A judge in Frankfurt on Monday singled out Deutsche Bank’s risk management controls as totally inadequate in sentencing a former senior Deutsche Bank trader to three years in jail, and five others to suspended sentences, for helping international investors cash in €220 million ($249 million) in illegal tax refunds from the German government.
In delivering his verdict, the regional court judge in Frankfurt, Martin Bach, criticized the bankers and the bank’s internal controls system for failing to recognize and stop a sophisticated scheme in 2009 and 2010 to bilk the German Finance Ministry through the sale of CO2 carbon dioxide emissions trading certificates. An attorney for the bankers said he would appeal the court’s decision.
The bankers were convicted of structuring trades for six foreign investors that were specifically designed to trigger tax refunds from German authorities, even though the investors through sales of CO2 emissions trading certificates never paid any taxes. The illegal trading took place in 2009 and 2010 and the bank has since repaid the refunds to the German government.
The 55-year-old head of the bank’s CO2 emissions trading desk, identified in the German media as Heinz H., was sentenced to prison as the ringleader of the scheme, and his subordinates received suspended sentences. One other employee was acquitted.
Deutsche Bank is struggling under the weight of hundreds of investigations and fines, most incurred in and around the global financial crisis in 2008. The largest penalty so far, $2.5 billion, was imposed by British and U.S. regulators on the German bank for its role in an international ring to manipulate Libor interest rate benchmarks to generate illicit profits on trades.
Deutsche Bank was not on trial, and yet the judge reprimanded the Frankfurt institution for its role in the scandal, citing a 'complete failure of all security mechanisms' and the 'risk-affirming climate' in the bank.
In imposing the fine, the regulators said the bank had attempted to hinder the investigation. At its annual meeting last month, shareholders criticized the bank’s top managers, including the supervisory board chairman, Paul Achleitner, for the bank’s handling of the investigation. Mr. Achleitner, in an interview with Handelsblatt’s sister publication WirtschaftsWoche, denied any attempt to hinder the probes at Deutsche Bank.
While the case involving CO2 emissions trading was much smaller and less costly to Deutsche Bank, it once again called into question the integrity of the bank’s internal controls and its commitment to introducing a “cultural change” at the bank that sets clear lines that prevents the bank’s employees from breaking laws in search of profit gain.
In the emissions trading scheme, Deutsche Bank’s employees were involved in an illegal ring to generate refunds of Germany’s value-added tax, the rough equivalent of a sales tax in other countries. The bankers were accused of receiving reimbursement of taxes that had never been paid through cross-border trades of European Union rights to emit climate-damaging carbon dioxide (CO2).
For the trial, investigators analyzed more than 100 terabytes of electronic data evidence, and more than 1 million emails and thousands of recorded conversations. “Only through this analysis was it possible to form an objective picture of what happened in the bank,” Mr. Bach, the presiding judge, said.
Although the Deutsche bankers sentenced Monday did not personally enrich themselves, but merely aided the illegal activities of their clients, they enabled the CO2 emissions frauds. The same court had already sentenced six of the bank’s customers to prison terms in 2011 in the case. Six other members of the CO2 ring have been convicted since then.
Through its role in the CO2 fraud, Deutsche Bank evaded €220 million in taxes, a sum the bank has since repaid.
All of the defendants were fined. Judge Bach drew a distinction between the trading department head and his subordinates, some of whom had confessed. He accused the department head of coordinating the CO2 trading activities and being instrumental in the fraud. The judge argued that the defendant should have realized the individuals he was dealing with were not honest.
“He was an offender and not an accessory to a few employees in the tax department who acted in bad faith,” Judge Bach said. The department head allegedly resumed trading, which had been initially stopped, with a dubious business partner who could “easily have been identified as a VAT fraudster,” the judge said.
According to the judge, the 55-year-old was also partly responsible for destroying the careers of “the other employees, some of whom were very young.”
The defendant’s behavior contributed to his jail sentence, which the judge imposed without the chance for parole.
“He did not confess to his involvement,” Judge Bach said. The 55-year-old was the only defendant who had pleaded not guilty.
Heinz H., the department head, remained calm when the verdict was pronounced, listening to the grounds for the court’s decision with his arms crossed and looking down at the floor. At the beginning of the trial, he had tearfully insisted his customers had deliberately deceived him. “The verdict is wrong, but it isn’t surprising,” said his attorney, Wolf Schiller, who said he intended to appeal the decision.
Deutsche Bank was not on trial, and yet the judge reprimanded the Frankfurt institution for its role in the scandal, citing a “complete failure of all security mechanisms” and the “risk-affirming climate” in the bank as a “mitigating” circumstance.
As a result, the judge said “this extremely mild sentence” of three years in prison for the trading head was sufficient. The prosecution had asked for a four-year sentence. A Deutsche Bank spokesman said that the bank has since “fundamentally changed” its procedures in accepting new customers, and the employees in question had been let go long ago.
In its sentencing of the others, the court fell short of prosecutors’ demands. In three cases, prosecutors had called for imprisonment without the possibility of parole. Nevertheless, Chief Prosecutor Thomas Gonder said he was satisfied with the outcome, adding it was “especially gratifying” the court acknowledged the defendants’ personal culpability despite “the bank’s organizational deficiencies.”