Deutsche Bank is a well-known financial organization providing services to individuals and corporate entities all over the world. The bank has a long history of success and is considered to be among the key global financial companies. It has also made a significant contribution to the economic development of Germany before expanding its ambitions to overseas markets (Caesar, 2016). Nevertheless, in the recent years, the company’s reputation has been overshadowed by the $10-billion scandal, which was caused by the alleged involvement of Deutsche Bank in money laundering activities in Russia. Since the accusations, the bank has been subject to a large-scale investigation and global discussion that had an impact on its financial performance.
In today’s competitive environment, maintaining a stable positive reputation is important to all types of companies. The case of Deutsche Bank offers a useful example of how the business’ reputation can be damaged by unethical activities, leading to financial losses. Although the talks on Deutsche Bank’s case are still in progress, the bank is currently facing a $14 billion fine from the U.S. government, which is a large share of its market cap (Smith, 2016). The fine is a direct consequence of the company’s failure to comply with the principles of business ethics. The present essay will seek to develop a comprehensive understanding of the case from the perspective of business ethics. The first sections will provide important information about the company and its structure, whereas the remaining part of the paper will concentrate on the $10-billion scandal and the problems faced by Deutsche Bank as a result. The Recommendations sections of the paper will offer advice on how the company could handle the current crisis and avoid similar threats in the future.
Background
Deutsche Bank has a relatively long history, which allowed the company to develop a solid reputation despite some of the controversies surrounding it. The bank’s corporate culture and business ethics is mainly a result of its past history, which is why understanding the company’s development can help to determine the source of its’ problems with business ethics. The present section will consider both Deutsche Bank’s history and its current position on the global financial scene.
History
Deutsche Bank was founded in 1870 by Adelbert Delbrück, who was the main ideological inspiration behind the bank’s primary development. Deutsche Bank appeared during the time of industrialization in Germany, which had a significant effect on the banking industry of the country. As noted in the “Chronicle – from 1870 until today” (n.d.), the industrialization put pressure on the traditional banking industry to change. Deutsche Bank became a vision of the future, applying new, innovative ideas in its work. For example, the bank started to accept cash deposits in the first year of its existence, which was revolutionary for the German banking industry at the time (“Chronicle”, n.d.). The deposit-taking activity soon became the main source of profit, which allowed the bank to solidify its share in the market and increase it over time.
Starting from the second half of the 1890s, Deutsche bank began expanding its position in the domestic market by forming regional alliances and joint ventures, as well as by opening regional branches in large, industrial cities (“Chronicle”, n.d.). Branches in foreign countries soon followed suit, causing Deutsche Bank to become known as the largest bank in the world by 1914 (“Chronicle”, n.d.). Nevertheless, during World War I, the bank has lost most of its assets in foreign countries. The domestic banking industry also took a major hit, forcing Deutsche Bank to seek a powerful merger with Disconto-Gesellschaft, one of its most significant German rivals at the time (“Chronicle”, n.d.). Although Deutsche Bank managed to achieve some stability due to that move, the darkest period of its history was yet to come.
Another threat to Deutsche Bank in the aftermath of the 1931 crisis was the Nazi Rule. Nazi leaders opposed most financial institutions, especially those that provided services to Jewish people. In order to stay in the market, Deutsche Bank was willing to compromise and show support for the Nazi ideology. The bank started to dismiss Jewish staff and officials and offered no protection to its Jewish customers when the new government began to monitor and freeze their assets (“Chronicle”, n.d.). Deutsche Bank even achieved some benefit from the forced expansion of the state in Austria and Czech lands by opening branches in annexed territories (“Chronicle”, n.d.). As the war broke out, the bank was involved in the Third Reich’s gold transactions used to support the state during the war; the bank officials confirm that “at least 744 kg of that gold came from Holocaust victims” (“Chronicle”, n.d., p. 7). Some of the bank’s branches were also supplying loans to construction firms building the Auschwitz concentration camp.
After the end of World War II, Deutsche Bank sought to retain its position in the domestic market. Under the new government, the bank was split into autonomous institutions only to merge back into a single entity in 1957 (“Chronicle”, n.d.). The years 1958 to 1988 marked a period of internationalization as the bank tried to restore its reputation throughout Europe and the rest of the world. In the 1970s, Deutsche Bank opened branches in most major locations, including Moscow, Paris, Brussels, New York, Tokyo, and Hong Kong. This was followed by a series of acquisitions of foreign banks, which helped Deutsche Bank to expand further and establish a stable global presence. Deutsche Bank was first listed on the New York stock exchange in 2001, marking its success in achieving its goals for internationalization.
