SEC Action Against Deutsche Bank Subsidiary Regarding Mutual Fund AML Program Deficiencies

On September 25, 2023,¹  the US Securities and Exchange Commission (SEC) fined DWS Investment Management Americas Inc. (DWS or DIMA), a majority-owned indirect subsidiary of Deutsche Bank AG, $6 million because DWS failed to develop a reasonably designed Anti-Money Laundering (AML) program to address the financial crime risk of its mutual fund business.²

Recent Events

The US Securities and Exchange Commission (SEC) fined DWS Investment Management Americas Inc. $6 million as part of an enforcement action³ initiated because DWS failed to develop a reasonably designed anti-money laundering (AML) program specific to its DWS Mutual Funds. It relied instead on an AML program intended for the general US operations of Deutsche Bank AG.⁴ The SEC specifically noted that the firm’s transactions monitoring system was not reasonably designed to detect possible suspicious activity in the mutual fund, was not calibrated and tuned, and certain alerts were not reviewed. Additionally, they did not conduct AML training specific to the DWS Mutual Funds’ business.⁵

Highlights

Rule 38a-1, under the Investment Company Act, mandates that registered investment companies, including mutual funds, establish and implement written policies and procedures reasonably designed to prevent violations of federal securities laws, including the Bank Secrecy Act (BSA).⁶  Further, in April 2002, the US Financial Crimes Enforcement Network adopted a rule  that requires mutual funds to develop and implement AML programs tailored to their specific businesses.⁷

DIMA, as the investment advisor to DWS Mutual Funds, was “responsible for establishing AML policies and procedures for the fund.”⁸ According to the SEC, from January 2017 until December 2021, DWS did not have an AML compliance program designed specifically for mutual funds. Instead, DWS used an AML program designed for US operations of Deutsche Bank AG, which did not address the specific AML compliance requirements, or financial crimes risks, for the mutual fund business.⁹

In addition, from 2009 until April 2022, DWS relied on a vendor-provided software system for transaction monitoring. Although the policy mandated regular calibration or tuning of the transaction monitoring system at least every one to three years, DWS failed to comply with this requirement. Furthermore, the SEC noted that although the vendor-provided system generated alerts, 90% of all alerts generated continued to be automatically closed without review by AML personnel. Additionally, while samples of the automatically closed alerts were subject to periodic review, reviews did not occur from March 2017 through September 2018.¹⁰  Also, from at least January 2018, the transaction monitoring system did not maintain approximately 53 of 391 different transaction types that were also not screened for all potentially suspicious activity.¹¹

Lastly, DWS did not adequately establish or implement reasonably designed transaction monitoring policies and procedures to identify activities indicative of money laundering, nor did they conduct AML training specific to the DWS Mutual Funds’ business. In addition to the vendor-provided transaction monitoring system, DWS Mutual Funds also had a transaction monitoring system maintained by the fund’s sub-transfer agent. Although DIMA employees did review alerts from this system, DIMA did not create policies and procedures to ensure that their employees knew about the supplemental system and their duty to monitor and resolve alerts generated and escalated by this system.¹²

Enforcement Action

This enforcement action reflects a continued focus on AML compliance by the SEC and its Division of Enforcement. It is in line with the SEC’s Division of Examinations’ July 2023 Risk Alert¹³ and its Examination Priorities, which highlighted overall deficiencies in key components of an effective AML program, specifically emphasizing transaction monitoring, independent testing, and training.¹⁴

This enforcement action also makes clear that investment management companies advising mutual funds must adopt risk-based AML programs that not only comply with mutual fund AML rules but are also tailored to their specific risks. It is important for mutual funds to choose a fit for purpose transaction monitoring system that is calibrated and tuned regularly to identify potentially suspicious transactions.

How Guidehouse Can Help

Guidehouse offers clients a variety of BSA/AML and sanctions compliance services, including:

• AML Program Gap Assessment 
• Independent Program Testing
• Model Validation
• Data Validation and Systems Testing
• Customer Risk Rating
• Coverage Assessments 
• AML and Sanctions Risk Assessments  

Our experts understand how to develop risk-based programs based on the business model of the financial institution, including investment management companies (advising mutual funds), broker-dealers, and other capital markets participants subject to AML requirements.

This article is co-authored by Laila Lapis.

<sup>1. On the same day, the SEC also fined DWS $19 million for overstating the role Environmental, Social, and Governance (ESG) factors played in its research and investment recommendations and for failing to adhere to its own ESG investment process. To read more on this, please see Guidehouse’s recently published article here.
2. SEC.gov | “Order Instituting Cease-And-Desist Proceedings Pursuant to Section 9(f) of the Investment 
Company Act of 1940, Making Findings, and Imposing a Cease-and-Desist Order, n.d., www.sec.gov. ia-6431.pdf (sec.gov).
3. SEC.gov | “Deutsche Bank Subsidiary DWS to Pay $25 Million for Anti-Money Laundering Violations and Misstatements Regarding ESG Investments,” n.d., www.sec.gov. https://www.sec.gov/news/press-release/2023-194. 
4. See footnote 2.  
5. See previous footnote. 
6. SEC.gov | “Anti-Money Laundering Source Tool for Mutual Funds,” n.d., www.sec.gov. 
https://www.sec.gov/about/offices/ocie/amlmfsourcetool#:~:text=Rule%2038a-1%20under%20the,BSA%20and%20rules%20adopted%20thereunder. 
7. See footnote 2. 
8. See previous footnote. 
9. See previous footnote. 
10. See previous footnote. 
11. See previous footnote. 
12. See footnote 2. 
13. SEC.gov | “2023 Examination Priorities Report,” n.d., www.sec.gov. February 7, 2023, 
https://www.sec.gov/files/2023-exam-priorities.pdf. 
14. SEC.gov | “Observations from Anti-Money Laundering Compliance Examinations of Broker-Dealers,” 
n.d., www.sec.gov. Risk Alert Division of Examinations, July 31, 2023, risk-alert-aml-compliance-examinations-bd-073123.pdf (sec.gov).</sup>