FCA fines Deutsche Bank for £227 million for IBOR failings and for misleading the regulator

The Financial Conduct Authority (FCA) has handed Deutsche Bank AG (Deutsche Bank) a £227 million ($340 million) fine, its largest ever for LIBOR and EURIBOR-related (collectively known as IBOR) misconduct. The fine is so large because Deutsche Bank also misled the regulator, which could have hampered its investigation.

Georgina Philippou, acting director of enforcement and market oversight, said:

“This case stands out for the seriousness and duration of the breaches by Deutsche Bank – something reflected in the size of today’s fine. One division at Deutsche Bank had a culture of generating profits without proper regard to the integrity of the market. This wasn’t limited to a few individuals but, on certain desks, it appeared deeply ingrained.”

“Deutsche Bank’s failings were compounded by them repeatedly misleading us.  The bank took far too long to produce vital documents and it moved far too slowly to fix relevant systems and controls.”

“This case shows how seriously we view a failure to cooperate with our investigations and our determination to take action against firms where we see wrongdoing.”

Between January 2005 and December 2010, trading desks at Deutsche Bank manipulated its IBOR submissions across all major currencies.

LIBOR and EURIBOR are based on daily estimates of the rates (submissions) at which banks on a panel can borrow funds in the inter-bank market. They are fundamental to the operation of both UK and international financial markets, including markets in interest rate derivatives contracts.

This misconduct involved at least 29 Deutsche Bank individuals including managers, traders and submitters, primarily based in London but also in Frankfurt, Tokyo and New York.

Deutsche Bank’s misconduct in relation to EURIBOR exemplifies how serious its failings were, and the potential they had to have a significant impact on the markets.

Traders at Deutsche Bank used a three pronged approach to attempt to maximise the impact on EURIBOR. These were:

  • To influence Deutsche Bank’s submitters to alter the Bank’s EURIBOR submissions;
  • To collude with other banks that sat on the panel that submitted the rates on which EURIBOR is based and request that they alter their submissions; and
  • On occasion to offer or bid cash in the market to create the impression of a change in the supply of funding in order to influence other panel banks to alter their submissions.

This misconduct went unchecked because of Deutsche Bank’s inadequate systems and controls. Deutsche Bank did not have any systems and controls specific to IBOR and did not put them in place even after being put on notice  that there was a risk of misconduct. What is more, Deutsche Bank had defective systems to support the audit and investigation of misconduct by traders. For example, the Bank’s systems for identifying and recording traders’ telephone calls and for tracing trading books to individual traders were inadequate. As a result, Deutsche Bank took over two years to identify and produce all relevant audio recordings requested by the FCA.

Failure to deal with the regulator in an open and cooperative way

Deutsche Bank gave the FCA misleading information about its ability to provide a report commissioned by the German regulator, BaFin. Deutsche Bank did not disclose the report to the FCA and claimed that BaFin had prevented it from being shared when this was untrue.

In addition, Deutsche Bank provided the FCA with a false attestation that stated that its systems and controls in relation to LIBOR were adequate. This was despite the complete lack of IBOR systems and controls. It was known to be false by the person who drafted it.

The FCA’s investigation was made more difficult and was delayed because Deutsche Bank failed to provide timely, accurate and complete information. In one instance, Deutsche Bank in error destroyed 482 tapes of telephone calls, which fell within the scope of an FCA notice requiring their preservation. Deutsche Bank also provided inaccurate information to the regulator about whether other records existed.

Deutsche Bank settled at an early stage of the investigation, qualifying for a 30% discount on its fine. Without the discount, the fine would have been £324 million.

We have worked closely with other regulators in the United States on this case: today the Commodities Futures Trading Commission has imposed a financial penalty of $800 million, the US Department of Justice has imposed a financial penalty of $775 million and the New York Department of Financial Services has imposed a fine of $600 million. The fine imposed by the FCA is approximately $340 million

Responding to the fine Jürgen Fitschen and Anshu Jain, Co-Chief Executive Officers of Deutsche Bank, said: “We deeply regret this matter but are pleased to have resolved it. The Bank accepts the findings of the regulators.

“We have disciplined or dismissed individuals involved in the trader misconduct; have substantially strengthened our control teams, procedures and record-keeping; and are conducting a thorough review of the Bank’s actions in addressing this matter.

“This agreement marks another step in addressing the past and ensuring that the Bank earns back the trust of its clients, shareholders and society at large.”

Deutsche Bank holds accountable those found to have acted inconsistently with its standards. It has worked intensively in investigating the matter. The Bank’s internal investigation was the largest in its history, involving the collection of more than 150 million electronic documents and 850,000 audio files and the review of more than 21 million electronic documents and 320,000 audio files.

The Bank recognises that there were defects and delays in collecting and producing documents and audio. It has significantly increased the number of employees dedicated to electronic discovery to 200 and raised expenditure by 600% since 2012.

Specific changes to procedures and controls across Deutsche Bank include:

  • Creating a Benchmark and Index Control Group, which now oversees the Bank’s IBOR submissions and reports to Risk Management, an independent control function;
  • Completely segregating duties between LIBOR/EURIBOR submitters and traders, including physical separation. Submissions are now based on observable transactions, not estimates, to the greatest extent possible;
  • Upgrading the Bank’s systems and controls so that it can more quickly identify electronic and voice communications that are of interest to regulators and to the Bank. This is part of the previously announced EUR 1 billion programme to upgrade systems and controls.