By Karen Freifeld and Arno Schuetze
NEW YORK/FRANKFURT (Reuters) - Deutsche Bank AG has agreed to pay $425 million to New York's banking regulator over a "mirror trading" scheme that moved $10 billion out of Russia between 2011 and 2015, the regulator said on Monday.
In addition, Britain's Financial Conduct Authority is about to penalise the bank roughly $200 million for the suspicious trades, a person familiar with the matter said.
The scheme involved clients buying stocks in Moscow in rubles and related parties selling the same stocks shortly thereafter through the bank's London branch, the New York Department of Financial Services (DFS) said in a statement.
The trade of a Russian blue chip stock, typically valued at between $2 million to $3 million an order, was cleared through the bank's New York operations, with the sellers typically paid in U.S. dollars, DFS said.
The regulator, which licenses and supervises the New York branch, found the bank conducted its business in an unsafe and unsound manner in violation of state banking law.
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Though the trades appeared to have no legitimate economic purpose, Deutsche's deficient anti-money laundering controls and know-your-customer policies did not detect and stop the scheme for years, DFS superintendent Maria Vullo said.
Deutsche Bank said "it has been unable to identify the actual purpose behind this scheme," according to a consent order between the New York regulator and the bank. "It is obvious, though, that the scheme could have facilitated capital flight, tax evasion or other potentially illegal objectives."
In addition to the penalty, Deutsche is required to retain an independent monitor to review the bank's compliance programs.
Deutsche Bank said in a statement that the settlement monies were already reflected in existing litigation reserves. It said the regulator considered its cooperation and remediation in reaching the penalty.
Deutsche also said it was cooperating with other regulators and law enforcement authorities with their ongoing investigations of the trades.
A spokesperson for the Financial Conduct Authority declined to comment. The source on the FCA's expected penalty did not want to be identified because the terms were not public.
The New York regulator said it worked closely on the investigation with the FCA.
Reuters reported on Monday that Deutsche Bank was poised to settle with British and U.S. authorities over the trades.
The U.S. Department of Justice, which also has been investigating the suspicious trades, is not party to the deal. A spokesman for the department declined to comment on the status of its probe.
Deutsche Bank disclosed last September that it had taken disciplinary measures against certain employees as part of an investigation of the trades and would continue to do so.
The bank also cut back on its investment banking activities in Russia last year.
Monday's consent order found Deutsche Bank's Moscow traders facilitated the scheme, with most of the trades placed by a single trader representing both sides of the transaction.
Deutsche's Moscow traders did not question the suspicious trades because it made for easy commissions when their Russian business had slowed, the regulator found.
The regulator also noted that one Moscow supervisor may have been bribed to facilitate the schemes, and that senior bank employees missed red flags and did not take action towards real reform until 2016.
Deutsche Bank had set aside 1 billion euros ($1.1 billion) in provisions for the Russian probes, people close to the matter have told Reuters.
The resolution of the New York mirror trade probe comes on the heels of a $7.2 billion agreement with the Justice Department for misleading investors in selling mortgage-backed securities in the run-up to the financial crisis. The two settlements lift much of the uncertainty swirling around the bank over its exposure to fines and enforcement.
The bank is due to report fourth-quarter financial results on Thursday.
(Reporting by Karen Freifeld and Arno Schuetze; Editing by Bernard Orr)