Deutsche Bank Attracts Attention Due to Failure in Internal Controls

Deutsche Bank AG (NYSE: DB) is set to be under the limelight because of a series of instances, which are all related to the legal matters of the bank. The financial firm employed strategic restructuring measures during the previous year to reorganize itself as a profitable business. Attention from these efforts could however turn to the recent accusations regarding failure in terms of failure in its internal controls.

Just recently, the Financial Conduct Authority in the United Kingdom found the financial controls of the bank to be insufficient against terrorist financing and money laundering. According to the FCA, it reviewed Deutsche Bank during the previous year and found “serious” and “systemic” internal controls failure. This involves inadequate monitoring, incomplete documentation, as well as influencing the company’s staff to undertake certain actions to specific customers. The regulatory body has now sent a letter to the German bank, which demands a separate independent review.

Based on a report by the Financial Times, the FCA indicated in a letter that the “overall conclusion was that DB UK had serious AML (anti-money laundering), terrorist financing and sanctions failings which were systemic in nature.”

In addition, “Effective senior management engagement and leadership on financial crime had been lacking for a considerable period of time.” As a reply, the financial institution maintained that it will cooperate with the regulatory body to modify its internal controls to fight against financial crimes.

The Co-Chief Executive Officer Mr. John Cryan stated in February, “I am personally investing time to resolve successfully and steadily open regulatory and legal cases.”

During the previous week, the German bank has released its earnings results for the first quarter of the current fiscal year. Moreover, internal conflict at the financial institution ensued regarding legal matters, with the co-CEO together with former executives being acquitted from allegations over false testimony in Kirch Media Group collapse lawsuit. The legal counsel of Deutsche Bank Mr. Georg Thoma opted to leave the company in the middle of the conflict within the board.

The financials of the German Bank have not been attractive either. Deutsche Bank’s net income plunged by 58 percent on a year-over-year basis during the first quarter of fiscal year 2016, driven primarily by market volatility impacting investment banking and causing the company to leave non-profitable operations. Because of the decrease in litigation charges by approximately EUR 1.4 billion, the non-interest expenses of the bank dropped 17 percent on a year-over-year basis. During the previous year, litigation charges at the financial institution went up by 160 percent, in comparison to 2014. Regardless of the decrease in charges, investor focus will turn to the most recent legal developments at Deutsche Bank.

Mr. Georg Thoma, who will continue to act as Deutsche Bank’s legal counsel until May 28, faced  the criticism of the supervisory board for soaring legal costs during the previous week. Aside from that, in the previous month, a shareholder demanded the financial company to perform a special audit. This audit is particularly centered on litigation charges, the failure of Deutsche Bank’s management when it comes to internal controls, as well as the effect of these expenses on financial statements.

The German bank has already settled some of the charges against it since the start of restructuring efforts. The latest interest by regulators in the efficacy of the internal controls of Deutsche Bank could very well influence investor sentiment.

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