Deutsche Bank AG, Germany’s largest bank, admitted criminal wrongdoing and agreed to pay $553.6 million to avoid prosecution in the U.S. over fraudulent tax shelters that generated $29 billion in “bogus” tax losses.
The U.S. Justice Department, under an agreement yesterday, won’t prosecute the Frankfurt-based bank for fraud or tax evasion for enabling wealthy U.S. citizens to avoid $5.9 billion in taxes, after the bank admitted criminal wrongdoing.
The settlement includes a $149 million civil penalty, the fees that Deutsche Bank generated from the shelters, and the taxes and penalties the Internal Revenue Service was unable to collect from taxpayers because of the misconduct, according to the agreement.
From 1996 to 2002, “Deutsche Bank assisted high net worth United States citizens, who, through 2005, reported approximately $29.3 billion in bogus tax benefits on their tax returns,” according to the agreement. “DB acknowledges that it was wrong and unlawful to have engaged in these transactions and regrets having done so.”
The settlement stems from a U.S. probe into illegal tax shelters sold by accounting firm KPMG LLP. The U.S. previously brought criminal charges against former KPMG executives. Charges against New York-based KPMG, one of the Big Four firms, were dismissed in January 2007 after the firm paid a $456 million fine.
HVB Group agreed to pay $29.6 million to avoid prosecution on charges the Munich-based bank helped KPMG LLP sell shelters.
As part of yesterday’s settlement, Deutsche Bank agreed to the appointment of an independent expert to ensure the bank doesn’t use transactions to defraud the IRS again, according to the agreement. The overseer’s term will run for at least one year.
“The bank has previously taken appropriate provisions for the full amount of the fine, so the payment will not have any impact on current net income,” the bank said in a statement. “Deutsche Bank is pleased that this investigation, which concerned transactions that ceased more than eight years ago, has come to a resolution.”
Deutsche Bank admitted that it participated in 15 different shelters, including transactions called “BLPS,” “FLIP” and “HOMER,” in at least 1,300 deals for over 2,100 customers.
As part of the agreement, Deutsche Bank admitted that it knew or should have known that its participation in the deals was meant to create the appearance of legitimate investment activity, even though their “primary purpose” was to avoid taxes. The bank also said it knew that documents falsely describing the transactions would be used by taxpayers and promoters of the shelters.
Deutsche Bank agreed that it would continue to cooperate with the government, provide records, and alert prosecutors to related criminal activity it uncovers. The agreement bans Deutsche Bank from participating in “pre-packaged tax products,” which U.S. Attorney Preet Bharara said “were the type of tax shelters” previously offered by the bank.
Should the bank violate the agreement, the Justice Department may prosecute the bank or extend the tenure of the independent expert.
Federal prosecutors in New York have brought criminal cases against numerous executives since 2005. The government initially accused 17 ex-KPMG executives, only to see charges against 13 of them dismissed once a judge ruled that prosecutors violated their right to counsel. Three were convicted at a trial, one was acquitted, and others who were later charged pleaded guilty.
The U.S. crackdown on illegal tax shelters also targeted Jenkens & Gilchrist, a Dallas-based law firm that once had 600 lawyers and which shut down after agreeing to pay millions of dollars to avoid prosecution for selling phony tax shelters.
Executives at accounting firms BDO Seidman and Ernst & Young were also convicted of selling illegal shelters to wealthy clients.
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