SEC penalizes embattled Deutsche Bank more than $16 million to settle graft failings tied to China, Russia ‘referral hires’ – third bank to fall

Securities and Exchange Commission

By Brian Monroe
bmonroe@acfcs.org
August 28, 2019

The country’s top securities watchdog has penalized beleaguered behemoth Deutsche Bank AG more than $16 million to settle charges it violated domestic corruption laws by hiring the relatives of foreign government officials in order to illicitly influence them and snare new investment banking business deals.

For nearly a decade, Deutsche Bank employees hired relatives at the request of foreign officials in both the Asia-Pacific region and Russia to capture or grow business or position them to do so, according to the Securities and Exchange Commission (SEC) order detailing violations of the U.S. Foreign Corrupt Practices Act (FCPA).

The action is just the latest household name bank to engage in what has been called the “princelings” scandals, where some of the largest banks in the U.S. and Europe intentionally skirted internal anti-bribery compliance program protocols to woo powerful and politically-connected individuals by offering choice employment opportunities to their children and relatives.

In 2016 JPMorgan paid U.S. authorities more than $260 million to resolve charges it hired the children of Chinese officials to capture certain choice banking deals, while Credit Suisse just a few years later paid nearly $80 million to settle a similar probe.

The Deutsche action also flies in the face of U.S. and foreign regulators, and international watchdog groups, calling for large, international financial institutions to create a “culture of compliance” that is truly enterprisewide and tackles potential financial crime vulnerabilities in a convergent holistic fashion, where they are tied to money laundering, fraud, corruption or cybersecurity.

In recent years, many large banks have struggled to extend broad and deep compliance practices to regions of the world still known to be tightly gripped by graft, including China, Russia, certain regions in the Middle East and the Americas.

In the latest SEC action, these “Referral Hires” bypassed Deutsche Bank’s typically highly competitive and merit-based hiring process and, in many instances cited by the SEC, were” often less qualified than applicants hired through the bank’s formal hiring process.”

“Between at least 2006 and 2014, Deutsche Bank provided valuable employment to the relatives of foreign government officials in various parts of the world as a personal benefit to the officials in order to improperly influence them to assist the bank in obtaining or retaining business or other benefits,” according to the SEC.

The hires happened even though since at least 2009, Deutsche Bank’s Global Anti-Corruption Policy “prohibited employees from providing ‘anything of value’ to a government official to gain an improper business advantage,” though the SEC admits the policy was weakly enforced and policed.

“From the outset, the primary goal of Referral Hiring was to generate business for Deutsche Bank by extending personal favors to clients, including government officials, through hiring their relatives,” the SEC stated in the action, including for companies about to do an initial public offering (IPO).

For example, “during the time Deutsche Bank was working to obtain an IPO from a Chinese client, the client’s Chairman asked Deutsche Bank to hire his son,” according to the action. “The banker working to obtain the IPO told Deutsche Bank management that if Deutsche Bank hired the Chairman’s son, he believed they would be awarded the business.”

Job performance issues

In other instances, when bankers submitted a client referral hire request, management in the Asia Pacific (APAC) region would the ask what role the parent performed at the state-owned entity (SOE) in a bid to “determine if the parent could steer business to the bank and asked the banker to quantify the fees Deutsche Bank could expect to earn from the referring client.”

Similar misconduct took place from 2009 to 2012 in Russia, where Deutsche Bank employees hired relatives at the request of foreign officials in Russia to obtain or retain business or other benefits.

As was the case in APAC, Russian Referral Hires were sometimes “unqualified and couldn’t perform the given tasks,” no matter how many times they were moved, re-assigned or given chances to learn, according to the SEC.

In some instances, if requested by the candidate or parent, Deutsche Bank’s London-based global management “authorized unqualified Russian Referral Hires to work in London.

One Russian Referral Hire performed so poorly in London that he was deemed ‘a liability to the reputation of the program, if not the firm…’ by a London-based human resource employee,” according to the SEC.

Penalty snapshot – Financial institution corruption connections:
  • Credit Suisse – Switzerland’s second largest bank and a Hong Kong subsidiary paid U.S. federal authorities nearly $80 million to settle corruption charges that it improperly awarded choice employment spots to the family and friends of Chinese government officials to influence and, eventually gain, new business. (7/2018)
  • Societe Generale: The French banking group was part of a historic multi-jurisdictional graft and rate-rigging deal. In June 2018, the bank stated it would pay $1.3 billion in a global settlement related to corruption and currency manipulation charges in the United States and France. (6/2018).
  • JPMorgan Chase– The largest US bank paid more than $260 million to settle federal charges it sought to corruptly influence Chinese officials into giving it preferential treatment in regional business and finance deals by awarding jobs and internships to their relatives and friends. (11/2016)
  • Las Vegas Sands– The casino and resort company agreed to pay $9 million to settle charges that it failed to properly authorize or document millions of dollars in payments to a consultant facilitating business activities in China and Macao. (4/2016)
  • BNY Mellon– SEC charged the global investment company with violating the FCPA by providing valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund. BNY Mellon agreed to pay $14.8 million to settle charges. (8/2015)
  • Och-Ziff Capital Management– The New York hedge fund entered into a deferred prosecution agreement and paid $412 million in combined penalties for bribing government officials in Libya, the Democratic Republic of Congo, and other African nations. (9/2016)
  • (Bonus, not a bank, but similar failings) Qualcomm– The San Diego-based semiconductor and telecommunications company agreed to pay $7.5 million to settle charges that it violated the FCPA when it hired relatives of Chinese officials deciding whether to select the company’s products. (3/2016)

We must do it!’

To cover their tracks, Deutsche employees in some cases created falsified books and records that obfuscated the corrupt hiring practices and failed to accurately capture and record certain related expenses, violating internal accounting rules, while also faking some of the qualifications and abilities of the referral hires.

In one very overt instance, Deutsche Bank hired someone simply called “Referral Hire D” at the request of her father, a Deputy Minister at a Russian government entity “from which Deutsche Bank had repeatedly, and unsuccessfully, sought business,” according to the SEC.

Referral Hire D’s father asked Deutsche Bank Russia’s Chief Country Officer (Russia Chief) to hire his daughter to work at a Deutsche Bank office in Moscow, London, or New York in 2009.“The Russia Chief enthusiastically voiced his support for the hire to his supervisors in London, ‘We must do it! We should have her in London as it is NOT politically correct to have her in Moscow!’ 

Deutsche Bank hired Referral Hire D as a temporary employee in Moscow with the understanding that she would be given a permanent job with Deutsche Bank in London.”But the deal from Russia never materialized – that is until the permanent position for “D” came to fruition. 

“Referral Hire D’s move to London was approved and approximately 10 days after Referral Hire D was transferred to London, Deutsche Bank received a request for proposal signed by Referral Hire D’s father regarding a €2 billion Eurobond issuance, which was the first step to obtain the business,” according to the SEC.