Today’s Position
Despite the recent controversy with money laundering, Deutsche Bank occupies a stable position in the global banking market. With branches in 70 countries, the bank has made its services available to people from most major locations in Europe, Asia, Africa, and the Americas. According to Deutsche Bank Group (DBG, 2016), the bank employs over 100000 people from 150 nationalities worldwide, supporting diversity and equality on a global scale. Nevertheless, the bank’s current position is still influenced by external factors, including the tough market environment and accusations of money laundering. As shown in the “Annual report” (2016), the bank faced net losses of €1.4 billion in 2016. Its share on the New York Stock Exchange has been decreasing throughout the past few years, despite efforts to stabilize the company’s position.
Business Ethics
Business ethics is the main focus of this assignment, which is why it is useful to understand Deutsche Bank’s commitment to the issue. As evident from its reports, the bank has been working to establish and maintain a solid reputation since the post-war era. For example, Deutsche Bank seeks to promote gender equality and diversity in the workplace. As shown in the Human Resources Report (2016), the share of women on the Supervisory Board is 35%, which is a significant figure for the industry. Since 2012, the share of female officers and female managing directors has been gradually increasing, allowing the company to fulfill its goals for gender diversity in the workplace. Deutsche Bank also supports various LGBTI initiatives on a global level. For example, in 2016, “Deutsche Bank announced plans to freeze the expansion of its operations in Cary, North Carolina, as the result of state legislation which invalidated existing protections of the rights of LGBTI fellow citizens in some municipalities” (“Human resources report”, 2016). The role of Deutsche Bank in fostering an inclusive environment in the workplace has been recognized with awards and certifications.
The bank also recognizes its corporate responsibility by supporting environmental issues. For instance, in 2016, Deutsche Bank announced an intention to decrease its coal financing business by 20% by 2020 (DBG, 2016). The bank has also issued an official policy framework aimed at improving transparency and explaining Deutsche Bank’s corporate responsibility efforts. One of the key goals behind Deutsche Bank’s business model is to create a positive impact on the stakeholders and the industry by supporting economic growth, innovation, and financial security, as well as by fulfilling its corporate responsibility in social and environmental causes.
On the whole, Deutsche Bank is now seeking to improve its business ethics in order to restore its reputation, which would help it to prevent further losses. Today, the bank exemplifies a strong business ethics model and recognizes its corporate responsibility on a global scale. Another important decision for Deutsche Bank was the restructuring of its management, which helped to improve corporate structure. This could potentially contribute to the company’s business ethics by ensuring further transparency and accountability of the management.
Structure and Stakeholders
Corporate Structure and Leaders
Deutsche Bank has three main business divisions, each serving different types of customers: Private and Commercial Bank, Deutsche Asset Management, and Corporate and Investment Bank. In addition to operating several business lines, the bank also has a strong global presence with offices and branches all over the world. These features prompt for a complex organizational structure. The management of Deutsche Bank consists of the Supervisory Board, the Committees of the Supervisory Board, and the Management Board.
The Supervisory Board is the key governing structure of Deutsche Bank, as it has a direct impact on decision-making and supervises the activity of the Management Board. The Supervisory Board consists of officers from Germany, United Kingdom, the United States, Austria, and Switzerland. The Committees of the Supervisory Board are seven separate structures performing various functions from audit and risk assessment to compensation control and integrity oversight. Lastly, the Management Board consists of 12 members that are accountable for managing the company. The members of the Management Board include Chief Officers and Presidents of the company’s main business divisions. For instance, the Management Board includes Chief Risk Officer, the Head of Deutsche Asset Management, and Chief Executive Officer for the Asia-Pacific Region.
On the whole, despite a complex corporate structure with many business divisions and branches in most major areas of the world, the company has a successful organizational structure. The management and decision-making at Deutsche Bank is a multi-level process, which enhances supervision and oversight of key management functions. This, in turn, promotes increased transparency and has a potential to enhance compliance of workers and managers with the company’s Code of Conduct and business ethics.
