Deutsche Bank admits breach of 2021 DOJ DPA tied to ESG reporting failures, has current compliance monitor extended to 2023

By Brian Monroe
bmonroe@acfcs.org
March 14, 2022

U.S. federal prosecutors have found Germany’s largest bank to be in violation of a 2021 multi-agency deferred prosecution agreement tied to graft, fraud and illicit commodities trading practices.

The U.S. Department of Justice (DOJ) has chastised Deutsche Bank for dragging its feet on reporting a whistleblower complaint alleging the bank overstated its investments in environmental, social and governance (ESG) initiatives and operations by hundreds of billions of dollars, with the relatively muted penalty of extending its current monitor and monitorship for nearly a full year, according to the bank’s just-released annual report.

In the original January 2021 deferred prosecution agreement (DPA), Deutsche Bank paid more than $120 million to resolve bribery, commodities trading and spoofing charges brought by a host of U.S. investigative and regulatory agencies, including the Justice Department, Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission.

In the settlement documents, prosecutors stated that between 2009 and 2016, Deutsche Bank violated the Foreign Corrupt Practices Act (FCPA) by doling out more than $7 million to business development consultants in China, the United Arab Emirates, and Saudi Arabia, according to the Justice Department and SEC.

As part of the DPA, Deutsche was required to report any potential new legal issues as soon as it found out about them.

Even after whistleblower concerns, PwC review, bank MIA on ESG struggles

But according to media reports and the publication that broke the story in August, the Wall Street Journal, Deutsche, after finding out about issues raised by an insider in January 2021 – didn’t immediately fess up to federal prosecutors.

Instead, the bank engaged in an internal, and then external consultant, review of the issues, but didn’t update the DOJ for more than six months – that is until federal officials got wind of the WSJ news story.

The consultancy, PricewaterhouseCoopers (PwC), eventually found no merit to the insider’s accusations.

While the Wall Street Journal reported that the newspaper had uncovered the potential breach of the DPA and reported on it late last year, the new wrinkle – and potential telling sign of federal investigative and regulatory enforcement trends to come – was how officials would punish the bank.

The answer: by extending the oversight of a corporate compliance monitor – ostensibly already installed for prior fincrime and other compliance failings in previous settlements – for nearly a full year, to February 2023.

The actions that raised DOJ’s ire this time around involved the bank’s subsidiary DWS Group GmbH & Co. KGaA, which allegedly misstated the cumulative value and assets devoted to Deutsche ESG efforts by nearly 350 billion euros, roughly $384 billion.

That it could be an ESG issue revoking a DPA is an ironic twist in the world of fincrime and related compliance rules and bank-driven altruistic aims.

Why?

Because banks bolstering these arenas, largely by choice and not regulatory pressure, are trying to portray the image that they are caring more about more esoteric, corporate reputation boosters, like climate change, human rights – and global conflict.

On the social side of the equation, fearing customer reactions and reputation-shaming, more than 400 companies have announced their withdrawal from Russia—but “some companies have continued to operate in Russia undeterred,” according to a Yale School of Management analysis tracking which corporates have jettisoned Russia.

The goals of ESG initiatives are to better understand how the bank could be directly, or through customer relationships, harming the environment, hampering discourse on social issues, like racial justice, and governance, including the decisions around the diversity of the C-suite and top banking executives.

ESG, a newer acronym from the stately and staid classics like anti-money laundering (AML), has burst on the scene in the aftermath of major protests tied to equality and social justice protests.

As well, customers are asking harder questions about their banks, wanting to know that these institutions stand for more than just padding profits.

That’s fine, but it can’t do so at the expense of funding a project that deforests the Amazon or supports a mine that produces toxic waste that pollutes and befouls rivers.

While the connections may not always seem obvious, institutions globally are taking a hard look at how financial crime programs connect to and support wider sustainability goals and analyzing how they connect to fincrime typologies, like environmental crimes, corruption and human trafficking.

Part of these efforts are also driven by the United Nation’s Sustainable Development Goals (SDGs) and broader industry initiatives on sustainability.

Corporate compliance stumbles before, after, during DPA, expected to get more rigorous review by regulators, investigators

How banks and corporates handle the compliance controls to counter money laundering and human trafficking and detect and report suspected frauds and scams is an issue also on the minds of federal officials – who in recent months have shown a willingness to take a harder tack on failings and breaches of negotiated settlements.

In essence: financial institutions and corporates facing federal prosecutions for financial crime compliance failures will find themselves facing more stringent resolutions, more pressure to name and shame individuals and less leeway or leniency – particularly if they have had prior high-profile enforcement actions.

