Huge fraud discovered at Deutsche Bank subsidiary

Deutsche Bank, Germany's biggest commercial bank, was plunged into fresh controversy yesterday when Klockner-Humboldt-Deutz, a household name in German engineering, warned that its survival was threatened following the discovery of an alleged multi-million-pound fraud at a subsidiary.

KHD, where Deutsche is the largest shareholder with a 47.7 per cent stake following a huge financial rescue package last year, said book-keeping "irregularities" at its Humboldt Wedag plant construction unit had been unearthed on Friday, which would result in unexpected losses running to "several hundred million" marks.

The episode is the latest in a series of embarrassments for Deutsche and its chairman, Hilmar Kopper, that have raised doubts about the German system of corporate governance where banks, through their large industrial shareholdings, wield considerable influence on companies by being represented on their supervisory boards and also creditors.

In particular, Deutsche was closely associated with the near-collapse of the metals group Metallgesellschaft; the bankruptcy of the Jurgen Schneider real estate group and the record losses at Daimler-Benz, Germany's largest industrial group.

KHD blamed several board members at the subsidiary, a number of employees and "outside third parties" for the cover-up of the losses stretching back to 1993.

A spokesman for Deutsche declined to reveal the size of the bank's exposure to loss-making KHD. "There is no official figure," he said. However, press reports say Deutsche provided more than half the DM830m (pounds 356m) capital injection that helped save KHD last year.

While analysts speculated that Deutsche would have to throw another lifeline to KHD, the bank said it was too early to discuss a possible bail-out. "We will have to wait until we have further information before we decide what to do," the spokesman added. Trading in KHD shares was suspended yesterday.

"KHD has been a basket case for some time," said one analyst. "But the latest developments again raise questions about the general level of competence of Deutsche Bank."

News of KHD's latest difficulties overshadowed strong four-month figures from Deutsche. Helped by its London-based investment arm Morgan Grenfell, group net profit rose 32 per cent to DM770m, driven by trading income which more than doubled.