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Analysis: Carbon trading scandal engulfs top management at Deutsche Bank

Probe widens to include co-CEO and CFO

Before he stepped down last May, former Deutsche Bank chief executive Josef Ackermann pledged that he would leave a “cleanly swept bank” to his successors Anshu Jain and Jürgen Fitschen.

But yesterday morning, 500 German tax officials and police stormed Deutsche Bank’s twin towers in Frankfurt. They were looking for evidence of the bank’s involvement in a complicated tax scam based on trading in EU carbon emissions certificates. Frankfurters had never seen anything like it in the city’s financial district.

As the officials seized bank documents, the public prosecutor for the state of Hesse announced that 25 Deutsche employees were under investigation for their involvement in the scam, which has cost the German public €230m in lost value-added-tax (VAT) revenue. Five Deutsche employees have already been arrested.

Deutsche had no official press release at first, yet when it did it was a bombshell: it confirmed that Co-CEO Fitschen and current chief financial officer Stefan Krause were two of the 25 people under investigation.

Fitschen was board member in charge of Deutsche’s German business at the time of the scam, which took place between September 2009 and April 2010.

Details of Fitschen and Krause’s involvement are sketchy, but it appears the prosecutor believes that they share some responsibility by signing off on a flawed VAT tax return for 2010.

Deutsche insists, however, that this return has long since been corrected. “Unlike the prosecutor, we also feel that the correction we made on a voluntary basis was done in a timely manner,” the bank says.
The scandal is unrelated to the now disbanded DB Climate Change Advisors, the bank’s in-house environmental research and investment division that was the brainchild of former asset management chief Kevin Parker.Parker has since resurfaced at US-based renewable energy investment firm Green Partners LLC.

Regarding the scam, here is what is known so far: A band of six men based in Frankfurt, Hamburg and Paderborn approached several banks in Frankfurt in 2009 with the idea of essentially cheating the German state out of VAT by trading carbon emissions certificates. Although other unnamed banks declined the offer, Deutsche’s carbon trading desk took them up on it and provided the platform for the trades.

In order to cheat, the traders bought emission certificates in European countries outside of Germany and thus avoided VAT. They then sold the certificates to a second party and charged VAT. Instead of transferring the VAT to fiscal authorities, the traders kept it.

The German authorities uncovered the scam in the spring of 2010 and by December 2011, the six men were convicted of fraud. In that investigation, tax authorities searched Deutsche Bank and questioned several members of the carbon trading desk but the prosecutor handed down no indictments.

Some time later, though, Germany’s largest bank took a charge of €310m to deal with the consequences of the scam, and just two months ago the bank suspended a group of traders for their involvement with it. Whether these traders are the same ones that the prosecutor has now arrested is not known.

According to Deutsche’s website, its largest shareholders – that is with more than 3% of the traded stock – include US asset managers BlackRock (5.1%) and Capital Management and Research (3.1%) as well as Swiss bank Credit Suisse (3.9%). BlackRock said it doesn’t comment on its shareholdings.