The U.S. Securities and Exchange Commission (SEC) has issued a fine of $25 million to DWS (also known as DIWA), the asset management arm of Deutsche Bank AG.
The fine, announced on the 25th of September, comprises two enforcement actions: one for failure to develop a mutual fund Anti-Money Laundering (AML) program, the other for “misstatements” regarding its process for Environmental, Social, and Governance (ESG) investment.
DWS, which was separated out from Deutsche Bank AG in 2018, has now endured over two years of investigations from the SEC, BaFin, the US Department of Justice, and German prosecutors. The prolonged investigations and media coverage has done significant damage to its reputation as a household name in Asset Management.
A Massive Fine for the Asset Management Sector
A few months ago, Bloomberg reported that DWS was in “advanced resolution discussions” with the SEC and that the asset management firm was preparing to part with $30 million to resolve expected settlements from the various probes it faced. At the time, DWS was cited as saying it did not expect any proceedings to have a significant impact on its financials.
However, the size of the SEC’s fine is not insignificant. In fact, it’s larger than all the fines to asset management firms globally in the last year combined. For some context, asset management firms were the target of $18 million in fines in 2022 for AML and ESG related breaches - $12 million of this was accounted for by breaches by US-based firms.
So, while $25 million may not seem like a huge sum for a name like Deutsche Bank, it’s an absolutely mammoth fine for just one organization to be handed and is far larger than most other fines issued by the SEC and other U.S. regulators for similar offences.
Its response to DWS’s breaches suggests that the SEC is ramping up its enforcement efforts towards asset managers and upping the stakes for those that fail to meet the mark in their compliance frameworks. The dominance of the SEC and other US regulators in the Asset Management enforcement landscape may indicate the sector’s inability to comply with AML and related regulatory requirements. The fact that US regulators are the most active territory when it comes to enforcement actions to the sector indicates that firms operating in or dealing with the US must ensure high standards of compliance with US regulatory frameworks.
The Reputational Damage that Comes with Regulatory Scrutiny
Since August 2022, the impact of investigations into DWS and Deutsche Bank have so far included:
- The loss of DWS’s CEO, Asoka Woehrmann
- A 24% drop in share prices for DWS (from August 2021 to July 2022)
- Raids on the DWS and Deutsche Bank headquarters
- A $25 million fine for DWS from the SEC
For Deutsche Bank, this fine to DWS is the latest in a series of run-ins with regulators, a habit which has cost over $1 billion in enforcement fines since 2008 and plagued consumer and investor trust in the firm. Just months ago, Deutsche Bank were fined $186m for AML breaches by the US Federal Reserve – which goes to show how much the German banking group is featuring on the radar of US regulators lately.
The SEC’s Current AML Priorities for US Financial Institutions
On July 31, 2023, the SEC's Division of Examinations released a "Risk Alert" titled "Observations from Anti-Money Laundering Compliance Examinations of Broker-Dealers" which outlines significant findings from the SEC's scrutiny of multiple broker-dealers’ compliance with AML regulations.
The publication of these observations, while centered on Broker-Dealers, sheds valuable insight for all US-based financial institutions as to the SEC’s enforcement priorities and areas of focus for AML enforcement in 2023.
Deficiencies were crucially identified around procedures concerning: suspicious activity monitoring and reporting mechanisms; independent program testing; personnel training; and customer identification and verification procedures. Asset managers and other financial institutions subject to the SEC’s rules should look to shore up compliance in these areas in particular and learn from the mistakes of other sectors within financial services.
How Asset Managers Can Avoid Non-Compliance Fines
With regard to AML failings, the SEC’s release criticized DWS for two key things:
- That mutual funds it advised did not develop and implement a “reasonably designed AML program” to comply with the Bank Secrecy Act (BSA) and applicable jurisdictional regulations set out by FinCEN.
- DWS caused the failure of these mutual funds to adopt and implement such policies and procedures to detect suspicious activities and to conduct AML training specific to the mutual funds’ lines of business.
It additionally found that the asset management firm “failed to adopt and implement policies and procedures reasonably designed to ensure that its public statements about the ESG integrated products were accurate.”
So, how can fellow asset managers avoid the mistakes – and the financial penalties – of DWS and Deutsche Bank? What does ‘good’ look like?
The key things for asset management firms to aim for in developing and implementing an AML program are:
- Building a truly optimized, efficient, and transparent process which doesn’t stop after initial onboarding, but continues and remains consistent and thorough, through all touchpoints in the investor lifecycle
- Integrating data sources and systems pertaining to investor onboarding and ongoing monitoring, centralizing this information, and presenting it in a clear and meaningful way to internal teams. This will help to gain a true, integrated view of all investors across all teams, business lines and jurisdictions
- Sourcing a client/investor lifecycle technology partner that offers a truly engaged community-based platform in order to more effectively tackle regulatory and industry challenges
- Prioritizing visibility of executive, operational and client relationship employees
How Fenergo Helps Asset Management Firms to Remain Compliant with AML Regulations
The Client Lifecycle Management Experts
Led by our team of regulatory experts, our global client base feed directly into community forums, client advisory board meetings and product-specific working groups, allowing for mutualization of cost and future proofing against upcoming regulations.
Digitalized Investor and Counterparty Journeys
Investor onboarding, including KYC, AML and compliance processes, are streamlined by replacing manual, error-prone tasks with automation and straight-through processing. Increased automation reduces the manual rekeying of data, improving data accuracy and reducing both operational costs and the workload of operational teams
Continuous Risk Monitoring
Fenergo provides continuous monitoring of the investor profile by identifying changes from integrated data and screening providers, assessing the impact of those changes and determining materiality to keep compliance profiles up-to-date in real-time
360 View of Clients and Investors
Fenergo integrates with financial institutions’ existing technology ecosystems, to consolidate and centralize investor data and present this as a single investor profile.
Our AML solutions provide clear visualization of ultimate beneficial owners (UBOs) and complex fund structures, enabled by centralized data and API data integrations.
Speak to a member of the Fenergo team today about our AML, ESG, and compliance solutions for Asset Management.