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Deutsche Bank Warned by FCA Over 'Serious' Control Issues

Regulatory and legal issues seem to be never ending for Deutsche Bank AG DB. The German banking giant has “serious” failings in anti-money-laundering controls, per findings by the UK regulator Financial Conduct Authority (FCA). The news was first reported by The Financial Times on Sunday, citing a letter by FCA to Deutsche Bank, dated Mar 2.

FCA stated in the letter, “Our overall conclusion was that DB UK had serious AML (anti-money laundering), terrorist financing and sanctions failings which were systemic in nature.” The regulator also added, “Effective senior management engagement and leadership on financial crime had been lacking for a considerable period of time.”

In response, Deutsche Bank mentioned, “We understand the importance of this issue and are committed to and engaged in fixing it.”

Reportedly, FCA has now ordered a separate independent review. The findings of FCA come as part of Deutsche Bank’s participation in the regulator’s AML program, which is evaluating the controls of 14 major banks against financial crime. The program is being overseen by FCA’s supervision team and any potential fines ordered are not generally publicly disclosed.

Notably, in a bid to ensure high internal operating standards, last November, the company’s new Co-CEO John Cryan announced the review of its know-your-client (KYC) and client on-boarding procedures. The company seeks to achieve an increased transparency in these processes, which will, in turn, help it maintain sustainable client relationships in the long run.

Tightening the internal policies, the company further decided to suspend the addition of new clients as well as introduction of new products to the existing clients in “certain locations that have higher risk weightings.” Further, the company determined that any transaction with a new client will commence only upon successful completion of the required KYC and on-boarding procedures.

The latest issue crops up at a time when Deutsche Bank’s co-CEO Cryan, is expediting efforts to revamp the bank and boost profitability. However, we remain cautious as litigation headwinds are not likely to ease soon as the bank continues to struggle with numerous lawsuits and regulatory proceedings. A potential legal action will not only add to the litigation burden of Deutsche Bank but also expose the company to high legal expenses stemming from the case.

Deutsche Bank currently carries a Zacks Rank #3 (Hold). Some well placed stocks in the foreign banks space include Banco Macro S.A. BMA, Grupo Financiero Galicia S.A. GGAL and Shinhan Financial Group Company Limited SHG, each sporting a Zacks Rank #1 (Strong Buy).

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DEUTSCHE BK AG (DB): Free Stock Analysis Report
SHINHAN FIN-ADR (SHG): Free Stock Analysis Report
GRUPO GALIC ADR (GGAL): Free Stock Analysis Report
BANCO MACRO-ADR (BMA): Free Stock Analysis Report
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