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Two former-managing directors of an unnamed German bank are in custody facing charges of running an international commercial tax fraud operation that manipulated dividend arbitrage opportunities to pocket roughly €160 million over two years.
This week German public prosecutors brought criminal charges against a total of six German bankers, aged between 37 and 63, including four other, partly former-employees of the Mainz-based bank for “concealing the origin of the incriminated funds”.
Proceedings against another employee of the bank were dropped for health reasons, the prosecutor confirms.
The multi-year, cross-border investigation has so far involved collaboration between three European supervisory bodies that teamed-up to track down the latest suspects in the on-going dividend arbitrage scandal that first broke in 2012 and is believed to represent €55 billion of lost tax revenue.
Investigations were first instigated by Danish and Belgian law enforcement authorities against the group of perpetrators on suspicion of commercial tax fraud to the detriment of the kingdoms of Denmark and Belgium between February 2015 and May 2017.
Almost all of the €160 million in question is alleged to have been stolen from the Danish tax authorities, with only €7 million being claimed by the Belgian taxman.
Beyond the suspects and their employer, the ultimate beneficiaries of these activities are understood to be (unnamed) US pension funds.
What happened?
According to the content of the indictment, the suspects in the preliminary proceedings in Denmark are accused of having pretended to the Danish tax authorities that they had bought Danish shares and received dividends on the dividend date, from which the Danish tax authorities withheld a withholding tax.
In fact, the share transactions were not carried out and therefore no dividends were distributed and no withholding tax was paid.
The accused in Denmark then “deliberately and contrary to the truth asserted to the Danish tax authorities that the owners of the shares were US companies which were already taxed in the US and which were therefore based on those between Denmark and the US double taxation treaties would be entitled to a refund of the withholding tax allegedly paid,” the prosecutor states.
Some of the pension funds also had accounts with the Mainzer Bank, which is the subject of the proceedings, through which the perpetrator group passed on reimbursement amounts that had been stolen by fraud.
If found guilty, what’s the potential punishment?
Money laundering is punishable with imprisonment from three months to five years, and, in serious cases, with imprisonment from six months to ten years.
Section 261 of the German criminal code aims to punish anyone who hides, conceals its origin or the determination of the origin, the discovery, the confiscation or the determination of the origin, the discovery, the confiscation or the result of an unlawful act.
The indictment states that all six of the accused were aware of the criminal activities but no money laundering report was made in accordance with the obligations under the Money Laundering Act and the funds were transferred to accounts of various companies in different countries, thereby concealing the origin of the funds.
Background
Since the scandal was first uncovered almost a decade ago, a steady stream of bankers from across Europe, mostly in the UK and Germany, have had their day in court defending their trading activities in recent years.
Various regional police raids have also been conducted at the offices of ABN AMRO and Clearstream, as well as the homes of traders, as part of the Europe-wide campaign to uncover market abuse.
ABN AMRO's offices were raided for a second time in February for similar reasons, according to a report by Bloomberg.
Both firms stated at the time of the raids that they were fully cooperating with authorities on the matter.
In March, two former London-based traders were convicted in Germany of tax evasion related to Cum-ex trades.
More recently, the European Banking Authority published the results of its two-year enquiry into the Cum-ex/cum-cum trades which set out a 10-point action plan for 2020/21 to enhance the future framework of prudential and anti-money laundering requirements covering such schemes.
For a full legal walkthrough of the cum-ex scandal to date and its relationship with securities lending, Market FinReg’s head of financial regulation, Seb Malik, offers a two-part series exclusively for SLT.
Part one: Cum-ex, a legal primer
Part two: A case study of the recent “landmark decision” in Bonn
