Telecom Italia launched a "thorough investigation" last night into the role of one of its subsidiaries in an alleged €2bn ($2.7bn) tax evasion scam that Italian prosecutors believe could be one of the biggest in the country's history.

Franco Bernabé, chief executive, said the board of Italy's biggest telecommunications group was examining 1,600 pages of court documents relating to a sweeping tax evasion and money laundering probe involving Sparkle, its wholesale voice and broadband business, and Fastweb, another Italian telecoms group.

The alleged €2bn fraud centres on invoices for premium phone services involving Sparkle, Fastweb and a network of offshore groups in Panama, Luxembourg and other jurisdictions between 2003 and 2006. Prosecutors and Italy's tax police are investigating the alleged evasion of €350m in value-added tax on the deals.

"We will take the time in the next month to make a thorough investigation of the situation [at Sparkle]," said Mr Bernabé after the authorities seized €300m of its cash. The seizure forced Telecom Italia to postpone a meeting with analysts and investors scheduled to take place in Milan today and the announcement yesterday of its 2009 results.

Mr Bernabé said it was "too early to say" whether the group's exposure to the alleged fraud would be limited to €300m. "We expect that from our point of view the position of the company is fully protected," he added.

A judge in Rome issued arrest warrants on Tuesday for 56 people in connection with the alleged fraud. One of the people being sought is Silvio Scaglia, the founder of Fastweb, a rival of Telecom Italia and one of Italy's largest broadband internet providers. He was expected to return to Italy last night from a business trip and was facing the prospect of arrest and detention. Mr Scaglia has denied any wrongdoing.

Telecom Italia and Fastweb said they were "injured parties" in the alleged fraud, which has embroiled Nicola Di Girolamo, a member of the Italian senate for the party of Silvio Berlusconi, prime minister.

Speaking on a conference call with investors and analysts yesterday, Mr Bernabé said: "Managers have been changed in the meantime and controls have been strengthened in the past two years."

Telecom Italia had been considering a sale of Sparkle to pay down its €35bn of net financial debt, a transaction that analysts said may now be in doubt.

Aldo Morgigni, the chief prosecuting magistrate in the investigation, described the scale of the alleged wrongdoing as "among the biggest frauds there has ever been in Italy".

A judge is set to hear the case against the two companies on Tuesday.

 source:ft