The co-CEO is taking a combative approach. "We have nothing to hide. It's also in our interest to fully clear up these issues," he said in comments on last week's tax evasion raid. "We will continue to cooperate with the prosecution; these problems can be solved."
It is somewhat accidental that Fitschen has become caught in the clutches of the judiciary. Fitschen signed the tax return in question, for the year 2009, only because then-CEO Joseph Ackemann was out of the office. It is a signature that could prove disastrous for him. Investigators believe that the tax return was incorrect because bank employees were engaged in an effort to evade taxes.
According to the allegations, the bank assisted several dubious companies trade large numbers of greenhouse gas emissions certificates in 2009 and 2010, and then fraudulently used the deals to obtain tax refunds. This VAT carousel, in which large sums were rapidly handed from one shell company to the next, made even the investigators dizzy.
The construct was possible in the first place because trade in the certificates across European borders is tax-exempt -- but sales within German borders are not tax-exempt. It was practically an invitation to abuse. A company in Germany would buy emissions certificates from a foreign partner without paying VAT. The crooks would then pass the certificates through several companies to cover their tracks. Finally, the last company would sell the emissions certificates out of the country and have the German treasury reimburse it for the VAT it claimed to have paid when purchasing the certificates in Germany.
As documents from the public prosecutor's office indicate, the fraudulent company found a willing partner in Deutsche Bank. Between September 2009 and February 2010, the lender acquired large numbers of emissions certificates from four suspicious companies, and was thus able to book pre-tax earnings on the deal of 211 million.
Because the investment bank sees itself as one of the world's leading trading companies for all manner of securities, it welcomes anything that generates a profit. Still, the HMRC, the British taxation and customs agency, had warned the bank in late 2009 that 85 to 95 percent of emissions certificates in circulation were "associated with fraudulent criminal activities." A special commission of the Frankfurt general public prosecutor's office, named after the Germanic god Odin, was also investigating the dealings at the time.
Odin's hammer struck quickly. In the spring of 2010, the investigators smashed a network of dubious trading companies and in the course of a raid they also searched Deutsche Bank premises in Germany and abroad. At that point, five Deutsche Bank employees suspected of being involved in the carousel were arrested.
They were not the same bankers arrested last Wednesday. This time, they came armed with more personnel and new allegations. They were interested in senior employees in the department responsible for combating money laundering. Authorities believe they had approved fraudulent trading activities against their better judgment. The investigation was also focused on employees in the IT and legal departments, who were accused of having concealed information prosecutors had requested from the bank after the first raid in 2010.
This time the investigators brought along five arrest warrants, and they took two employees from the IT department, two from the legal department and one money laundering expert into custody. With the exception of one of the five, who was able to demonstrate medical reasons for not being detained, they all remained in custody after the arraignment. This time the investigators wanted to be completely certain that nothing would slip through the cracks.
They also followed up on information about a tipster who had allegedly warned the certificate traders at Deutsche Bank prior to the first visit by law enforcement on April 28, 2010. At 10:37 p.m. on April 27, a bank employee who handled corporate clients and had been involved in emissions trading, received a phone call from his boss to warn him of the raid that was going to happen the next day. "I just wanted to let you know that we have reliable information to the effect that the public prosecutor's office could show up tomorrow," the then manager of a sales territory told his subordinate.
Investigators had tapped the phone lines of both bank employees and recorded the conversation, in which the manager suggested that the bank apparently had more than one source. He told his subordinate that the bank had in fact received the information about the upcoming search through five different channels.
In the conversation, the two employees discussed the fact that it was very important to keep the investigators from knowing that the bank had been forewarned. The senior employee advised his subordinate to do everything possible to avoid creating the impression that bank personnel had been prepared for the issue or had quickly taken preventive measures.
The investigators would probably ask for the computer drive and make a copy of it, the supervisor continued. He also noted that it was important that the bank always have a lawyer present who was familiar with the issues at hand. Aside from that, he said, it was important not to seem self-conscious.
Apparently the tip-off prior to the first raid only made the investigators more determined. They also felt deceived by Deutsche Bank, which they accused of not having cooperated as meticulously as it had claimed, following the first raid.
In late April 2010, the Federal Office of Criminal Investigation and Deutsche Bank lawyers had prepared a written list of the information the bank was to provide the authorities concerning the VAT carousel scheme. It included emails, documents, tables and presentations associated with 40 bank employees.
In late summer 2010, the financial institution supplied the authorities with several hard drives, containing a terabyte of data. Then the bank heard nothing more about the case for almost two years. Then, in May 2012, the public prosecutor's office contacted the bank and reproached it for providing incomplete data to authorities in 2010. The bank subsequently delivered some of the missing information. According to Deutsche Bank, some of the requested information could no longer be reconstructed after two years, especially as some of the data had been outsourced to Siemens and IBM. The public prosecutor's office, however, believes the bank could have provided all of the data.
