U.S. tax investigators focus on Deutsche Bank

http://www.iht.com/articles/2006/02/15/business/tax.php
http://www.nytimes.com/2006/02/15/business/15shelter.html

U.S. tax investigators focus on Deutsche Bank
By Lynnley Browning The New York Times
WEDNESDAY, FEBRUARY 15, 2006
NEW YORK Prosecutors in Manhattan are investigating Deutsche Bank's role in questionable tax shelters that helped wealthy investors evade billions of dollars in taxes, according to people briefed on the case.

The development is the latest in a widening inquiry of accounting firms, lawyers and now banks. On Tuesday, the second-largest German bank after Deutsche, HVB Group, agreed to pay nearly $30 million in a plea bargain over four types of tax shelters, averting an indictment.

A spokeswoman for Deutsche Bank declined to comment. The criminal investigation of the banks is being conducted by the U.S. Attorney's Office in Manhattan and follows its investigation into the role of the accounting firm KPMG in the creation and sale of bogus tax shelters. KPMG avoided indictment last August by agreeing to pay $456 million. Seventeen former KPMG employees and two other people have been indicted on charges of plotting to defraud U.S. tax authorities through the creation and sale of four tax shelters. All are fighting the charges.

The settlement with HVB includes a strongly worded admission of "criminal wrongdoing" by the bank. In the agreement, HVB acknowledged it had conspired to defraud the U.S. government, committed tax evasion, caused false and fraudulent tax returns to be filed, and assisted in the preparation of false returns. HVB, the statement said, worked with KPMG and certain unidentified law and investment firms to take part in fraudulent tax shelter transactions.

"KPMG and HVB have admitted that they and their co-conspirators used false and misleading documentation to cheat the government out of billions of dollars in taxes owed by America's wealthiest citizens," the U.S. attorney, Michael Garcia, said in a statement. He called the tax shelters "nothing more than fictions designed to enable privileged taxpayers to avoid paying their fair share."

HVB, under its agreement with prosecutors, will pay nearly $30 million in fines and penalties stemming from its work on four questionable tax shelters sold to investors from 1996 through 2003 that cost the U.S. Treasury $500 million in unpaid taxes.

The deal, which lasts 18 months, allows HVB to avoid a criminal trial if it abides by terms of the agreement, which include cooperating with the widening investigation. In a statement, HVB said that it "has cooperated fully with the government's investigation and will continue to do so."

Investigators at the Justice Department and the tax agency who are investigating questionable tax shelters have said that a network of banks, law firms, accounting firms and investment firms worked together from the mid-1990s through 2003 to create and sell abusive shelters and carry out financial transactions underpinning them.

The agreement with HVB covers four kinds of tax shelters, known as blips, cards, 357c and common trust funds. All four involve generating phony losses that were then used by investors to evade income tax by offsetting other income.

Blips required complex financial transactions, which HVB carried out. Prosecutors said those transactions were essentially "non-bona-fide loans" to investors that generated phony tax losses permitting "illegal tax benefits." In 1999 and 2000, HVB carried out transactions for 29 blips that generated at least $5.1 billion in phony tax losses, according to a statement of admitted facts accompanying the deferred prosecution agreement.

For that same blips shelter, however, Deutsche Bank played a much bigger role. The bank made 56 blips "loans" in 1999 and 2000, earning fees of $44 million, according to testimony given by a former Deutsche Bank employee during hearings by the Senate's Permanent Subcommittee on Investigations in 2003.

That Senate report said that after a 1999 meeting between unnamed HVB employees and an employee of an investment firm, "HVB was put in touch with Deutsche Bank" regarding loans underpinning the shelter. No court has ever ruled blips or the three other tax shelters in question illegal. Still, the IRS has never considered the shelters valid.

The criminal investigation in Manhattan adds to Deutsche Bank's legal problems. In late December, a German court ruled that the bank's chief executive, Josef Ackermann, would be tried again in a criminal case. Ackermann, who was a director at a telecommunications company, Mannesmann, during a takeover battle with Vodafone of Britain, was acquitted in 2004 of charges that he broke the law by awarding rich bonuses to top Mannesmann executives. Deutsche Bank also is a defendant in many civil lawsuits filed by former clients who bought blips and other tax shelters.

HVB has more than 2,000 branches in more than 40 countries. In June, it agreed to be acquired by UniCredit of Italy for $18.7 billion.