Lawsuit details Deutsche Bank’s investigation of ties to top Russian officials
Deutsche Bank called it Project Dastan, a Persian word for the kind of ornate oral histories that are common across Central Asia, including heroic tales of resistance to Russian occupation.
But in this case Dastan is a code name for an internal probe into whether executives at the embattled German lender breached antibribery rules by getting too cozy with Russian officials — specifically by hiring their children to win business.
The bank’s investigation into its own hiring practices was detailed for the first time in a lawsuit last week by a former executive, Nizar al-Bassam. The revelation of the four-year-old probe, which appears to be ongoing, opens another window into Deutsche Bank’s troubled history in Russia.
In 2017, it paid more than $600m in fines to US and UK regulators over its use of so-called mirror trades to move as much as $10bn out of the country.
Scrutiny of hiring practices by global banks has intensified since JPMorgan Chase paid $264m in 2016 to settle US allegations it hired children of Chinese decision-makers to win fees, according to Nicholas Ryder, a professor in financial crime at the University of the West of England.
"If these practices are found to have breached bribery legislation, it’s likely that banks will face a series of hefty financial penalties and more damage to an already tarnished reputation," Ryder said.
Bassam said in his complaint there was a potential conspiracy inside the bank.
The Frankfurt-based bank said in its annual report in March that US regulators were among those investigating its employment history for possible bribery violations, without identifying a country. Citigroup, Credit Suisse and HSBC among competitors that have made similar disclosures.
A Deutsche Bank spokesperson, Rupert Trefgarne, declined to comment on Project Dastan because of an ongoing investigation. The bank has yet to submit a defence to the lawsuit Bassam filed in London.
Executives have enough to worry about. Deutsche Bank’s shares fell to a record low on Thursday after reports that the lender was added to a list of troubled bank monitored by US regulators.
On Friday, S&P Global Ratings cut the firm’s credit rating by one notch to BBB+, the third-lowest investment grade, citing ‘‘significant execution risk". Bassam, who quit Deutsche Bank to start his own fund in 2016, is suing for €4m in bonuses he says the lender is refusing to pay even though allegations of misconduct in hiring while he was corporate finance chief for Central and Eastern Europe, the Mideast and Africa were "abandoned" long ago.
After he left Deutsche Bank, he helped found London-based finance firm Centricus. Bassam is also an adviser to the Softbank Vision Fund, an investment vehicle tied to Japanese technology giant Softbank that has raised tens of billions of dollars.
The fathers of two of Project Dastan’s targets, according to the filing, were both deputy finance ministers involved in Russian sovereign debt sales at the time their children joined Deutsche Bank.
Elena Arkhangelskaya was hired in Moscow in 2009 and in 2011 relocated to London, where she helps clients in the former Soviet Union sell bonds, according to her LinkedIn profile. Bassam defended hiring her, saying that although his team had "some dealings" with the government at the time, she was "well qualified" and supported by other senior managers. Arkhangelskaya declined to comment.
The other employee is Alexey Storchak, whose father, Sergei, has been a deputy minister since 2005. The younger Storchak joined in 2010 after a stint at Credit Suisse and the ministry’s "foreign assets division", according to his LinkedIn page. Based in London, he now works on "debt-hybrid" transactions for clients in Central and Eastern Europe.
Bassam, who was part of a wave of senior managers to leave Deutsche Bank soon after John Cryan became co-CEO in 2015, rejected any allegation of misconduct regarding Storchak’s employment.
"At the time Alexey Storchak was hired in 2010, his father was in custody and therefore unable to influence the ministry of finance in the bank’s favour," he said in the filing.
In fact, Storchak was back at work. Although he was detained on suspicion of fraud at the end of 2007, he resumed his duties when he was released 11 months later. The case was finally dropped for lack of evidence in 2011 after intense lobbying by his boss and defender, then finance minister Alexei Kudrin, a longtime ally of Vladimir Putin. Alexey Storchak declined to comment.
How much, if any, of that business can be attributed to familial ties may never be known
Bassam said in his complaint there was a potential conspiracy inside the bank. The bonus suspension may have been "improperly guided and influenced" by other executives, he said, "with the intended consequence of injuring" him.
Those were lean years for Deutsche Bank, which tumbled from number one in combined Russian equity and debt sales in 2007 to number eight in 2010 as state-run VTB Capital embarked upon a $500m expansion that would include poaching more than 100 bankers from its erstwhile German partner.
The Ceemea business that Bassam oversaw was hit particularly hard. In 2009 and 2010, state-run gas giant Gazprom and various Russian Federation entities sold about $20bn of bonds combined, more than most issuers in the region, yet Deutsche Bank was absent from every deal, Bloomberg data show. Barclays, BNP Paribas, Citigroup and Societe Generale led the sales instead.
That changed over the next several years as more Russian entities turned to a restaffed Deutsche Bank to raise foreign funds. In 2013, the lender became the biggest single underwriter of bond deals in the Ceemea region, arranging billions of dollars of debt sales for the government, Gazprom and other state behemoths such as Rosneft and Rosselkhozbank.
How much, if any, of that business can be attributed to familial ties may never be known, but banks should always avoid such grey areas or run the risk "of appearing to seek influence", according to David Knutson, head of credit research in New York for the Americas at Schroder Investment Management.
"Hiring practices are under increased scrutiny," Knutson said. "It makes me feel better about investing in nondeveloped markets."