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Deutsche Bank's (DB) DWS Scrutinized Over Sustainability Claims

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Deutsche Bank AG’s DB asset-management arm, DWS Group, is under investigation by the Securities and Exchange Commissions (SEC) and federal prosecutors over potential overstated efforts on environmental, social and governance (ESG) claims. The news was reported by Wall Street Journal.

As per the article, the $1-trillion asset manager is being probed after its former head of sustainability said that the company overstated sustainability metrics on certain investments.

After evaluating documents and speaking with DWS's former sustainability chief, the Wall Street Journal reported that the firm sometimes showed a more promising view of its progress on ESG investing than reality.

Earlier this year, the SEC established a task force to ascertain misconducts around ESG issues. It noted that investors need to be more informed and cautious, especially since a record of $51 billion was pumped into sustainable U.S. funds in 2020 alone, as per the Morningstar data.

In the past, Deutsche Bank has had several clashes with U.S. regulators, such as foreign-exchange violations and money laundering cases. The German giant has also been answerable to the Fed on its risk management practices. It had previously been slapped with a fine of $41 million for money laundering susceptibilities.

In June, it was privately reprimanded by the Federal Reserve to improve its anti-money laundering controls and other compliance procedures, as the bank has been persistently failing in paying heed to several pacts with U.S. regulators.

Earlier this February, Deutsche Bank, along with three other foreign lenders, was penalized by Taiwan’s central bank in a currency speculation case. The central bank of Taiwan had issued a statement banning Deutsche Bank’s Taipei branch from trading Taiwan dollar deliverable and non-deliverable forwards. It further suspended the bank for two years from trading foreign-exchange derivatives.

Also, in January, Malaysia’s 1Malaysia Development Bhd. and SRC International SdnBhd filed lawsuits against Deutsche Bank and JPMorgan to recoup assets worth more than $23 billion. The lawsuit was related to a scandal that involved the misappropriation of funds worth $4.5 billion, from 1MDB by top officials of the fund and their colleagues from 2009 through 2014. In the same month, the Frankfurt-based bank agreed to pay a penalty of more than $130 million in a deal signed with the Justice Department. The move settled the probes related to criminal and civil charges against the bank for bribing foreign officials and manipulating the precious-metals futures market through a trading method called spoofing.

Our Take

While Deutsche Bank's cost-control efforts and its strategic initiatives will likely support its financials in the quarters ahead, the litigation issues due to the bank’s past business misconduct are a key concern. These might lead to higher legal costs in the upcoming period, thereby, hurting its bottom line.

Over the past six months, on the NYSE, shares of the company have gained 0.4%, underperforming 7.7% growth recorded by the industry it belongs to.

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Currently, Deutsche Bank carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Several banks continue to encounter legal probes and are charged with huge sums of money for business malpractice. This May, Bank of America BAC agreed to pay a penalty of $75 million in order to settle an excessive fees probe.

In the same month, the Consumer Financial Protection Bureau investigated Wells Fargo & Company’s WFC practice of freezing consumer deposit accounts. The probe was based on suspicions of fraudulent activity by any third parties or account holders.

The U.S. Department of Justice stated in May that State Street Corporation STT has entered a deferred prosecution agreement and agreed to pay a criminal fine of $115 million to settle charges that it had deceived its clients by secretly overcharging them for back-office expenses.

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