Legal Troubles One Up, One Down for Deutsche Bank

Deutsche Bank is back in the headlines for all the wrong reasons: Eight of its employees have been formally charged in a European tax evasion probe. But on the up side, another case has been dropped.
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It’s been a good run of positive headlines recently for Deutsche Bank and its new co-chief executive, John Cryan, who took over Germany’s largest bank in July.

The Frankfurt-based bank last month posted solid results for the first half of this year. Mr. Cryan, a British-born banker known for his realism and pragmatism, has won plaudits from shareholders and investors for offering an honest assessment of the high costs and low profitability that have plagued the bank for the past few years.

Mr. Cryan also promised to make it a “personal priority” to get the bank’s many legal woes under control, even taking over management of the bank’s legal affairs department. His task will be to work through some 7,000 legal cases and regulatory investigations that are still facing the bank around the world.

On Thursday, Mr. Cryan was once again reminded that he will have his hands full. Frankfurt prosecutors said they had filed charges with a local court against seven current and one former employee of a “large bank” in the city for their role in a European-wide tax evasion ring involving CO2 emissions trading certificates.

In an 865-page indictment, Frankfurt’s prosecutors allege that the eight bank employees helped companies evade some €220 in VAT taxes.

It’s not a scandal that has affected Deutsche Bank alone – nor was the latest development a surprise.

Sources last month said charges were likely to be filed against the eight employees, and the probe itself is part of a long-running European investigation into the tax fraud ring, in which companies sought to evade taxes through a complex network of importing, exporting and swapping carbon-emissions trading certificates between firms and countries in the European Union.

It’s a scandal that has reportedly cost European governments about €5 billion ($5.6 billion) in lost income over the years, as the scheme allowed companies to avoid paying taxes on some certificates and reclaim taxes on others. The CO2-trading probe has already seen 14 people jailed, one for as long as seven years in Germany.

In an 865-page indictment, Frankfurt prosecutors on Thursday alleged that the eight bank employees helped companies to evade some €220 million in VAT between September 2009 and February 2010. Prosecutors said charges were also pending against a “ringleader” based in the United States, who has been arrested in Las Vegas and is set to be extradited to Germany.

While prosecutors didn’t expressly name the bank involved, it is widely understood to involve employees of Deutsche Bank. Indeed the announcement was hardly a surprise. Handelsblatt sources reported last month that charges were pending against eight employees of the finance house.

Deutsche Bank itself has been conducting an internal investigation into the CO2 emissions case. In a brief statement on Thursday, the bank said its investigation continued to evaluate “all relevant facts” surrounding the case and was cooperating with the authorities.

The case is one of a long list of legal scandals that Deutsche Bank has faced since the 2008 crisis, and which have undermined both its reputation and cost the bank some €10 billion in legal fees. The largest was a $2.5 billion fine in April from U.S. and British regulators for its role in Libor, the global benchmark interest rate rigging scandal.

Along with the bank’s struggles to turn a consistent profit, the legal woes helped bring down its former co-chief executive Anshu Jain, the Indian-born British investment banker who resigned in June.

Jürgen Fitschen, who led the bank together with Mr. Jain since 2012, will remain as co-CEO with Mr. Cryan until May of next year. After that, Mr. Cryan will steer the bank on his own.

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But Deutsche Bank did also receive some good news this week on the legal front. Frankfurt prosecutors have halted an investigation into the bank’s managers over charges of a “betrayal of confidence” in another long-running legal dispute involving the former Kirch media empire.

The Kirch saga has been running since 2002, when former Deutsche Bank executive Rolf Breuer questioned in an interview whether the once-powerful Kirch media firm could escape bankruptcy. Kirch collapsed just months later, and its founder Leo Kirch sued Deutsche Bank for allegedly orchestrating the insolvency to profit from it.

Deutsche Bank eventually settled the case last year, agreeing to pay €925 million to the heirs of Leo Kirch, who passed away in the meantime, despite having long denied that they purposely nudged the Kirch company into bankruptcy.

Despite the settlement, Mr. Fitschen and four former managers, including Mr. Breuer, were criminally charged in April with misleading the courts during the long civil trial.

That trial is still ongoing, but the bank can at least rest easy that Frankfurt prosecutors won’t be adding to the existing charges.

The now-halted criminal investigation was looking into whether Deutsche Bank may have improperly settled the Kirch suit. A shareholder of the bank had accused Deutsche Bank of settling the lawsuit as part of a (failed) attempted to avoid Mr. Fitschen facing criminal charges. Prosecutor found there was no basis for a case.


Christopher Cermak is an editor with Handelsblatt Global Edition in Berlin, covering the financial sector. To contact the author: [email protected]