Behavox Blog

No hiding place for Deutsche Bank as blame game exposes endemic compliance failures

Mar 7, 2018 10:25:18 AM / by Behavox Regulatory Intelligence

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The former Deutsche Bank trader Guillaume Adolph was fined £180,000 ($250,000) and banned from the industry for his role in the Libor rigging scandal this week, but instead of going quietly he has turned fire on his former employer and accused it of letting him down.

 

In a statement, BCL Solicitors said Adolph rubbished the UK Financial Conduct Authority’s findings that he was “not fit and proper” to work in the sector, and said Deutsche had used the traders collared for manipulating the benchmark as scapegoats.

 

“As the FCA has previously found, the blame for the problems associated with Libor within Deutsche Bank lies firmly at the door of the bank,” a statement issued by his lawyers, BCL Solicitors said. “In a regulatory vacuum, the bank failed to provide Mr Adolph and others with any proper guidance or training.”

 

Adolph said the bank placed him in a position of direct conflict of interest in his trading role, and “specifically encouraged the kind of culture that only now, many years on, has led to FCA sanctions”.

 

The FCA is fairly straight that it does not buy the line that Adolph did not know his actions were taking place in any kind of “regulatory vacuum”, and said he was “knowingly concerned in Deutsche’s failure to observe proper standards of market conduct”, acknowledging the serious internal oversights that have given Deutsche the ignominious title of ‘Europe’s most heavily fined bank this century’.

 

According to Bloomberg chat logs, the FCA found that between July 2008 and March 2010, Adolph and others begged Deutsche’s Swiss franc Libor submitters to adjust submissions to benefit their trading positions. Adolph, a co-conspirator of jailed ex-UBS and Citigroup trader Tom Hayes, also bent his position, as Deutsche’s primary yen Libor submitter, to his own advantage. The chats also show Adolph agreeing to make yen Libor submissions in collusion with a trader from another bank.

 

However, in a section of its notice entitled “Recklessness”, the FCA said Deutsche did not provide any formal training to Adolph on Libor submissions, despite the behaviour that he and others widely acknowledged to be in breach of market manipulation rules.

 

The regulator repeatedly chides the bank for risk management flaws and for having inadequate systems and controls. It is often basic mistakes like training oversights, lawyers told Behavox Regulatory Intelligence, that will have the FCA continually revisiting any firm even after a clean-up operation and remediation programme.

 

“There is currently a low bar for commencing an enforcement action,” said Andrew Tuson, head of the white collar practice at Berwin Leighton Paisner law firm. “Firms should be well aware of the heightened environment for risk and act accordingly.”

 

The compliance errors flagged in the 2015 FCA report are endemic in other breach notices that have dogged the bank for nearly two decades.

 

According to the Behavox Enforcement Case Database, a live tracker of enforcement and sanctions cases, since 2000 Deutsche has accumulated more than $12bn in penalties from more than 20 actions, with $9bn alone related to securities trading failures.

 

It has sucked up more than $3.5bn in Libor fines; this is $1bn more than its nearest rival, and it still faces further embarrassment with the ongoing criminal trial of two ex-employees, Matthew Connolly and Gavin Black, also accused of rigging the global benchmark.

 

In January, the bank was also fined $30m for so-called “spoofing” and manipulation of the futures market, in actions that also took place from 2008, this time running until 2014. The fine was double that of UBS who faced the next highest sanction from the Commodities and Futures Trading Commission, UBS.

 

Compounding a bad week, four days later the bank was fined a further $70m by the CFTC for attempted manipulation of the ISDAFIX benchmark, actions alleged to have begun in 2007.

 

How did the German lender end up blamed by both staff and regulators for myriad failings that have catapulted it to the top of the EU’s sanctions table?

 

The answer, chronicled in almost every order and notice put out by regulators in the wake of Deutsche’s latest fine, lies in the lax systems and controls, inferior email surveillance, and above all its consistently weak corporate governance and culture.

 

“The lessons to be learned from Deutsche Bank’s troubles are moral, ethical and practical ones,” said Betsy Collins of Burr & Forman LLP.

