NEW YORK—Deutsche Bank AG agreed Tuesday to pay $553.6 million and admitted criminal wrongdoing to settle a long-running probe over fraudulent tax shelters that allowed clients to avoid paying billions of dollars in U.S. taxes.
Under a nonprosecution agreement with the U.S. Attorney's office in Manhattan and the Internal Revenue Service, the German bank won't be prosecuted for its participation in about 15 tax shelters involving more than 2,100 customers between 1996 and 2002, including shelters marketed by accounting firm KPMG LLP and defunct law firm Jenkens & Gilchrist PC.
"Customers used the transactions to generate more than $29 billion in bogus tax benefits, mainly losses," according to the agreement.
The $553.6 million payment represents the total fees that the bank collected during the period, the taxes and the interest the IRS was unable to collect during the period, and a civil penalty of more than $149 million.
"Deutsche Bank is pleased that this investigation, which concerned transactions that ceased more than eight years ago, has come to a resolution," the bank said in a statement.
Deutsche Bank said it previously had taken "appropriate provisions" for the full amount of the fine and it won't have an impact on current net income.
The agreement resolves an investigation that stemmed from aggressive, prepackaged tax shelters that the government believed were fraudulent.
More than a dozen people were charged criminally in the matter. However, a federal judge threw out charges against 13 former KPMG executives in 2007 after finding prosecutors violated their rights to counsel by putting undue pressure on the accounting firm not to advance them defense costs.
A former KPMG LLP tax partner, a onetime KPMG senior tax manager and a lawyer in a case were convicted of criminal charges in 2009 in a case once billed as the largest tax-shelter fraud prosecution in U.S. history. The investigation is continuing.
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Under the agreement, Deutsche Bank admitted it knew or should have known that the transactions underlying the shelters were "intended to create the appearance of investment activity, but taxpayers were entering into these transactions for the primary purpose of avoiding taxes, as opposed to making profits on the transactions." Here, the bank's headquarters in Frankfurt, Germany.
KPMG itself signed a deferred prosecution agreement in which it admitted to the fraudulent sale and marketing of bogus tax shelters and agreed to pay a $456 million penalty.
A conspiracy charge against KPMG was dropped in December 2006.
The shelters at issue included so-called Blips, or bond-linked issue premium structure; Flips, or foreign leveraged-investment program; and OPIS, or offshore portfolio-investment strategy.
Jenkens & Gilchrist issued opinion letters touting the legitimacy of the transactions underlying some of the shelters and marketed some of the shelters. The firm closed its doors in 2007 after entering into an agreement avoiding prosecution and paying a $76 million IRS penalty.
Last year, criminal charges were brought against seven people related to the Jenkens & Gilchrist shelters, including three former Jenkens & Gilchrist lawyers, two former Deutsche Bank employees and the former chief executive of accounting firm BDO Seidman LLP. Two people pleaded guilty in that case.
As part of its agreement Tuesday, Deutsche Bank agreed not to be involved with any type of prepackaged tax products and to adopt an ethics and compliance program. The bank also agreed to cooperate with prosecutors.
Under the agreement, Deutsche Bank admitted it knew or should have known that the transactions underlying the shelters were "intended to create the appearance of investment activity, but taxpayers were entering into these transactions for the primary purpose of avoiding taxes, as opposed to making profits on the transactions."
Write to Chad Bray at chad.bray@dowjones.com
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