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Glitch risk

27 October 2015 By Dominic Elliott

Deutsche Bank’s systems are under scrutiny – in more ways than one. Regulators are looking ever more closely at $6 billion-plus of potentially sanctions-busting trades undertaken by Germany’s biggest bank by assets, the Financial Times reported on Oct. 25. A day later, the same paper said that Deutsche boss John Cryan would start over with the bank’s IT systems. The two issues could be related.

The fear for Deutsche investors is that the bank may have allowed blacklisted Russian oligarchs to evade U.S. sanctions by buying equity or equity-related instruments in roubles through Deutsche Bank in Moscow, while selling the same securities at its London branch for, say, pounds, dollars or euros. Deutsche blew the whistle itself on these so-called “mirror trades”, and has not been found guilty of anything yet.

It’s unclear why it took so long for Deutsche to come clean: media reports say that the suspect trades were executed over the last four years. If it knowingly enabled American sanctions-dodging, huge fines and worse could follow: a 2014 sanctions-related penalty for BNP Paribas was $9 billion. But there is another possibility – that its creaking computer systems prevented bosses from seeing what was going on.

Co-Chief Executive John Cryan’s plan to rip up Deutsche’s computer systems as part of a wider strategic overhaul suggests this may have been a factor. The bank has more than 100 different booking systems for trades in London alone, according to the Financial Times. Spotting mirror trades can be hard even with top-notch surveillance systems, a financial compliance executive told Breakingviews. Perpetrators can take simple but effective steps to mask their identities, such as trading via shell companies. Deutsche’s myriad technology platforms would have made effective monitoring tougher still.

The possibility that other wrongdoing could slip by unnoticed makes Cryan’s IT revamp essential. It will not be cheap, but it may save costs eventually: the Bank of England’s Andy Haldane noted in 2012 that big banks spend up to 80 percent of their computing budgets on simply maintaining legacy systems. And if it also helps Deutsche’s managers steer clear of litigation by spotting trouble in advance, investors could receive a double benefit.

 

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