* Bank says Juergen Fitschen involved in investigation
* Prosecutors make five arrests
* Search linked to ongoing carbon tax evasion probe
(Adds bank comment)
By Edward Taylor
FRANKFURT, Dec 12 (Reuters) - Deutsche Bank co-chief executive Juergen Fitschen was drawn into a widening tax evasion probe linked to carbon trading at Germany's biggest lender on Wednesday as police and tax inspectors raided its offices.
Prosecutors said they were investigating 25 bank staff on suspicion of severe tax evasion, money laundering and obstruction of justice, and searched the headquarters and private residences in Berlin, Duesseldorf and Frankfurt.
"Two of Deutsche Bank's Management Board members Juergen Fitschen and Stefan Krause are involved in the investigations as they signed the value-added tax statement for 2009," Deutsche Bank <DBKGn.DE> said in a statement.
Back in 2009, Fitschen was Germany chief and Krause was chief financial officer, a post he retains to this day.
Deutsche Bank said it voluntarily corrected its 2009 tax return, but noted that authorities disagreed over whether this had been done in a timely fashion.
"Unlike the Public Prosecutor's Office, Deutsche Bank is of the opinion that this correction took place in due time," it said.
Around 500 police and tax inspectors raided Deutsche Bank, arresting five staff in a probe linked to a tax scam involving the trading of carbon permits.
Tax inspectors clutching backpacks and suitcases were seen leaving the bank's twin-tower headquarters in Frankfurt. About 20 police mini buses and two coaches were parked outside.
The raids mark a setback for Deutsche's efforts to polish its image. The bank is struggling with lawsuits in the United States and the UK connected to allegations of Libor manipulation and the mis-selling of subprime assets during the 2007-2009 financial crisis.
Eight policemen wearing dark blue overalls and armed with handguns were stationed in the bank's lobby and appeared to be coordinating a high-profile search of the glass towers which can house up to 3,000 staff.
The officers declined to comment on the exact nature of the raids, which a person working in the building said started at 0915 CET (0815 GMT).
In October, a financial source familiar with the matter said Deutsche had suspended a handful of employees in connection with an investigation into tax evasion on carbon permits by traders.
The judge in that case sentenced six men to jail. He stopped short of prosecuting Deutsche Bank staff but noted that the bank - through its conduct - had left the door open for tax evasion.
A ring of traders was accused of participating in a conspiracy to evade around 300 million euros ($390 million) in value-added tax (VAT) on carbon permits between August 2009 and April 2010.
Deutsche Bank on Wednesday said it was cooperating fully with the authorities and declined to 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.
RIDING THE CAROUSEL
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, in June the European Commission 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 pound ($61 million) carbon tax fraud, Britain'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 states an estimated 5 billion euros in lost tax revenue.
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.
Separately, Deutsche Bank is set to cut staff at its U.S. and European power and gas trading desks with up to 50 traders leaving the bank, and its global head of commodities, David Silbert, is also to leave. ($1 = 0.7693 euro = 0.6210 pound)
(Additional reporting by Alexander Huebner, Andreas Kröner, Vera Eckert and Nina Chestney,; Writing by Jonathan Gould; Editing by David Cowell and Helen Massy-Beresford)