 

The bank’s management have been repeatedly shredded by regulators for allowing a poor culture to take hold. US authorities said Deutsche enabled “egregious and pervasive misconduct to thrive”.

 

“Likely people within the organization who were not guilty of the conduct themselves either learned of it or at least knew the culture was a breeding ground for this kind of conduct,” said Collins.

 

The FCA said it found evidence Deutsche Bank employees destroyed phone records despite an order to maintain them and then “took far too long to produce vital documents”. It “repeatedly” lied to regulators and also failed “to fix relevant systems and controls” in an expeditious manner.

 

“If you need to hide what you are doing, you probably should not be doing it,” said Collins. “Be as transparent as possible, and remember that in the digital age, you can be sure your sins will find you out and that evidence of them exists somewhere as perfectly preserved fossils.”

 

A lawyer who asked not to be named who has worked for Deutsche said the bank simply did not have any controls to stop or expose bad conduct, despite knowing this was and continues to be an area that the FCA deems to be a top priority.

 

“Even if they caught it, they did nothing with it, which is a cardinal sin now not just in the UK but with the likes of the SEC (Securities and Exchange Commission) and FINRA (Financial Industry Regulatory Agency) too,” the London-based lawyer told Behavox Regulatory Intelligence.

 

Along with Adolph’s ban, the FCA published its 2015 final order into Deutsche Bank’s alleged misdeeds, which came with a £220m penalty.

 

In the context of several major regulatory trends that have emerged in the last three years, including the Senior Managers Regime and individual accountability, the renewed focus on systems and controls, and the effectiveness of Market Abuse Regulation, the fine and sanctions now for such acts, which were described as “reckless”, would be significantly higher.

 

The FCA took Deutsche to task for the attempted manipulations, but saved another level of criticism for the compliance failings that exacerbated the problem.

 

Only after misconduct was discovered did Deutsche attempt to begin recording some of the calls. The FCA said this method of surveillance was “not fit for purpose”; it couldn’t identify who was talking, and the bank couldn’t recover the recordings within a reasonable time, nor how much telephonic data it had on each trader.

 

The bank told the regulator that to identify and retrieve all calls for a single trader for a single month using the standard retrieval process would take 105 hours of machine time. In the event of a much more wide-ranging regulatory request, retrieval using the standard retrieval process “could take years to complete”.

 

Internal investigations which followed produced statements from the compliance staff to the regulator that were “wholly false” in regard to Deutsche’s surveillance capabilities.

 

The regulator said Deutsche’s monitoring of communications of front office staff did not include any Libor-specific terms. In particular, there were no exact matches between the lexicon used in Deutsche Bank’s internal investigation and the lexicon used to monitor front-office communications.

 

It also said Deutsche Bank willingly destroyed potentially incriminating communications chat it could find, and that provision of certain other relevant electronic communications was “unacceptably slow”.

 

The regulator said the shortcomings of Deutsche’s compliance monitoring tools were magnified by the fact it only came to light during the investigation by the FCA, and that it could not be relied upon to handle internal probes.

 

Lawyers say the worst place to be is in a position where the regulator knows more than the firm it is investigating about wrongdoing, and as the FCA develops more advanced and sophisticated surveillance techniques, that is where some in the market will find themselves.

 

A slew of market abuse enforcements are being lined up by the regulator, and those who cannot get ahead of similar problems before they mushroom into the kind of environment that Deutsche has found so hard to change are going to be the most vulnerable.

 

“Adopt good enterprise risk management practices so you can identify risks ahead of time and try to hedge against them through improved systems, reserves and insurance protection,” said Collins.

 

Behavox runs regular roundtables for compliance professionals as part of its Compliance Community service in the UK, the US and Asia where peers get to share their knowledge and experience of market practice confidentially. Anyone interested in attending should email alex.viall@behavox.com.

 

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Disclaimer: This content is intended to provide general information in summary form on legal and regulatory topics, current at the time of publication. It does not constitute legal advice and should not be relied upon as such. 

Topics: enforcement, surveillance, Financial Conduct Authority