The European Central Bank (ECB) and BaFin, the financial supervisor from Germany, have both expressed their dissatisfaction over the actions of employees at Deutsche Bank, the country's largest lender, who mis-sold foreign exchange (FX) instruments to make large profits.
Deutsche Banks May Face a Fine over Project Teal
According to the Financial Times (FT) report, which quotes people familiar with the matter, ECB and BaFin said they are "not satisfied" with the 'Project Teal' probe regarding the internal review of the lender's misconduct.
The investigation that started almost three years ago, and is close to being summarized, found that Deutsche Bank employees used flawed elements of the internal control systems to sell highly-complex currency derivatives to small and medium-sized companies in Spain, in violation of EU law.
According to BaFin and the ECB, the action taken by the lender was too slow, and some shortcomings in the methodology of the internal investigation were noted as well. The bank allegedly inspected a limited number of transactions that were carried out. According to the regulators, a much broader sample of data would have been necessary to assess the situation better.
According to people familiar with the matter, the problem did not affect only one office, which was the probe's focus in its initial phase, but also other desks. However, the bank did not officially detect that employees were exploiting the security holes in other divisions. In the end, 12 people were punished for violating regulations related to supervision, and some for using the flawed systems in bad faith.
According to the FT, negative feedback from regulators regarding Project Teal could end in fines. The new penalties have continued Deutsche Bank's bad streak seen in recent years.
Watch the recent FMLS22 panel titled: "Regulation Roundup: Everything You Need to Know for 2023."
Christian Sewing Promised to Heal Deutsche Bank
Deutsche Bank had been involved in several high-profile financial scandals over the previous decade, including manipulating Libor rates, mis-selling securities, tax fraud, and money laundering for Russia's oligarchs.
When Christian Sewing was appointed as the new CEO in April 2018, he promised to steer the bank away from similar controversies in the future. However, the events now under investigation by Project Teal took place prior to mid-2019, which is a year after Sewing took over as head of the institution.
In addition, in 2021, the US Department of Justice admonished the institution for breach of prior arrangements after it belatedly submitted a whistleblower complaint to its asset management unit. Meanwhile, November saw the escalation of a long-term dispute with the German regulator over improving the money laundering controls. Finally, BaFin imposed an administrative penalty of €8.66 million.
Big Banks Pay 'Big Bucks'
In the past decade, the world's largest banks, including Deutsche Bank, paid a total of $10 billion in financial penalties for manipulating forex rates. Although the market hasn't witnessed such a major scandal since then, Project Teal and similar investigations show that large financial penalties go hand in hand with the activities of large lenders.
According to the SteelEye report, in 2022, the world's largest regulators imposed penalties of $7 billion on financial institutions.
Allianz Global Investors US LLC had to pay more than $1 billion in connection with an allegedly fraudulent scheme that concealed the risks of a complex options trading strategy called 'Strucuted Alpha'.
Meanwhile, in December 2022, the UK-based Santander paid £108 million for prolonged AML breaches. The UK unit of Santander failed to properly oversee and manage its AML systems for almost five years, from 31 December 2012 to 18 October 2017. These lapses impacted the oversight of more than 560,000 business customers.
