Royal Bank of Canada (TSX:RY) has agreed to pay a US$35 million penalty to settle allegations from U.S. derivatives regulators that it conducted wash trades on U.S. futures markets as part of a strategy designed partly to generate tax benefits.

The U.S. Commodity Futures Trading Commission (CFTC) announced that a U.S. district court judge, Alvin Hellerstein of the Southern District of New York, entered a consent order against the bank for engaging in more than 1,000 illegal wash sales, fictitious sales, and non-competitive transactions over a three-year period. In addition to the US$35 million penalty, the order enjoins RBC from committing future violations derivatives rules.

In settling the case, the bank neither admits nor denies the CFTC’s allegations.

The CFTC charged RBC with the violations back in 2012. In the order handed down today, the court found that between June 1, 2007 and May 31, 2010, RBC “knowingly executed 1,026 illegal wash sales and fictitious sales of narrow-based stock index futures and single stock futures contracts,” the CFTC says. It says that the bank conducted the transactions as block trades through its branches and internal trading accounts that traded opposite two of its offshore subsidiaries, and executed the trades on the OneChicago, LLC futures exchange.

The order says that the trading strategy was designed, in part, to gain tax benefits for the banking group. It notes that the trades “negated the market risk inherent in normal futures transactions because the profits and losses that accrued to the RBC entities participating in the trades were ultimately consolidated in the RBC corporate group’s overall profits and losses, where they netted to zero, and were therefore economic and futures market nullities for the bank.”

“Illegal wash trades may seem innocuous. They are not. They provide misleading signals to the market and are thus prohibited, whether their purpose is to lessen a foreign tax bill or another reason,” said CFTC director of enforcement, Aitan Goelman. “This matter clearly demonstrates that the CFTC will vigorously enforce this prohibition to protect the integrity of our markets.”