That is, according to statements and updated guidance by DOJ unveiled just a few months ago by Deputy Attorney General Lisa Monaco, speaking at a recent industry conference.

She stated in late October that the agency is restoring prior guidance tied to the finer points of cooperation credit to name all involved, not just the top illicit influencers, to mine lower-ranking lackeys to reel in the bigger fish.

To read ACFCs coverage of the statements, click here.

To read her full statements, click here.

As well, she detailed federal authorities are crafting new guidance ensuring prosecutors weigh a company’s full compliance history – not just in a specific area, like corruption, if it has a hefty helping of prior tax infractions.

In tandem, the DOJ further stated it was rescinding prior guidance on any real or perceived roadblocks to assigning corporate compliance monitors – or in the case of Deutsche bank, continuing to use them in an ongoing monitorship.

The agency stated it would “review whether it was appropriate to enter into agreements to waive or defer prosecutions with companies that continue to break the law,” according to Reuters.

Between 10 percent and 20 percent of “all significant corporate criminal resolutions involve repeat offenders,” Monaco said, adding that the Justice Department had “notified two companies, without naming them, that they were in breach of such agreements,” according to media reports.

Deutsche admits DPA breach in annual report, noting scrutiny will continue

In its annual report, the bank gave up update on its various civil and criminal investigations, inquiries and issues around the globe, including its sustainability stumbles.

In its filing, Deutsche stated that on February 28, 2022, following a finding by the DOJ that the “Bank violated the 2021 DPA based on untimely reporting by the Bank of certain allegations relating to environmental, social and governance (ESG)-related information at the Bank’s subsidiary DWS Group GmbH & Co. KGaA.”

For its fumble, the bank agreed with the DOJ to “extend an existing monitorship and abide by the terms of a prior deferred prosecution agreement until February 2023 to allow the monitor to certify to the Bank’s implementation of the related internal controls.”

But that still may not be the end of it, as investigators could invoke harsher penalties or even a criminal prosecution, a thinly veiled allusion with Deutsche noting that the DOJ “has reserved all rights to take further action regarding the 2021 DPA if it deems necessary.”

So how did Deutche bank seemingly find itself in such a position, praying for leniency from the DOJ, while touting ESG efforts, that would typically be seen as a positive, socially responsible move?

Well, the problem does have to do with the color green.

“At the heart of the matter are whistleblower allegations, raised in March 2021, of large-scale greenwashing at Deutsche’s asset management arm DWS,” according to the Financial Times.

The allegations were levled by DWS’ former head of sustainability, Desiree Fixler, coming in short order after she was fired in early 2021.

In an email sent on March 17 to Karl von Rohr, Deutsche’s deputy chief executive and DWS chair, she “accused DWS of misrepresenting how it used environmental, social and governance metrics to analyze companies across its investment platform.”

DWS subsequently mandated accounting and consulting firm, PwC, which guided the firm on ESG topics, with an “internal investigation into the complaint. PwC later dismissed all allegations,” according to the FT.

Fixler’s made her allegations public with the help of the Wall Street Journal last August, after which the DOJ launched an investigation into the ESG errors.

Did ESG changes come because of whistleblower fears or updated EU expectations?

News about the probe wiped €1 billion from DWS’s market capitalization in a day. After Fixler’s departure, DWS ditched its controversial “smart integration” ESG approach that was at the heart of her complaint, according the Times.

DOJ’s fears were potentially confirmed with the difference in the ESG figures detailed in the annual report.

In its 2021 annual report, also published on Friday, DWS only reported €115bn in “ESG assets” for 2021 — 75 per cent less than a year earlier when it stated that €459bn in assets were “ESG integrated,” according to the story.

The “smart integration” approach “will cease to exist during 2022” and will be replaced by a new, more demanding framework based on new EU rules, the DWS annual report said.

“I pointed out in 2020 that smart integration was a highly flawed risk assessment system that could cause investors financial harm,” Fixler told the Financial Times on Friday.

In its 2020 annual report, DWS described “smart integration” as one of “the first steps” on its road map to climate neutrality, calling it a “new more intensive review process for managing sustainability risks.”

Fixler objected to DWS labelling investment strategies as “ESG integrated” even when funds management had mere access to ESG data but decided not to use it, according to FT.

DWS rejected the greenwashing allegations and denies any wrongdoing. It has not booked any provisions that are earmarked for the case.

A person familiar with DWS’s internal discussions said that the changes were made regardless of the whistleblower complaint, but were triggered by new EU regulation that was put in place after the asset manager introduced its “smart integration” approach, according to the Times.