The German tax evasion probe haunting global banks

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The investment seemed virtually risk-free, guaranteeing high returns after only a short trading period. By exploiting the way Germany once taxed dividend payments, dozens of bankers, brokers and lawyers have helped investors snatch billions of euros from the national treasury. A decade later, prosecutors won their first convictions for tax crimes. At the end of 2022, some 1,600 people were under investigation in Germany alone in what has been called the Cum-Ex case.

1. What is a cum-ex swap?

Trades exploited an interpretation of the tax code that seemed, at the time, to allow multiple people to claim ownership of the same shares and, importantly, the right to reimbursement of taxes withheld from dividends. The deals relied on the sale of borrowed stock just before a company was expected to pay dividends. This allowed more than one investor to claim a refund of a tax that had only been paid once, according to German authorities. The practice was named after the Latin terms cum/ex, meaning with/without, because the stock was sold with – but delivered without – a dividend payment.

2. Why is it controversial?

For years, tax authorities granted refunds despite knowing the process could result in multiple payments. Although there have been several attempts to fix the practice, in 2007 lawmakers said tax authorities must tolerate occasional mishaps. Law enforcement authorities, however, began to investigate a few years later, arguing that Parliament had focused on the unintended side effects of legitimate transactions – not exchanges created deliberately to generate tax refunds. . Prosecutors say those involved in the deals knew they were doubling up on repayments. The practice ended in 2012 when Germany revamped the way it collects tax on dividends. Similar agreements were under consideration in Denmark and Belgium.

3. Which banks and investors have used it?

According to a parliamentary inquiry, the practice was first noticed by banks as early as the 1990s. A decade later, deals were set up by traders in structured finance units of banks, mostly in London. Cum-Ex has spread beyond the banking industry as some ex-bankers set up funds to allow wealthy people to take advantage of the loophole. Many investment banks across Europe and the United States have participated at some level: buying or selling shares, lending shares to the short seller, contributing capital or acting as custodians.

4. What is the scope of the investigations?

At least half a dozen probes have been launched in Germany, with one in Cologne being the widest. Major banks including JPMorgan Chase & Co., Barclays Plc, Merrill Lynch of Bank of America Corp. and Morgan Stanley, had their Frankfurt offices raided. At Deutsche Bank AG alone, dozens of former and current employees were under investigation, including five former board members. Its headquarters as well as the home of a former co-chief executive, Juergen Fitschen, were raided in October 2022. The banks say they are cooperating with prosecutors. Investigations have been opened in other countries including Belgium and Denmark.

5. Has anyone been charged and/or convicted?

Yes. Former MM Warburg chief executive Christian Olearius in July 2022 became the first major banker to be charged. A former colleague described as his “right hand man” was convicted of aggravated tax evasion in 2021 and sentenced to 5 and a half years in prison. Hanno Berger, a German tax lawyer, made a partial confession in a German court after being extradited from Switzerland. Executives linked to Duet Group, a London asset manager, were charged in Germany in September. Paul Mora, a former investment banker at UniCredit SpA’s HVB unit in New Zealand, has been placed on Interpol’s most wanted list in 2021. Two former London bankers were convicted in 2020 but given suspended sentences after cooperating with Cologne investigators. In July, Germany’s highest criminal court backed the verdicts, calling the deals “flagrant money-taking”. Cases are likely to continue for years.

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