Europe’s top banking regulators have informed Deutsche Bank that they are “not satisfied” with its probe into the mis-selling of risky foreign exchange derivatives in Spain, people briefed on the matter told the Financial Times.
Both the European Central Bank as well as Germany’s watchdog BaFin have expressed frustration with the probe — code-named “Project Teal” — which began in the second half of 2019 and is about to be concluded, people familiar with the matter said.
It has found that Deutsche Bank staff acted disingenuously, exploited flaws in the bank’s controls and broke EU rules to sell highly complex foreign exchange derivatives to small and medium-sized Spanish companies, the FT reported this month.
However regulators chided the group for several reasons, including methodological shortcomings as well as the duration of time it took to conduct and punish those concerned. One person familiar with the matter said that one of the points criticised by regulators was that the bank only scrutinised a limited amount of transactions when checking the quality of its internal controls, arguing that taking a broader sample would have been a better approach.
Deutsche Bank, BaFin and the ECB declined to comment.
After finding misconduct at one desk during the initial phase of the investigation, where flawed controls were deliberately gamed by employees, Deutsche widened the probe to other desks. While the bank uncovered shortcoming in its internal processes elsewhere, it did not detect that those holes were exploited by staff on other desks too according to people familiar with the matter.
Deutsche replaced large parts of its management in Spain as well as several senior investment bankers in London, while other people involved received compliance training and had their bonuses cuts, according to people familiar with the issue.
In total, fewer than 12 people were sanctioned by Deutsche Bank, the majority for a lack of oversight but some for exploiting flawed controls in bad faith.
The negative feedback from regulators on the probe, which could be followed by a fine, is a blow for the ambitions of Deutsche Bank chief executive Christian Sewing to usher in a new era of more rigorous controls and a better compliance culture.
In the decade before, Deutsche had been rocked by a string of highly embarrassing scandals including dividend tax fraud, Libor rate rigging, the mis-selling of mortgage-backed securities and money laundering for Russian oligarchs, exposing the bank to billions of euros in fines and settlements
However, the misconduct that has been investigated in Project Teal, which affected one London-based desk of the lender’s investment bank as well as its private bank in Spain, took place until mid-2019 — more than one year after Sewing was named CEO in April 2018.
While Sewing has promised to put an end to scandals and to improve the bank’s relationship with its regulators, the US Department of Justice rebuked it in 2021 for violating a deferred prosecution agreement when it disclosed a whistleblower complaint at its asset managing unit DWS too late to US authorities. In November, a long-running tussle with BaFin over the bank’s anti money-laundering controls escalated when the watchdog threatened to fine the lender if it misses crucial deadlines to implement change.