a Balinese dance instructor that the
family planned to remain on the island for a year. (Wiswell’s wife
declined, through a lawyer, requests for an interview.)
Former
colleagues expect Wiswell to return to Moscow, where he owns an
apartment. Russia is likely to be a friendly jurisdiction to him. When
Moscow regulators looked into the mirror trades, they found little to
trouble them. They said simply that Deutsche Bank had fallen victim to
an illegal scheme, and levied a token punishment—about five thousand
dollars. American and European regulators are likely to be much more
punitive. Indeed, Wiswell probably will not return to America anytime
soon, given the Department of Justice’s investigation of Deutsche Bank.
One of Wiswell’s friends, now in America, called him “finance’s Edward
Snowden.”
On March
9, 2015, less than a month before the mirror-trades scandal became
public, Oliver Harvey and Robin Winkler, two strategists in the research
department of Deutsche Bank in London, published a report, “Dark
Matter,” which described the vast unrecorded transfer of money among
nations. Most economic papers are politely ignored by the world at
large, but “Dark Matter” attracted wide interest. Several newspapers ran
articles about it, and Harvey appeared on both CNN and the BBC to
discuss his research.
The report’s
conclusions confirmed long-held suspicions. In any national economy,
the authors explained, there are capital flows that do not appear on
what is called “the balance of payments.” Errors and accidental
omissions should be random, and therefore reveal no pattern. The authors
found that in the United Kingdom the pattern was anything but random.
Britain had “large positive net errors” that suggested significant
“unrecorded capital inflows.” Analyzing data from other countries,
Harvey and Winkler deduced where the vast majority of unrecorded capital
flowing into the U.K. was coming from. Since 2010, they wrote, about a
billion and a half dollars had arrived, unrecorded, in London every month;
“a good chunk” of it was from Russia. “At its most extreme,” the
authors explained, the unrecorded capital flight from Moscow included
“criminal activity such as tax evasion and money laundering.”
In
a connected and digitized financial system, how could such capital
flight happen? Bank transfers leave a footprint. Imports and exports are
accounted for. How could money disappear in one place and show up in
another? The two strategists did not have to wait long, or look far, to
learn the shameful answer: of the eighteen billion dollars that the
researchers had estimated was flowing into the U.K. each year, about
twenty per cent had arrived there as the result of trades made at their
own bank. Half the trades were settled at Deutsche Bank’s City of London
headquarters, which is a short walk from the office, in Pinners Hall,
where Harvey and Winkler worked.
John
Cryan, the Deutsche Bank C.E.O., has little time to think about such
embarrassments. Whatever the outcome of the various investigations into
mirror trades, the bank is in trouble. It lost seven and a half billion
dollars last year. Cryan has called the 2015 result “sobering.”
Britain’s recent decision to leave the E.U. has imperilled Deutsche Bank
even further. So far in 2016, the bank has lost half its market
valuation, and in early August its stock price dipped to an all-time
low, of $12.58. The only investors who now like the bank are
short-sellers. The financier George Soros took a short position in
Deutsche Bank before the Brexit referendum, effectively betting against
the share price, and is estimated to have made more than a hundred
million dollars as the stock nose-dived. Meanwhile, unlike many other
Wall Street lenders, Deutsche Bank continues to loan millions of dollars
to businesses associated with Donald Trump. When the Times
questioned Trump recently about his credentials on Wall Street, he said
that a private wealth manager at Deutsche Bank, Rosemary Vrablic, could
vouch for him.
The mood within the
bank is bleak, not least because Cryan has announced that job cuts are
forthcoming. A recent survey found that less than half of Deutsche Bank
employees are proud to work there. (Cryan also called this news
“sobering.”) The mood among shareholders is, if anything, worse. Ingo
Speich, a fund manager at Union Investment, a German company that is one
of Deutsche Bank’s biggest shareholders, told me that in 2015 there
were catcalls at the bank’s annual general meeting. This year, Speich
stood up and inveighed against “a decade of mismanagement.” Meanwhile,
the market capitalization of Deutsche Bank has become a grim Wall Street
joke. This summer, Deutsche Bank, which is a hundred and forty-six
years old, has been valued at about eighteen billion dollars—the same as
Snapchat.
Since 2011, the Federal
Reserve has performed a yearly “stress test” of U.S. lenders, assessing
whether banks would have enough capital to withstand the shock of an
economic downturn. Deutsche Bank failed the test in 2015, and failed
again this June, when “broad and substantial weaknesses” were uncovered.
Soon after the Federal Reserve’s latest report was released, the
International Monetary Fund issued a dire warning. Deutsche Bank, it
said, was not only “one of the most important net contributors to
systemic risks in the global banking system”; it was also a contagious
agent, because of heavy financial “spillover” between Deutsche Bank and
other lenders and insurers. Any kind of failure at Deutsche Bank, the
I.M.F. suggested, would be extremely bad news for everybody.
Given
Deutsche Bank’s fragility, the mirror-trading scandal could not have
come at a worse time. Cryan has promised to settle the Russian case by
the end of this year, and the bank recently set aside about a billion
dollars for legal costs. This may not be enough. Last year, Deutsche
Bank was fined the relatively small sum of two hundred and fifty-eight
million dollars for its circumvention of sanctions against Iran, Sudan,
and elsewhere. In 2014, however, BNP Paribas agreed to pay nearly nine
billion dollars to settle with regulators over sanctions violations. And
the mirror trades may exact a heavy fine from U.S. regulators, who take
a dim view of activity that looks like money laundering. A payment as
vast as the one levied at BNP Paribas could require Deutsche Bank to
raise capital to survive. A German government bailout might become a
necessity. A capital shortfall at Germany’s largest bank might provoke a
banking crisis across Europe. The shock to the global economy would be
profound.
Deutsche Bank’s Web site
includes a statement of values. The document was written in 2013, when
Deutsche Bank created a new code of ethics to help it “conduct business
with the utmost integrity.” In the wake of the mirror-trades scandal,
one section of the text stands out. “We enable our clients’ success by
constantly seeking suitable solutions to their problems,” it reads. “We
will do what is right—not just what is allowed.” ♦
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