DFSA’s Deutsche Fine a Statement of Intent

Euromoney, April 2015 

The decision by the Dubai Financial Services Authority to fine Deutsche Bank $8.4 million in April isn’t going to lose the German lender any sleep in financial terms; at the time of writing it was expected to face a fine of $1.5 billion over Libor manipulation. But, apart from the reputational damage to the bank, the case may also represent a belated toothiness on the part of the Dubai International Finance Centre.

The DIFC is Dubai’s ring-fenced financial centre within which an English common law-like regime prevails; DFSA is its regulator, which, the DIFC will tell you, “was created using principle-based primary legislation modelled closely on that used in London and New York.” While the fundamental structure of DFSA has always looked sound, there has long been a question about just how committed Dubai would be if asked to show its teeth in the face of malpractice, for fear of scaring off others from using the centre.

In that context, the announcement against Deutsche was strident, in language if not in quantum. DFSA says Deutsche misled it, had failures in its internal governance, systems and controls, and in its client take-on and anti money laundering processes. The regulator says it started out investigating whether Deutsche had “failed to properly classify some of its customers as clients under DFSA rules and, therefore, deprived them of certain protections”, and then realised that there were “wider failings” so broadened its investigation.

Having done so, it concluded that Deutsche knew its private wealth management business was operating in breach of DFSA requirements and didn’t do enough about it; that its staff provided false information to the regulator “on several occasions” about the nature and scope of its business; and various other “material failings of governance.”

In a statement provided to Euromoney by the DFSA, Ian Johnston, its chief executive, described the failings as “a serious matter” and pledged to “take a robust stance.”

“Had DBDIFC [the DIFC registered arm of Deutsche] cooperated at an early stage of the investigation, the matter would have been resolved far sooner and at significantly less costs to both the DFSA and the firm,” he said.

If anything, it’s this last comment that’s the most significant. The DFSA is pissed off and wants the world to know it. The case has been rattling around for a couple of years – DFSA took Deutsche to court in October 2013 after it refused to hand over files on clients, dropping the case when Deutsche relented a few months later – and the regulator feels that it has been messed around. There is a clear message being articulated here: that if people think they’re above the law because they’re in a low-regulation Gulf outpost, they’re wrong. The truth is that many – maybe most – businesses in the DIFC are modestly staffed, chiefly with sales people, seeking to extract GCC hydrocarbon wealth to be managed elsewhere. Dubai wishes to be taken rather more seriously than that.

“Deutsche refused to open their files, claiming they were protected by Swiss bank secrecy laws, and the DFSA basically had to fight for them,” says Carlo Fedrigoli, partner at Galadari Advocates, the UAE-based lawyers. “It’s quite clear the DFSA has been very tough in the way they have approached this. It’s good news because it shows they are attentive, strong and can monitor.”

This is the biggest fine the DFSA has ever given, but there might be more. There used to be a US$100,000 cap on corporate fines for regulatory breaches; it was removed in August 2014 in an effort to boost the regulator’s powers of enforcement.

It’s interesting that this record fine has come at a time where DIFC is perceived to be under threat from competitors in the region, with the Abu Dhabi Global Market taking shape down the road. DIFC’s chief strategy and business development officer Chirag Shah told Euromoney in March that there is room for both, and more – “why don’t people ask how many airports are too many?” – and argued: “The economic pie is so large that there’s enough room for many players to exist. It’s a question of having a modern infrastructure around the entire region.”

But it is perhaps a useful time to be able to demonstrate that Dubai doesn’t take a truly anything-goes approach and has the resources to investigate and enforce when it needs to. Fedrigoli believes it fits within a context of Middle East regulators becoming tougher and moving closer to western standards to reflect increasingly cross-border business. “It’s the DFSA’s largest fine so far, and you can say that in terms of regulatory enforcement, it is following the regional trend.”

Deutsche provided Euromoney with a fairly standard statement in response – pleased to have reached an agreement, reviewed and upgraded processes, no financial detriment to customers, respectful of DFSA – and there it is likely to rest. Given the scale of its regulatory challenges in other markets, Dubai is likely to be the least of its senior management’s worries.