A Deutsche Bank probe into the mis-selling of risky foreign exchange derivatives in Spain has found that staff acted disingenuously, exploited flaws in the bank’s controls and broke EU rules, according to people with knowledge of the report.

One of the people said employees acted in “bad faith” over years, pushing small and medium sized Spanish companies to buy highly complex foreign exchange derivatives. The products, which were promoted as safe and cheap, were meant to hedge against foreign exchange risks. They generated huge profits for Deutsche but exposed clients to extensive risk and crippling losses in some cases.

A second person familiar with the probe described some of the Deutsche staff conduct as “very unfortunate”.

Fewer than twelve people were formally sanctioned by the bank over the misconduct, the people said.

The probe of the mis-selling — code-named “Project Teal” — was first reported by the Financial Times two years ago and is nearing its conclusion. The bank has paid tens of millions of euros in settlements to affected clients, the people said. It has also tightened internal controls and stopped offering some foreign exchange products to certain client groups.

The bank is still fighting a €500mn legal claim by one of Spain’s largest hotel groups in London’s high court over the trades, arguing this case was structurally different from others it has settled.

The misconduct, which involved a London desk of Deutsche’s investment bank, as well as Spanish operations at its international private unit, spanned several years until 2019. The probe, which was conducted by a large London-based law firm, was launched in the second half of 2019 after an internal whistleblower raised allegations, just after a managing director in charge of the structured products had left.

The investigation failed to back up the whistleblower’s claims that Deutsche Bank staff colluded with some of their clients’ financial directors and may illicitly have shared the proceeds of such trades, some of the people said.

However, the probe found several red flags of problematic behaviour that had not been followed up earlier. For instance, between 2011 and 2014, Deutsche lost a series of court cases against a Spanish electronics components wholesaler that had bought a series of foreign exchange hedging products and was pushed close to bankruptcy when the trades turned sour.

One of the people familiar with the results of the probe told the FT that the past lack of awareness of potential misconduct was at odds with the culture the current leadership wants to promote.

Since then, the bank has taken “decisive action”, according to another person briefed on the results, replacing large parts of its senior management in Spain as well as some senior investment bankers in London while others had their bonuses cut. It also shared the results with regulators which have not imposed any fines so far.

After finding flaws in its internal controls, which were deliberately exploited by staff on one of its trading desks according to the people familiar with the probe, the bank widened the Teal investigation to other desks, regions and products. While it uncovered weaknesses in its controls elsewhere, it did not find evidence of similar misconduct.

Deutsche Bank told the FT in a statement that it took “appropriate action” after it reviewed “parts of our sales activities in structured FX derivatives”, adding that it was “improving our processes and enhancing our controls”.

Arranging the trades was highly profitable for Deutsche, but exposed many of the buyers to significant losses and pushed some smaller companies to the brink of bankruptcy.

The products in question were types of foreign exchange swaps called targeted accrual redemption notes and forwards. They were pitched by Deutsche as a cheaper way to hedge currency risk.

Small companies were told the products were “zero premium” with no initial cost and could even make them money, according to people familiar with the details.

In a stable currency market, the derivatives sometimes benefited clients. However, if volatility increased and the exchange rate passed a pre-determined level, losses could multiply rapidly.

After Project Teal began, Deutsche started offering out of court settlements to some of those affected. J García-Carrión, Europe’s largest wine exporter, was paid more than €10mn by the bank. In 2021, Spain’s largest hotel group, Palladium, took its case to London’s high court seeking €500mn in damages.

The outstanding notional amount of derivative positions Palladium had with Deutsche at their peak in 2017 was €5.6bn, eight times the hotel group’s annual sales and larger than its entire balance sheet.

Palladium’s US law firm, Quinn Emanuel, has alleged in court filings that Deutsche exploited a “close personal relationship” between the brother of the company’s founder and Amedeo Ferri-Ricchi, Deutsche’s then head of foreign exchange in Europe.

Deutsche denies wrongdoing in the Palladium case, arguing its client was a “sophisticated investor with extensive experience of using derivatives”.

Ferri-Ricchi, who is not a defendant in the case and not involved in the legal proceedings, left Deutsche before the Teal probe started. He denies the allegations against him in the claim.

The ECB and German regulator BaFin declined to comment. The Spanish regulator CNMV said it had been conducting some supervisory reviews on the matter but could not comment further.

Additional reporting by Barney Jopson