On Monday, the SEC settled charges against DWS Investment Management Americas Inc. (DWS), a subsidiary of Deutsche Bank AG, related to its failure to develop a mutual fund AML program and misstatements concerning its ESG investment process.

To resolve the charges, DWS agreed to pay a total of $25m in penalties – $6m for the AML deficiencies and $19m for the ESG lapses.

In the AML action, the SEC’s order states that DWS caused mutual funds it advised to fail to develop and implement a reasonably designed AML program to comply with the Bank Secrecy Act and applicable Financial Crimes Enforcement Network regulations. The order further says that DWS caused such mutual funds’ failure to adopt and implement policies and procedures reasonably designed to detect activities indicative of money laundering and to conduct AML training specific to the mutual funds’ business.

“Here, DWS advertised that ESG was in its ‘DNA,’ but, as the SEC’s order finds, its investment professionals failed to follow the ESG investment processes that it marketed.”

Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement

From at least January 2017 until December 2021, the DWS Mutual Funds did not have an AML compliance program specifically for mutual funds, the SEC said. Instead, the DWS Mutual Funds adopted an AML program designed for the US operations of Deutsche Bank AG, which did not address the specific AML compliance requirements for the mutual fund business.

In April 2002, FinCEN adopted a rule requiring mutual funds to develop and implement AML programs tailored to their own business structures, including certain minimum requirements. In addition, SEC Rule 38a-1 requires registered investment companies to adopt and implement written policies and procedures reasonably designed to prevent violations of the federal securities laws, which includes the BSA as it applies to funds.

“Importantly, those AML obligations require mutual funds to establish and implement individualized programs to detect and prevent money laundering and terrorism financing. I congratulate the Asset Management Unit for bringing this important mutual fund AML enforcement action,” said Gurbir Grewal, Director of the SEC’s Enforcement Division.

ESG issues

In the ESG-related enforcement action, the SEC said that DWS made materially misleading statements about its controls for incorporating ESG factors into research and investment recommendations for ESG integrated products, including certain actively managed mutual funds and separately managed accounts.

The order alleged that DWS marketed itself as a leader in ESG that adhered to specific policies for integrating ESG considerations into its investments, when in reality, from August 2018 until late 2021, the business failed to adequately implement certain provisions of its global ESG Integration Policy as it had led clients and investors to believe it would.

The business failed to adopt and implement policies and procedures reasonably designed to ensure that its public statements about the ESG integrated products were accurate, the SEC said.

“Her whistleblowing action sent shockwaves throughout the finance industry and galvanized efforts to tackle greenwashing.”

World Economic Forum website

Specifically, DWS in its public statements (such as on its website) represented that its ESG Integration Policy meant its research analysts were required to include “financially material and reputation relevant ESG aspects into valuation model[s], investment recommendations and research reports and consider material ESG aspects as part of their [i]nvestment decision.”

The representation was misleading, the SEC said, because DWS failed to adequately implement the policy’s requirements for research and monitoring compliance. Its own internal analyses even showed its research analysts having inconsistent levels of documented compliance with the ESG Integration Policy’s requirements to consider material ESG risk factors in research and valuation models, the SEC said.

“Here, DWS advertised that ESG was in its ‘DNA,’ but, as the SEC’s order finds, its investment professionals failed to follow the ESG investment processes that it marketed,” said Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement and head of its Climate and ESG Task Force.

In the ESG misstatements action, the SEC’s order finds that DWS violated SEC Rules 206(4)-7 and 206(4)-8 under the Investment Adviser’s Act, rules specifically prohibiting fraud by investment advisers on investors in pooled investment vehicles.

A spokesperson for DWS stated: “The SEC ESG order, following an extensive two-year examination, finds no misstatements in relation to our financial disclosures or in the prospectuses of our funds. We have consistently stated that we stand by our financial disclosures and the disclosures in our fund prospectuses. The order also makes clear that the weaknesses identified by the SEC are in relation to processes and procedures that the firm has already taken steps to address. We are pleased to have resolved these matters.”

Whistleblowing and greenwashing

The SEC does not mention this, but Desiree Fixler was Group Sustainability Officer at DWS Group when she exposed what she considered to be extensive greenwashing by highlighting the discrepancies between DWS’s public ESG claims and its internal statements and actions.

As her profile on the World Economic Forum website states, “her whistleblowing action sent shockwaves throughout the finance industry and galvanized efforts to tackle greenwashing.”

She is the now Chief Content Officer at Attain, as well as a frequent public commentator and advisor on topics including sustainable finance, the prevention of greenwashing and whistleblowing.