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Deutsche (DB) Violates DOJ DPA, Agrees to Extend Monitorship

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Deutsche Bank AG (DB - Free Report) has agreed to prolongate the term of an existing independent compliance monitor until February 2023, after the U.S. Department of Justice (DOJ) prosecutors detected that the bank breached terms of a deferred prosecution agreement (DPA) by not timely revealing a misconduct complaint on environmental, social and governance (ESG)-related information in its asset-management arm, DWS.

Per a Financial Times article, Deutsche had signed a DPA with the DOJ in 2021. As a part of the settlement related to the bank’s alleged manipulative commodities trading and bribery practices, DB had agreed to notify the DOJ about potential new legal issues at its earliest knowledge on the same.

However, the German banking giant broke the terms of the DPA with the DOJ by not disclosing a whistleblower’s complaint on greenwashing claims at DWS, in the nick of time. Deutsche has agreed to abide by the terms of the DPA and to allow the monitor to certify to the bank’s implementation of related internal controls. The DOJ has reserved all the rights to take further steps with respect to the 2021 DPA if required.

The issue at DB revolves around claims made last year by its former head of sustainability, about the bank’s action of overstating sustainability metrics on certain investments. The firm sometimes showed a more promising view of its progress on ESG investing than reality.

In the past, Deutsche has had several clashes with U.S. regulators in relation to foreign-exchange violations and money laundering cases. The German giant has also been answerable to the Fed on its risk management practices. It had previously been slapped with a fine of $41 million for money laundering susceptibilities.

In June 2021, it was privately reprimanded by the Federal Reserve to improve its anti-money laundering controls and other compliance procedures, as it persistently failed in paying heed to several pacts with U.S. regulators.

Our Take

While Deutsche's cost-control efforts and strategic initiatives will likely support its financials in the quarters ahead, the litigation issues due to the bank’s past business misconduct are a key concern. These might induce higher legal costs in the upcoming period, eventually hurting its bottom line.

Over the past six months, DB has lost 15.2% on the NYSE, wider than the industry’s fall of 2.5%.

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Currently, DB carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Several banks continue to encounter legal probes and are charged with huge sums of money for business malpractice. In January 2022, Morgan Stanley (MS - Free Report) agreed to pay $60 million as fine to settle a lawsuit by its customers. The lawsuit alleged that the investment bank had failed twice to correctly rescind some of its outdated information technology that exposed customers’ personal data.

While Morgan Stanley agreed to resolve the case via a settlement, the investment bank reportedly denied any wrongdoing. In the settlement documents, it was added that MS made “substantial” upgrades to its data security practices.

In October last year, Washington Federal (WAFD - Free Report) agreed to pay a civil money penalty of $2.5 million to the Office of the Comptroller of the Currency in relation to its February 2018 Consent Order for Anti-Money Laundering and Bank Secrecy Act (“AML/BSA”) deficiencies.

The president and CEO of WAFD, Brent Beardall had stated, “WaFd Bank is committed to building and maintaining an effective AML/BSA program and appreciates the opportunity to continue working with the OCC to achieve that goal.”

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