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The headquarters of Deutsche Bank are pictured next to a pictograph in Frankfurt July 23, 2010.

RALPH ORLOWSKI/Reuters

State prosecutors searched offices of Germany's biggest lender, Deutsche Bank, on Wednesday in a widening probe linked to a tax evasion scheme involving the trading of carbon permits.

Frankfurt public prosecutors said they were investigating suspicions of severe tax evasion, money laundering and obstruction of justice against 25 bank staff and had arrested five of them.

Around 500 police and tax inspectors searched Deutsche Bank premises and private residences in Frankfurt, Duesseldorf and Berlin, prosecutors said in a statement.

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Tax inspectors clutching backpacks and suitcases were seen leaving Deutsche Bank's headquarters in Frankfurt, where about 20 police minibuses and two large coaches were parked outside.

Eight policemen wearing dark blue overalls and armed with handguns were stationed in the lobby.

In October, a financial source familiar with the matter said Deutsche had suspended a handful of employees after it was criticised by a judge last year during a trial into tax evasion on carbon permits. It was unclear when the traders were suspended.

The judge in that case had sentenced six men to jail for participating in a conspiracy to evade around €300-million ($390-million U.S.) in value-added tax (VAT) on carbon permits between August 2009 and April 2010.

The way Deutsche Bank conducted emissions trading with some of the convicted men had left the door open for tax evasion, the judge said at the time.

Deutsche Bank on Wednesday said it was cooperating fully with the authorities and declined comment on the arrests.

"Public prosecutors searched Deutsche Bank offices today in connection with investigations that have been underway since the spring of 2010 against individuals suspected of tax evasion in the trading of CO2 emission certificates," Deutsche Bank said in a statement.

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The European Union's spot carbon market was hit by so-called carousel trade in 2009 and 2010, in which buyers imported emissions permits in one EU country without paying value-added tax (VAT) and then sold them to each other, adding tax to the price and pocketing the difference.

To stop the problem of VAT fraud in the EU's emissions trading scheme, the European Commission in June activated a new common carbon registry to replace some 30 national registries with a single platform.

Investigations are continuing in other EU countries.

Three British men were jailed for a combined 35 years after being found guilty of a £38-million ($61-million U.S.) carbon tax fraud, the UK's revenue and customs agency said in June.

Czech police accused two men of a $20-million CO2 tax fraud in October.

The European police agency Europol estimates VAT fraud has cost EU member states an estimated 5 billion euros in lost tax revenue.

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The EU Emissions Trading System, the bloc's chief weapon against climate change, caps the emissions of factories and power plants, forcing them to buy carbon permits for additional emissions if needed while also allowing them to sell surpluses.

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