Financial Performance
In the past 10 years, the company’s financial performance was rather unstable. As shown in the WSJ report (“Deutsche Bank AG”, 2018), the company’s income was affected by the economic crisis of 2008, as well as by the recent accusations of money laundering in 2015. In 2015, Deutsche Bank’s net income was at -7.022 billion EUR, marking the most significant performance loss in the past year (“Deutsche Bank AG”, 2018). However, the company was able to decrease its losses in 2016, which shows its resilience at times of crisis. Overall, although the company has made the necessary changes that helped it to reduce losses and improve income in the last two years, the stability of Deutsche Bank in terms of its financial performance was clearly influenced by the recent events.
Stakeholders
There are four key groups of stakeholders that are affected by Deutsche Bank and its activities. The first group consists of the bank’s employees. Deutsche Bank is a major global company employing over 100,000 people who are affected by the company’s financial performance. Poor performance might result in the bank closing its branches, as well as in employee cuts, which would significantly affect the company’s workers. In addition, the bank’s reputation might also affect its workers indirectly. For instance, the $10-billion scandal has set certain concerns with regards to Deutsche Bank’s transparency, which might affect its ex-workers that are currently seeking recruitment in other banks.
The second group of stakeholders includes the bank’s clients. Both corporate and individual customers of Deutsche Bank are affected by its activities in a similar way as its workers. For instance, if the bank becomes bankrupt due to the $14-billion fine that might be imposed by the U.S. government, it would probably fail to cover some of its existing liabilities. Similarly, the reputation of the bank might cast a shadow on large corporations choosing to work with it. Finally, if the bank’s financial performance is poor, the bank might choose to close certain branches, leading to many clients losing access to services and products.
Another group of stakeholders is the bank’s competitors, especially those that operate in the same market. Deutsche Bank’s competitors are affected by the company’s performance as it impacts the competitive landscape within the market. If Deutsche Bank loses clients or profit, one of its competitors would most likely improve its position in the market and vice versa. Secondly, certain activities of Deutsche Bank – for instance, the alleged money laundering – affect the trust in banking companies. As shown by DBG (2016), after the accusations of Deutsche Bank in 2015, the average stakeholders’ trust in the financial sector reduced by 7%. The clients’ trust in banking companies affects the entire financial sector by predicting their desire to acquire services or products from the bank. If the trust in the sector is too low, people might refrain from using certain services or products that are not necessary for daily life.
The final group of stakeholders that is affected by the bank’s activities is the general public. As evident from the history of Deutsche Bank, major financial institutions can play a significant role in the economic or political development of countries. For example, the bank had an important positive impact on the economic development of Germany, and was thus beneficial to the general public during the most important years of its existence. However, during the Second World War, Deutsche Bank’s activity also acted in support of the Nazi ideology, thus contributing to and extending the impact of the Third Reich. Today, banks can be used for money laundering aimed at supporting criminal structures, including drug cartels, human trafficking chains, and more. Thus, the actions of large international banks, including Deutsche Bank, also have an impact on the general public.
The $10-Billion Scandal
The $10-billion scandal has risen due to the alleged involvement of Deutsche Bank in money laundering activities in Russia and Mexico. The scandal exemplifies the bank’s impact on its stakeholders while also highlighting why maintaining solid business ethics is important. Fichtner, Goos, and Hesse (2016) explain that the scandal was the result of “years, decades, of failed leadership, culminating in the complete loss of control of the company by top managers during the period between 1994 and 2012” (para. 3). Thus, the case also shows the importance of corporate structure and governance in promoting ethical compliance and corporate responsibility.
Money Laundering
According to the International Compliance Association (ICA, 2017), money laundering is “the process by which criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have derived from a legitimate source” (para. 1). Banks and other financial institutions, especially those that operate internationally, often become a means for money laundering for criminal organizations and illegal activities. Such activities often include drug and human trafficking, terrorism, robbery, corruption, and bribery (ICA, 2017). Although there are international legislation and compliance laws aimed at reducing the incidence of money laundering, many banks still face the risk of being targeted by criminals.
The process of money laundering often consists of three steps. First, the illegally derived funds are placed into the financial system. Secondly, the money is layered using consecutive processes during which the money is transferred to disguise the source and owner. Lastly, the money is reintroduced into the economy (ICA, 2017). The key goal behind money laundering is to conceal the source and ownership of illegally obtained funds. By following a stream of processes through a financial institution, criminals can disguise this information and receive ‘clean’ money in the end.
