Deutsche Bank is investigating whether its staff mis-sold sophisticated investment banking products to clients in breach of EU rules and then colluded with individuals within these companies to share the profits.
The internal probe — codenamed Project Teal — was triggered by client complaints last year, according to people familiar with the process. It initially focused on a desk in Spain, which sells hedges, swaps, derivatives and other complex financial products.
The audit found that Deutsche had wrongly categorised client firms under the Markets in Financial Instruments Directive (Mifid) rules. These require banks to separate their clients by levels of financial sophistication, such as retail investor, professional investor or counterparty, which means another bank or financial institution.
Deutsche believes that some of its staff knowingly sold inappropriate or unsuitable products to customers who may not have been able to understand and shoulder the risk they were taking with these positions, the people said. The German lender is not just looking at a few isolated cases, but at what appears to be a broader pattern of misconduct over several years, the people said.
Project Teal is also looking into allegations that there was collusion between Deutsche employees and staff at some of the clients who bought the inappropriate products. One suggestion being explored is that the two sides shared some of the proceeds of the transactions, the people said.
“We initiated an investigation in relation to our engagement with a limited number of clients,” the bank said in a statement. “We cannot comment on details until all aspects of the investigation are complete.”
While Project Teal focused initially on Spain, the scope of the probe was subsequently extended to the rest of Europe, but it is believed only Spain and Portugal-based clients were affected, one of the people said. At the centre is one former employee who has already left the bank, the person added.
The investigation is drawing to a conclusion and the bank will have to soon make final disclosures to regulators about what happened and any measures it plans to take.
Deutsche’s primary regulators, BaFin and the European Central Bank, have been informed. Both supervisors declined to comment.
The focus of the Project Teal probe is part of Deutsche’s investment bank, which was the sole driver of the lender’s earnings growth in the first nine months of 2020. Buoyed by a global bond-trading boom, the unit’s revenue shot up 35 per cent year on year.
Over the past decade, Deutsche has become renowned for repeated breaches of compliance rules. It has forked out billions of euros in fines and settlements for misconduct that included rigging benchmark interest rates, selling toxic mortgage securities, and shortcomings over money laundering.
Chief executive Christian Sewing, in charge since April 2018 and the board member who is responsible for the investment bank, has pledged to improve the lender’s internal control and compliance functions.
Earlier this month, Deutsche agreed to pay US authorities nearly $125m to resolve allegations that it breached bribery and fraud laws by using a network of business development consultants to funnel kickbacks to clients.