It also accuses the bank of deliberately delaying and not fully safeguarded some material, thus allowing employees access to it and, for example, deleting emails. According to the authorities, some 20,000 items were deleted, and the bank supplied no emails at all relating to nine employees on the list. In addition, according to the Frankfurt public prosecutor's office, the bank, contrary to its assurances, opened emails in all of the email accounts before they were passed on to investigators.
Deutsche Bank Cooperation?
Still, investigators are also to blame for some of the problems they had with processing the data. "They were literally drowning in a sea of information," says an insider.
Multiple conversations between an attorney hired by the bank and investigators also didn't help clear up the differences. On the contrary, the public prosecutor's office accuses the bank of using the attorney to obfuscate the reasons for the data's incompleteness. Ultimately, the investigators had enough and they staged last week's raid.
Fitschen was perplexed as prosecutors stood before him last Wednesday and read out the accusations against him and his CFO. For six months in 2010, the bank had commissioned legal firm Clifford Chance to determine whether its employees were guilty of misconduct in conjunction with emissions certificate trading. The preliminary result of the appraisal was that at worst, the employees could be blamed of minor negligence.
It was that conclusion which led Deutsche Bank to hand in the tax return in question. Still, the bank stressed the tax return was preliminary, pending an investigation into the fraudulent companies involved in the alleged scheme. When prosecutors filed charges against those companies in the summer of 2011, Deutsche Bank amended its tax return accordingly. "Unlike the public prosecutor's office, Deutsche Bank believes that this correction was made in a timely manner," the bank stated.
Prosecutors say the bank waited too long to amend the return. After making initial inquiries, investigators concluded that Deutsche Bank was deeply entangled in the fraudulent activities, and that it must have known this in 2009.
Those responsible should "at least have been able to recognize that they were involved in fraudulent dealings," a senior tax investigator with the Frankfurt Tax Office noted in an internal memo in late 2009. After all, he wrote, the emissions certificates had regularly been offered to the bank at below market prices -- lower than prices on the European Energy Exchange. Any reputable seller would have sold the certificates for the better price available on the exchange instead of offering them to the bank for less.
Easy Access to Malfeasance
By just a few weeks later, authorities had gathered so much incriminating material that the investigation was formally expanded to include "officials at Deutsche Bank AG." Thomas Gonder, the chief prosecutor in charge of the investigation, concluded that the bank had engaged in "objective supporting activities," and that some bank employees had very clearly provided "deliberate assistance" to tax evasion.
By this point, investigators had found nothing that the bank's own internal investigations couldn't have readily uncovered a few months later. Some of the companies involved in the VAT carousel scheme used accounts with Deutsche Bank to settle their transactions. As such, investigators believe that the suspicious activity should have been obvious, particularly as Deutsche Bank had easy access to the accounts in question.
There was, for example, the newly founded company Lösungen 360 GmbH, which developed into one of the bank's key trading partners in the emissions certificate trade within just a few weeks. It repeatedly offered the bank certificates at bargain basement prices.
In August 2009, the bank transferred more than 13 million to the company's account in payment for the certificates. Soon afterwards, almost all of the money had been transferred out of the account, headed for London. There was literally nothing left in the account to pay the VAT, which the suppliers of the certificates should have paid. Nevertheless, the bank claimed about 2.5 million on its VAT return for reimbursement of the tax.
On another occasion, Deutsche Bank received certificates for 30,000 tons of CO2 from a small business called Shafiq Handelsgesellschaft, which, according to investigators, had "operated a snack bar in Heidelberg" until then. This seemed a little too suspect to the bank, so it decided to return the certificates. Soon afterwards, however, the same certificates were offered to the bank once again, this time through Lösungen 360 GmbH, and they were accepted without question.
To the investigators, it seemed "inconceivable" that Germany's largest financial institution was doing deals worth millions with fly-by-night companies whose reputability and credibility it had hardly verified at all. Had it bothered to check, the bank would have undoubtedly learned that its most important certificate suppliers had neither references nor their own office space. In some cases, they didn't even have managing directors residing in Germany, against whom civil suits could be filed.
Chief investigator Thomas Gonder noted in January 2010 that Deutsche Bank should have become suspicious. Not only was the provenance of the companies dubious, but it was also unclear how they were able to offer Deutsche Bank emissions certificates worth amounts in the triple-digit millions. "They also must have been aware of the fraudulent nature of the transactions," Gonder wrote of Deutsche Bank.
The bank counters that it had monitoring procedures that were considered suitable at the time, the purpose being to ensure that the bank was only dealing with clean customers. Deutsche Bank also notes that it turned away some customers.