Deutsche Bank, a German lender agreed to plead guilty and pay $2.5 billion to settle with regulators in the United States and the United Kingdom in connection with criminal charges that it rigged and manipulated the London interbank offered rate (“Libor”). Regulators announced the settlement Thursday, April 23, 2015. According to the regulators Libor is a benchmark for interest rates that apply to trillions of dollars of financial contracts. (Eyk Henning, “Deutsche Bank to Pay $2.5 billion to Settle Libor Investigation With U.S., U.K. Authorities,” Wall Street Journal (April 23, 2015)). The conduct of some 29 Deutsche Bank managers, traders and submitters based in London, Frankfurt, Tokyo and New York was in question in the investigation. Regulators blamed the culture within Deutsche Bank because it allowed “egregious and pervasive misconduct to thrive.” (Id.) To make matters worse, Deutsche Bank employees apparently destroyed phone records despite an order to maintain them and according to U.K.’s Financial Control Authority (“FCA”), “took far too long to produce vital documents,” and “repeatedly mis[led]” regulators. (Id.) Deutsche Bank also failed “to fix relevant systems and controls” in an expeditious manner. (Id.) Deutsche Bank admitted that the actions taken by those employees in furthering the misconduct were within the scope of their employment.” (Id.) “The bank has paid more than €7 billion over recent years for settlements and fines, stemming mostly from actions linked to the financial crisis.” (Id.)
The lessons to be learned from Deutsche Bank’s troubles are moral, ethical and practical ones:
- Follow the golden rule which simply means you should be as fair to your customers, consumers and investors as you would wish them to be with you, i.e., do not take unfair advantage and sacrifice others in order to line your own pockets. A fair profit is good; an unfair profit is bad.
- If you need to hide what you are doing, you probably should not be doing it. Be as transparent as possible, and remember that in the digital age, you can be sure your sins will find you out and that evidence of them exists somewhere as perfectly preserved fossils.
- Effect change. Likely people within the organization who were not guilty of the conduct themselves either learned of it or at least knew the culture was a breeding ground for this kind of conduct. Be brave and speak up if you see this sort of thing happening in your organization.
- When the regulators come calling, remember Lesson #2: everything exists somewhere and it is unlikely that you will get away with trying to erase it. Plus to delete stuff makes you look even guiltier. If it’s bad enough that you feel the need to delete it, common sense tells you that it might just be better to go ahead and own up to the problems, take swift action to rectify them, and negotiate an early settlement. Imagine what the attorney’s fees and accountant’s fees were for regulatory investigations dragging out so long and resulting in such large settlements in the Deutsche Bank affairs!
- Avoid leaving your company vulnerable to employee misconduct in the first place. Promote good conduct. Develop ethical statements or corporate codes of conduct. Do not reward bad conduct, and take swift action to punish it. Develop controls that will prevent or at least expose bad conduct; institute confidential hotlines or reporting systems in order to encourage employees to report bad conduct.
- Adopt good enterprise risk management practices so you can identify risks ahead of time and try to hedge against them through improved systems, reserves and insurance protection.
- Work with insurance professionals and attorneys who specialize in insurance coverage to make sure you have the best protections available in the event the regulators come calling.