DWS, the asset management subsidiary of Deutsche Bank, finds itself in hot water with the Securities and Exchange Commission (SEC). The investment management giant has been charged on two fronts: making misleading claims about its Environmental, Social, and Governance (ESG) investment practices and lacking a robust Anti-Money Laundering (AML) framework. To settle these charges, DWS will be parting with 25 million dollars in penalties.
«AML obligations require mutual funds to establish and implement individualised programmes to detect and prevent money laundering and terrorism financing,» said Gurbir S. Grewal, director of the SEC’s Division of Enforcement. His remarks point to DWS›s oversight in failing to provide a tailored AML programme for its mutual funds, a miss that leaves many investment managers questioning their compliance strategies in an era of strict regulations.
The second charge by the SEC shines a light on a growing area of concern for today’s investment managers: genuine ESG integration. Although DWS positioned itself as an ESG leader, the SEC›s findings suggest a mismatch between the firm’s promises and its actual ESG practices from August 2018 to late 2021. This discrepancy underscores the need for investment firms to ensure their operational actions match their marketing claims.
‘Actions must conform to words’
«Investment advisers must ensure that their actions conform to their words,” stated Sanjay Wadhwa, deputy director of the SEC’s Division of Enforcement. His comment serves as a pertinent reminder, especially when it comes to touting the integration of ESG factors into investment portfolios, a focal point for the contemporary investment manager.
DWS, Europe’s second-largest asset manager with 859 billion euro in assets under management per end-June, has agreed to a cease-and-desist order, the SEC said. The fines are divided, with the majority, 19 million dollars, addressing the ESG misrepresentations, while six million dollars relates to the AML shortcomings.
‘We learned many lessons’
“We have learned many lessons from the ever-evolving regulatory environment and are fully committed to continuing to improve,” said DWS in its response to the SEC fines. “We are pleased to have resolved these matters that relate to certain historic processes, procedures and marketing practices the firm has since addressed.”
The SEC›s order makes for fascinating reading. DWS in 2021 for example published an article on an investment magazine under the title “When ESG is in your DNA”. The article was publicly avaialble on the Internet and distributed to clients and prospective investor in its ESG products. The article claimed «Every DWS investment team uses it to make investment decisions for their portfolio». A marketing review intended to change “every” into “most” but that change was eventually not published, which according the SEC amounted to a “mis-statement”.
‹Failed to adopt policies’
The SEC also took issue with DWS› investment process. DWS “failed to adopt and implement written policies and procedures reasonably designed to prevent violations” and “lacked policies and procedures necessary to ensure the representations it made on its website”.
DWS’ Frankfurt offices in 2022 were subject to a raid by Frankfurt police and officials from German financial supervisor Bafin. The German greenwashing probe remains to be concluded. DWS was first confronted with the allegations by Desiree Fixler, its former head of sustainability who blew the whistle in 2021. These accusations were seized upon by both Germany and the United States for further investigation. In March, the offices of DWS in Frankfurt were the subject of a protest by Greenpeace, which decorated the glass windows on the ground floor with images of washing machines.