Europe’s top banking regulator has told Deutsche Bank it is “not satisfied” with its investigation into the mis-selling of risky foreign exchange derivatives in Spain, people briefed on the matter told the Financial Times.
The European Central Bank as well as German watchdog BaFin have expressed frustration with the probe – codenamed “Project Teal” – which began in the second half of 2019 and will end, people familiar with the matter said.
It has been found that Deutsche Bank staff acted disingenuously, exploiting flaws in bank controls and broke EU rules to sell highly complex foreign exchange derivatives to small and medium-sized Spanish companies, FT reported this month.
However, the regulator expelled the group for a number of reasons, including methodological shortcomings as well as the length of time it took to conduct and punish those concerned. One person familiar with the matter said that one of the points criticized by the regulator is that the bank only examines a limited number of transactions when examining the quality of internal controls, arguing that taking a wider sample would be a better approach.
Deutsche Bank, BaFin and the ECB declined to comment.
After discovering wrongdoing at one of the desks during the early stages of the investigation, where defective controls were deliberately operated by employees, Deutsche expanded the probe to other desks. While the bank found flaws in its internal processes elsewhere, it did not notice that the holes were being exploited by staff at other desks, according to people familiar with the matter.
Deutsche replaced a large part of its management in Spain as well as several senior investment bankers in London, while others involved received compliance training and bonus cuts, according to people familiar with the matter.
In total, less than 12 people were approved by Deutsche Bank, the majority due to lack of supervision but some due to exploiting defective controls in bad faith.
Negative feedback from regulators on the probe, which could lead to fines, is a blow to Deutsche Bank chief executive Christian Sewing’s ambitions to usher in a new era of tighter controls and a better culture of compliance.
In the previous decade, Deutsche had been rocked by a string of embarrassing scandals including dividend tax fraud, Libor rate rigging, 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 wrongdoing that has been investigated in Project Teal, which affected one of the desks in London of the lender’s investment bank and also a private bank in Spain, did not happen until mid-2019 – more than a year after Sewing was named CEO in April 2018.
While Sewing has promised to end the scandal and improve the bank’s relationship with regulators, the US Department of Justice is threatening in 2021 for violating the deferred prosecution agreement when it disclosed a whistleblower complaint in the asset management unit of DWS late to the 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 lenders if they missed a crucial deadline to implement changes.