Barclays PLC and Deutsche Bank AG Hit With Yet More Bad News

It seems as if the whole world is turning against Barclays (LSE: BARC) (NYSE: BCS.US) right now. After coming under attack for misleading investors about its dark pool trading venue, Barclays is now under investigation for helping hedge funds avoid billions in US government taxes. 

Complex products  

It was revealed yesterday that Barclays and the bank’s European peer, Deutsche Bank, had been helping hedge funds avoid US taxes. These revelations were made in a report published by the Senate permanent subcommittee, about investigations conducted by the Committee on Homeland Security and Governmental Affairs.

According to the report, the two banks were using a method called “basket options” to hide the trading activities of hedge funds. Simply put, these options allowed hedge funds to hide their trading profits in each banks own accounts. Hedge funds then collected a lump sum payout at the end of the year. 

As a result, hedge fund profits collected from these basket options were taxed as long term capital gains, rather than short term trading profits, which are taxed at a higher rate. 

Between 1998 and 2013, both Barclays and Deutsche are estimated to have sold 199 of these basket options, encompassing more than $100bn in trades. 

Unclear repercussions

As yet it’s unclear how much this will cost the two banking giants. The final sums are likely to be dependent on how much tax was avoided. But with regulators seeking to make an example of banks, both Barclays and Deutsche could be in for hefty fines. 

Indeed, French bank, Credit Suisse has recently been forced to pay $2.6bn for its involvement in US tax evasion, a charge which obliterated all of the bank’s profits for the second quarter. 

So, Barclays and Deutsche could be in line for multi-billion dollar fines. What’s more, the Senate subcommittee found evidence that suggests the two banks helped hedge funds skirt round US securities law, which governs levels of lending and leverage. 

The chairman of the subcommittee, Carl Levin has summed up the findings, which focused on two important issues.

“…[the banks were found to be assisting] tax avoidance by profitable companies and wealthy individuals, and reckless behaviour that threatens the stability of the financial system…”

Unfortunately, if it is found that Barclays and Deutsche have been threatening the stability of the financial system, fines levied on the banks could be crippling.

For Barclays, this news comes at a really bad time for the bank. These findings, along with the bank’s dark pool debacle, could be the beginning of the end for Barclays’ US arm.