Tuesday 7 May 2019 12:01 am

Deutsche Bank scandal: Courts still chasing billions through tax scams and carbon credits

Major banks enabled fraudsters to steal billions of pounds of public money through VAT scams, according to documents obtained by the Bureau of Investigative Journalism.

A decade later, tax authorities are still chasing the money through the courts.

Traders in London facilitated the so-called “carousel” fraud by organised crime gangs in 2009, which involved the trading of carbon credits, permits which allow a country or organisation to emit greenhouse gases.

The gangs imported millions of carbon credits from outside the UK before selling them on in Britain, charging VAT to the customer but disappearing with the money instead of passing it on to HMRC. These credits were eventually bought and sold by Deutsche Bank, Royal Bank of Scotland (RBS) and Citibank among others, a key step in the fraudsters’ plans, court documents show.

To hide the scam, the fraudsters set up a chain or “carousel” of bogus companies which traded the carbon credits, before selling them on to major banks through brokers. The carousel allows criminals to recycle the carbon credits and then re-sell them, allowing the fraud to continue for longer.

The fraudsters moved their operations from country to country. Now, German non-profit media organisation Correctiv has coordinated 28 newsrooms across Europe to put the jigsaw together. Teams of journalists including the Bureau have scoured thousands of newly obtained documents and talked to some of the participants as part of a project called Grand Theft Europe.

The documents reveal in great detail the allegations made against Deutsche Bank, RBS and Citibank and the broker companies who sold them the carbon credits. It is alleged the banks and brokers did not do enough to ensure the credits they traded were not connected to fraud.

Deutsche Bank settled in the UK in May last year, without admitting liability. It has refused to tell the Bureau how big the settlement was. Deutsche Bank told the Bureau it “exited carbon emissions trading in 2010 and reimbursed the German state”.

The current civil cases involve RBS – now called Natwest Markets – and Citibank, who are being sued for £71.4m and £14m respectively by liquidators of a string of companies involved in the fraud. The firms that absconded with the VAT have gone into liquidation. Accountancy firm Grant Thornton is acting on behalf of the companies in an attempt to recover the money.

Citibank said it considers the claim to be “fundamentally misconceived and entirely without merit”. It is “vigorously defending against the allegations”.

Natwest Markets said it “denies the allegations and defended them in court in 2018. This is a long-running claim and we are expecting judgment to be handed down shortly.”

Raids at Germany's biggest bank

In April 2010 EU police and tax investigators raided hundreds of offices and homes across Germany, including those of Deutsche Bank in Frankfurt. The bank was ordered to repay €145m (£124m) of lost VAT on trades between August 2009 until the raids in April 2010 that were connected to fraud.

Court documents reveal allegations that the fraud uncovered in Germany had its seeds in the UK in the months before the raids.

Seven Deutsche Bank employees in Germany have been prosecuted to date. None of the traders in Deutsche Bank’s London office have faced criminal charges so far.

The documents piece together how the carbon credit carousel fraud began in France, moved to the Netherlands and the UK, before migrating to Germany and Italy, in a pan-European fraud that is estimated to have cost EU governments €5bn.

By early June 2009, a series of scandals meant it was widely known across Europe that the market for carbon credits was teeming with frauds. The Paris-based Bluenext Exchange, the main trading exchange for carbon emissions, closed for two days on 8 and 9 June as the French tax administration opted to charge a zero rate of VAT on carbon credits to prevent carousel fraud.

A few days later, the Paris prosecutor’s office admitted it was investigating a multi-million-euro VAT fraud in the French carbon emissions market. Within a week, the Netherlands had also introduced a mechanism to combat the fraud.

This pushed the fraud to the UK – where VAT was still charged on sales of carbon credits – and HMRC had been given only a day’s notice about the changes in France.

An internal RBS email sent in early July said “it seems the UK’s carbon emissions market is rotten” and “is being targeted by carousel trading fraudsters”. RBS said this email reflects that individual’s opinion and not the wider team’s.

A summer spree

Shortly after the Bluenext Exchange reopened on 9 June 2009, court documents show an associate at Deutsche Bank London’s carbon trading desk, a trader, messaged a broker about the closure. “The whole carousel/VAT scam is a bit troubling,” they wrote, “maybe it really is a scam, and clearly illegal and clearly troubling”.

In any case, the trader predicted a “summer slowdown” on trades “as we all take holiday”. But in reality, over the next seven weeks trading suddenly exploded as fraudsters cashed in on the UK carbon credit market.

In mid-June Deutsche Bank was approached by SVS Securities, a broker with whom Deutsche had not dealt before. It had carbon credits to trade and expected to grow its business.

