Deutsche Bank is investigating whether its team mistakenly sold sophisticated investment banking products to clients in breach of EU rules and then conspired with individuals from those companies to share profits.
The internal investigation – dubbed Project Teal – was triggered by customer complaints last year, according to people familiar with the process. Initially, it focused on a table in Spain, which sells hedges, swaps, derivatives and other complex financial products.
The audit found that Deutsche misclassified client companies according to the rules of the Financial Instruments Markets Directive (Mifid). This requires banks to separate their customers by levels of financial sophistication, such as retail investor, professional investor or counterpart, which means another bank or financial institution.
Deutsche believes that part of its team intentionally sold inappropriate or unsuitable products to customers who may not have been able to understand and take the risk they were taking with these positions, people said. The German creditor is not looking at just a few isolated cases, but at what appears to be a broader pattern of misconduct over the course of several years, people said.
The Teal Project is also investigating allegations that there was collusion between Deutsche employees and employees of some of the customers who purchased the inappropriate products. One suggestion being explored is that the two sides shared part of the results of the transactions, people said.
“We have launched an investigation into our involvement with a limited number of customers,” the bank said in a statement. “We cannot comment on the details until all aspects of the investigation are completed.”
Although the Teal Project initially focused on Spain, the scope of the investigation was later extended to the rest of Europe, but it is believed that only customers in Spain and Portugal were affected, said one person. At the center is a former employee who has left the bank, the person added.
The investigation is coming to a conclusion and the bank will have to make final disclosures to regulators about what happened and any measures it plans to take.
Deutsche’s main regulators, BaFin and the European Central Bank, have been informed. Both supervisors declined to comment.
The focus of the Teal Project investigation is part of Deutsche’s investment bank, which was the sole driver of creditor earnings growth in the first nine months of 2020. Driven by a global bond trading boom, unit revenue soared 35 % per year in the year.
In the past decade, Deutsche has become known for repeated violations of compliance rules. It disbursed billions of euros in fines and misconduct agreements, including manipulation of benchmark interest rates, sale of toxic mortgage bonds and deficiencies in money laundering.
Chief Executive Christian Sewing, in office since April 2018 and a member of the board responsible for the investment bank, pledged to improve the creditor’s internal control and compliance functions.
Earlier this month, Deutsche agreed to pay US authorities about $ 125 million to resolve allegations that it violated bribery and fraud laws by using a network of business development consultants to channel bribes to customers.