US accuses Barclays and Deutsche Bank of aiding hedge funds in tax evasion

World banking giants Barclays and Deutsche Bank have been accused by the US of helping more than a dozen hedge funds in tax evasion.

Addressing a news conference, US Senate Permanent Subcommittee on Investigations chairman Carl Levin said the banks sold complex option products to Renaissance Technology that saved them and other hedge funds billions of dollars in taxes.

“Ordinary Americans had to shoulder a tax burden of billions of dollars, a burden that was shrugged off by these hedge funds.”

In a report, which will be released today and follows a year-long investigation into basket options, the panel alleges that the two banks enabled at least 13 hedge funds to conduct more than $100bn in securities trades, and taxed profits as long-term capital gains, reported Reuters.

The hedge funds then paid the lower tax rate on long-term capital gains, arguing that profits were generated by exercising the option, rather than from the underlying trades, the report adds, noting that the options were fictional.

Renaissance alone is alleged to have paid an estimated $6.8bn less in taxes.

The panel urged the Internal Revenue Service (IRIS) to audit hedge funds that used basket options, and called for a change in legislation to simplify auditing of large partnerships, such as hedge funds.

Levin said: “The IRS hasn’t completed their review. It’s about time they do. It’s long overdue.”

Deutsche urged that the option products it offered were “at all times fully compliant with applicable laws, regulations and guidance.”

Barclays said it had been fully compliant with the law, and had cooperated with the committee.