SVS was soon providing Deutsche Bank with many more carbon credits than expected. On 2 July, SVS sold 842,000 credits to the bank, three times the amount it had initially estimated it could supply. In its defence SVS said this was because the initial volume was calculated by an intern. It said the sudden increase can only be said to “appear illegitimate with the benefit of hindsight”.

The bank asked SVS for a reason behind the spike in carbon credits. SVS brokers met Deutsche Bank traders at a Corney & Barrow wine bar, and gave a plausible explanation for the uptick in business, according to Deutsche Bank.

SVS said another broker, Tradition Financial Services (TFS), had approached it with an influx of clients from Eastern Europe wanting to sell carbon credits, and that SVS and TFS introduced them to Deutsche Bank and split the commission.

SVS denies it ever gave the bank this explanation and said the meeting was simply a social occasion.

SVS and TFS’s clients were not in fact genuine Eastern European suppliers. They were the “missing traders” who disappeared with the VAT once Deutsche Bank sent in a claims form to HMRC, according to a witness statement given by Rod Stone, a fraud investigator at HMRC, during the German authorities’ investigation.

After the meeting trading resumed, and over the next 23 days Deutsche Bank bought more than 24m credits from SVS.

The documents reveal that during this summer spree traders at SVS and TFS were raising their own concerns about the carbon credits they were selling on to the banks.

Phone calls between Simon Fox, a trader at SVS, and Luca Bertali from TFS reveal they had never met anyone from one of the companies they were trading with and Bertali said one of them “could be an axe murderer”. Fox also questioned whether the company could “do a runner”.

After hearing of a presentation by Barclays Bank about how to detect VAT fraud, Bertali phoned Fox and asked: “What are we going to do?… I hope to God they’re not all dodgy, I can’t imagine every single one of these people being fucking dodgy.”

In another phone call between two unidentified SVS and TFS employees, the two agreed “the shit” will come down on carbon credit trading.

The Bureau spoke to Bertali, who left TFS in 2014 and now owns a yoga studio in Shoreditch, east London. He said he believed the market for carbon credits was genuine, and that clients came to brokers like TFS who took less of a cut of profits than a bank.

“It’s very easy to say with hindsight. We were just doing what we thought was the right thing,” he said. “We weren’t the ones stealing the VAT.”

A member of the emission trading desk at Deutsche Bank in London claims to have raised concerns about SVS’s trading, though it is unknown exactly when. The trader said she had queried the high volumes of credits coming from SVS.

During the civil case in the UK the lawyers acting on behalf of SVS and TFS’ creditors, Grant Thornton, alleged Deutsche Bank should have questioned SVS’s purported business model as it “made no commercial sense”. No other financial institution experienced such a spike in trading.

Deutsche Bank London bought increasing numbers of credits from SVS at favourable prices while knowingly failing to investigate SVS’s business properly as it was not in its financial interest to do so, the lawyers allege.

They were “wilfully shutting their eyes to the obvious, which was that there was no legitimate explanation for the trades such that there was a significant and unexplored risk that they were connected with criminal activity and in particular VAT fraud,” the claimants allege.

While Deutsche Bank settled, Grant Thornton lawyers are still seeking £50m from SVS, two of its former employees and TFS. The case will be heard in March next year.

In its defence, SVS said it denies being a knowing party in the fraud and denies that its traders “deliberately closed their minds or failed to ask questions”. They are “not culpable” for any fraud against companies or HMRC, it added.

TFS also denies assisting alleged VAT fraud but that if it did assist “it did so unwittingly and not dishonestly”.

Suspicions about Deutsche Bank’s trading were later raised at HMRC when in September 2009 the bank submitted a VAT refund claim for £48m, while prior to January 2009, the London branch would normally have paid VAT to HMRC. On investigators’ instruction, HMRC withheld the claim.

By this time, carbon credits were no longer charged VAT, putting an end to the fraud in the UK. RBS and Citibank stopped trading with SVS in July over concerns of fraud.

Despite this, Deutsche Bank London carried on trading: it stopped buying carbon credits from SVS and started selling to them instead.

These credits were coming from the bank’s Frankfurt branch and fraudsters were now stealing from German tax authorities, where VAT was still being charged. Deutsche Bank declined to comment further.

Almost a decade after the first suspicions of fraud emerged at HMRC, it has still been unable to recoup the full amount stolen from British taxpayers, estimated to be up to £300m. Even if it wins in court, it’s likely HMRC will only get back around half of what it is owed.

For Grand Theft Europe, the Bureau of Investigative Journalism teamed up with a network of 35 European media partners from every European country, coordinated by the German non-profit newsroom Correctiv, to investigate VAT carousels, the biggest ongoing tax fraud in the EU. Read more at grand-theft-europe.com