DFSA fine on Deutsche Bank illustrates need for balance between financial regulation and red tape

It’s a simple morality play for our times: big bad bank is caught breaking the rules; fearless watchdog steps in to impose massive fine; we all sleep easier in our beds.

That’s pretty much how the confrontation between Deutsche Bank and the Dubai Financial Services Authority (DFSA) played out last week, when the German giant was embarrassed to the tune of US$8.4 million by the DIFC regulator. Deutsche was found guilty of “serious contraventions” of the regulations regarding private bank clients, and was slapped down with a record fine and a strongly worded verdict.

For the DFSA, the result is something of a coup. The regulator cements its reputation as a hard-nosed financial watchdog, unimpressed by reputations or standing within the Dubai financial community. The fine beats, by some way, the previous big hits it levied on Damas International, the jewellery group ($2.9m), and Shuaa Capital ($950,000).

However, in an era when big banks are paying out billions in fines for sanctions-busting, drug financing and interest rate fixing, the fine on Deutsche is almost trivial, a rounding error in the German giant’s accounts. DFSA says it was set after taking into account the gravity of the offence and the financial capacity of Deutsche’s Middle East operations.

The actual offence, both sides agree, was technical and procedural, rather than outright criminal. Deutsche was in the process of upgrading its private banking and wealth management business in the UAE, and jumped the gun when offering advice to clients without going through the appropriate approval processes.

Many of the roughly 300 accounts involved already did business with Deutsche through the bank’s Singapore and Swiss offices, and there were delays in transferring personal information from these jurisdictions to Dubai, where the rules insist it should have been held. Transferring private financial details is never, and should not be, a routine process.

What appears to have particularly drawn the DFSA’s ire was the bank’s apparent unwillingness to cooperate, even when it became apparent that it had breached local regulations.

But there is no new plan at DFSA to be beastly to the banks. The regulator will prosecute wrongdoing whenever and wherever it appears. There may still be further action taken against individuals in the Deutsche affair, and several other financial institutions are currently being investigated for breaches, but the DFSA insists this does not amount to a campaign.

The message is that the sure, even-handed application of justice will continue, as part of the strategy to maintain DIFC’s role as the region’s leading financial market.

Deutsche does not see it entirely like that. While the bank admitted its breaches, and ended up paying a slightly smaller sum than if it had not “confessed”, the matter has left a bad taste at the bank.

For one thing, Deutsche is proud of the role it played in setting up the DIFC more than a decade ago and remaining at the heart of the financial centre ever since. It feels its reputation and track record have been unfairly sullied by the affair.

There is also a nagging sense at the bank that DIFC waited for previous limits on fines to be lifted last summer before it imposed its record-breaking and headline-grabbing sanction, although DFSA denies this.

But the real gripe at the German bank is rather more subtle. It is regulated in the UAE by three authorities: the Central Bank; the Securities and Commodities Authority; and the DFSA. Lately, the Central Bank has insisted on a more stringent delineation of the roles that fall within its jurisdiction, such as deposit-taking, foreign exchange transactions and trade finance, rather than within the laws of the Dubai financial free zone.

Despite the fact these real money-making operations take place outside the DIFC, Deutsche has to cover the full expense of meeting DIFC rules within the centre. How long will it be willing to fund the costs of satisfying three regulators, especially when one of them is aggressively handing out multimillion dollar fines?

As the UAE prepares to welcome yet another regulator in the Abu Dhabi Global Market, it’s a valid question.


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