Legal risks have become practically synonymous with Deutsche Bank in recent years. It’s damaging and costly for Germany’s largest bank – and part of the reason former co-chief executive Anshu Jain lost his job less than two months ago.
It’s now the job of John Cryan, who replaced Mr. Jain as co-CEO at the start of July, to clean up the legal minefield. Unfortunately for him, Mr. Jain’s departure hasn’t marked an end to the string of damaging revelations stemming from the firm’s investment banking unit, which is the largest in Europe.
When the bank’s new chief financial officer Marcus Schenck in July presented investors with a summary of the most menacing legal cases still facing the bank, there was a new case that had suddenly been added to the top 5 list of horrors: A case of suspected money-laundering in Russia.
Since then it has emerged that U.S. regulators are investigating into whether traders at Deutsche Bank’s offices in London and Moscow may have conducted as much as $6 billion worth of suspicious trading, helping wealthy Russian clients convert money into dollars.
The consequences of this new scandal could be massive. Several well-informed individuals told Handelsblatt that the Russia problem could be as serious as the Libor scandal, a global scheme to fix the benchmark interest rate that cost Deutsche Bank $2.5 billion in fines – more than any other bank that was implicated.
Several well-informed individuals told Handelsblatt that the Russia problem could be as serious as the Libor scandal.
Although a fine as high as that imposed in the Libor case is not expected, Handelsblatt has learned that Mr. Schenck’s department’s initial estimate of a potential fine runs in the high nine figures – close to €1 billion.
But that isn’t the worst of it. Sources said Deutsche Bank’s non-executive supervisory board is outraged that the suspicious trades allegedly went on from 2011 until April of this year.
That calls into question the bank’s promises of “cultural change” when Mr. Jain and his co-CEO Jürgen Fitschen took over in May 2012. The promise included improvements in the areas of corporate culture and better supervision of its traders.
Once again, there seem to have been serious shortcomings in internal controls instead. The charges relating to Russia are serious. In addition to money laundering, investigators are looking into suspicions that traders aided capital flight out of Russia and even violated U.S. sanctions that have been in place for the past year.
Unlike some of the past scandals that have affected the bank, Deutsche Bank has tried recently to get out in front of the Russia problem. Mr. Schenk and Mr. Cryan, who has taken over management of the bank’s legal department, were unusually open about detailing some of the many legal troubles when they presented the bank’s second-quarter results in July. That in itself marked a departure from the Libor scandal, where the bank was sharply criticized by Germany’s financial watchdog and U.S. regulators for not cooperating well with investigators.
All of these aspects could affect the eventual penalty, which is hard to gauge at this point. Because the investigations have only just begun and there are no precedents, the bank cannot establish any accurate reserves to guard against the legal risks at this time. Deutsche Bank was unwilling to comment on the allegations beyond its report on the allegations included in its second-quarter results.
The Libor scandal cost Germany’s largest bank a pretty penny back in April. New York’s banking regulator and the U.S. Department of Justice imposed a large portion of the fine on Deutsche Bank. Both agencies have also picked up the scent in the money laundering scandal.
The fact that the Russian scandal is not an old case but extends into the present must be an especially bitter pill to swallow for Deutsche Bank’s supervisory board, which sets the strategic course for the bank and has the power to hire and fire its managers.
As Handelsblatt has learned, the case played an important role in the bank’s surprising change in top management in June. It was one of the catalysts that caused the mood to shift against Mr. Jain.
The supervisory board first learned about the details of the case at a meeting one day before an annual gathering of shareholders in May – one that would become one of the most raucous in the bank’s history.
The bank had just been handed the penalty in the Libor case a few weeks earlier. Many shareholders and investors were also unhappy with a lackluster strategic overhaul that the bank had unveiled a few weeks earlier. The restructuring plan promised to slim down the bank’s operations and make it more profitable, but was less ambitious and shorter on detail than investors had hoped.
Given that background, the supervisory board was already aware that a large proportion of shareholders were planning a vote of disapproval against the management board.
Yet the group still unanimously supported Mr. Jain – they wanted to give him a chance to make his case to skeptical investors. The board even handed him sole responsibility for overseeing the bank’s strategic overhaul on that day, despite all the criticism.
“And then came Russia – the straw that broke the camel’s back,” said one source close to the supervisory board, who declined to be named.
The Russia case changed everything. Although no one openly called for Mr. Jain’s resignation at the meeting, it was apparently clear that the mood had shifted once and for all, according to people close to the board.
Just over two weeks later, on June 7, Mr. Jain surprisingly announced that he was stepping down – of his own volition, at least officially. John Cryan, a former chief financial officer of Swiss bank UBS and a member of Deutsche Bank’s supervisory board, took over the top management spot on July 1.
Mr. Jain, who headed the investment banking division before his time as co-CEO, had difficulty shaking off old cases from the Wild West period of global banking before the financial crisis. In April, he said that he would assume responsibility for these cases by making sure that they would never happen again.
To that end, he and fellow co-CEO Jürgen Fitschen had announced a major program to revamp the bank’s corporate culture shortly before the two men took office in 2012. The bank devoted €1 billion to improving internal control structures.
But the current distressing conclusion is that none of these measures managed to prevent the Russia scandal – and this is cause for fear and resentment in the bank’s leadership.
The volume of questionable activities, known as mirror transactions, amounted to $6 billion. With the help of Deutsche Bank, Russian customers bought securities in rubles, which the bank’s London office simultaneously bought from them in dollars. There is a suspicion that Deutsche Bank never seriously scrutinized or examined the source of the money in Russia.
According to financial circles, some of the deals were concluded through so-called special purpose vehicles. In addition, there were times when the same person processed the purchase and the sale, which may have violated internal rules. The bank is unwilling to comment on the ongoing investigations.
Russia is especially problematic as a source country of laundered money, because strict sanctions and controls on the flow of money from and to Russia have been in effect since Moscow’s annexation of Crimea last year.
With their so-called mirror transactions, banks apparently not only laundered money but also, at least since 2014, may have helped move it out of the country illegally while circumventing the sanctions. 2014 was a record year for capital flight from Russia.
In its internal investigations, the bank has already examined of all its customers, but has found no evidence of violations of the sanctions, said financial insiders. But these customers also included broker-dealers, and the extent to which Deutsche Bank is also responsible for their customers is unclear.
The bank management is particularly concerned about the possible violation of sanctions, which could make the penalty that much more costly.
“If there were people involved who are on the U.S. sanctions list, or even terrorists who once killed an American, it would be a huge problem,” fears one insider, because this is an issue that U.S. authorities have taken very seriously in the past.
Mr. Jain may have left the bank. But John Cryan still has quite the problem on his hands.
Laura De La Motte is an editor at the Handelsblatt finance desk and a specialist banking correspondent. Christopher Cermak of Handelsblatt Global Edition contributed to this story. To contact the author: firstname.lastname@example.org