The Accusations
In the case of Deutsche Bank, money laundering activities were allegedly located primarily in Russia and in Mexico. As explained by Caesar (2016), money laundering in Russia was primarily carried out using mirror trades, when brokers bought and sold the same company’s stock in two different currencies. Thus, the ownership of the money would be disguised, which helped criminals to hide their activities and earnings. Similarly, in Mexico, mirror deals could have been used to filter the money for drug cartels, human trafficking chains, and other criminal groups. Vulliamy (2015) notes that a similar scheme was used by HSBC for several years, also resulting in a major scandal.
Deutsche Bank remains under investigation of the United States’ federal government for its involvement in the scandal, particularly because the Russian money laundering activity was linked to Donald Trump (Kirchgaessner, 2017). The bank is actively assisting in the investigation, offering the necessary documents and reports to the investigators. Nevertheless, Deutsche Bank has already lost billions of euros due to the fines and legal charges imposed by courts. If the U.S. Department of Justice proceeds with the anticipated $14-billion fine, the bank’s financial performance and further existence will be threatened.
Recommendations
In order to improve the current image of the bank and avoid further repercussions of the scandal, it is critical for Deutsche Bank to acknowledge its failure at ensuring compliance. The bank should perform a thorough internal investigation, which would help to find people and processes that allowed the problem to occur in the first place. For instance, it would be useful to know if the compliance control procedures were effective and if the actions of secondary staff engaged in money laundering activities were in any way endorsed by the higher management. By identifying the sources of the issue, it would be possible to devise a thorough strategic plan to avoid similar cases in the future. However, it is also critical to note that, given the bank’s financial performance, any strategic actions must be carefully evaluated and weighted to reduce possible costs.
First of all, as shown in the previous sections of the report, one of the key reasons for the lack of compliance at Deutsche Bank was the complex organizational structure. Organizational structure is an important factor that affects managing patterns and behaviors within the company, which is why ensuring that organizational structure is efficient is crucial to prevent conflicts in the future. Following the scandal, Deutsche Bank reformed the critical leadership structures (DBG, 2015). However, further adjustments at medium and low levels would be required to enhance oversight and compliance.
Another important recommendation is for Deutsche Bank to restore its reputation by exhibiting improved transparency. Ensuring that the change initiatives undertaken by the company are actively covered in press releases would help the bank to earn the trust of its customers. In addition, the bank could aid in money laundering investigations by providing information. By fostering active collaboration with government authorities, Deutsche Bank would be able to clear its name and restore its reputation. Finally, it is essential for Deutsche Bank to establish internal control measures for improving compliance. For instance, the bank could introduce regular compliance audits and individual unit compliance checks to determine any problems before they cause a major scandal and lead to legal charges.
Conclusion
Deutsche Bank has a long history of successful growth and development, although it was also involved in some controversy both in the 20th century and in the recent years. Nevertheless, the company shows resilience in its ability to overcome major crises. In the $10-billion scandal, the key sources of the problem are not individual workers but a complex organizational structure with a reduced possibility for oversight and compliance monitoring. Improving the corporate structure and government while at the same time enhancing its public image would allow the bank to restore its financial performance. Most importantly, however, ensuring active cooperation with authorities and consistent transparency efforts in the future might aid the bank in avoiding the extensive fine and in preventing cases of misconduct in the future.
References
Annual report. (2016). Web.
Caesar, E. (2016). Deutsche Bank’s $10-billion scandal: How a scheme to help Russians secretly funnel money offshore unravelled.The New Yorker. Web.
Chronicle – from 1870 until today. (n.d.). Web.
Deutsche Bank AG. (2018). Web.
Deutsche Bank Group (DBG, October 18). (2015). Deutsche Bank announces comprehensive organizational restructuring and reorganization of key management roles.Deutsche Bank. Web.
Deutsche Bank Group (DBG). (2016). Corporate responsibility report. Web.
Fichtner, U., Goos, H., & Hesse, M. (2016). The Deutsche Bank downfall: How a pillar of German banking lost its way.Spiegel Online. Web.
Human resources report. (2016). Web.
International Compliance Association (ICA). (2017). What is money laundering? Web.
Kirchgaessner, S. (2017). Deutsche Bank hands bank records of Trump affiliates to Robert Mueller.The Guardian. Web.
Smith, G. (2016). 5 things you should know about the Deutsche Bank train wreck.Fortune. Web.
Vulliamy, E. (2015). HSBC has form: remember Mexico and laundered drug money.The Guardian. Web.