2021 has already seen a flurry of activity by European prosecutors restarting their campaigns against individuals thought to have profited from cum-ex schemes after COVID-19 scuppered most legal action last year. SFT offers a guide to what will likely be a busy year for litigation
The rollout of vaccines across the world heralds a possible return to normality after a year of disruption, lockdowns and heartache. At the beginning of a new year, with an end to the COVID winter in sight, many aspects of life may soon resume, including cum-ex prosecutions.
The feverish activities of European tax authorities and their legal outriders were largely put on ice in 2020 as the pandemic gained a stranglehold across Europe, shutting down the judicial mechanisms and lawyers’ ability to seek out persons of interest across borders.
As Spring comes again, legal experts predict that 2021 will be a pivotal year for those involved in the international tax fraud scandal as the backlog of postponed cases, including several key names, are heard.
In Germany, where much of the action is taking place, the 10-year statute of limitations means prosecutors are racing to advance cases against some of the 600 individuals named so far in connection with cum-ex strategies that occurred between 2007 and 2011. The statute can be extended in some cases but prosecutors are keen to claim as many scalps as possible while the eyes of the world are on them and there is a political will to pursue cases with little chance of financial gain, compared to the multi-billion euro tax revenue estimated to have been denied to various European governments.
For a full account of the various twists and turns that turned a basic arbitrage strategy reliant on securities lending programmes into what Ali Kazimi, a tax advisor with Hansuke Consultancy, describes as “the crime of the century”, SFT’s archive is available for your perusal.
Here, we seek to map out the road ahead and signpost some of the key events to watch out for.
Beyond the legal quagmire standing between prosecutors and their targets, the main factor that will determine whether 2021 is a vintage year for cum-ex remains COVID-19. Multiple individuals facing charges in Germany, Denmark and elsewhere are pointing to health or logistical issues related to the pandemic as the reason why they can’t face their day in court. Which are successful in putting off prosecutors for another year is yet to be seen.
Bonn appeals
The headline event of 2020 came in June when German prosecutors in Bonn secured a landmark victory against two former employees of HypoVereinsbank in the first successful case against cum-ex traders. Between them, the two men were found guilty on multiple counts of tax evasion and aiding and abetting tax evasion and handed suspended sentences, along with a €14 million fine for the more senior of the two.
Writing for SFT at the time, Seb Malik, head of financial regulation at Market FinReg described the ruling as “the tip of the iceberg”, and predicted it “will pave the way for state prosecutors to pursue banks, traders, custodian banks, law firms and ancillary actors”.
Both men are understood to be appealing their convictions with the possibility of a court date this year, depending on the development of the pandemic.
Hanno Berger
The key trial last year was meant to be the case in Germany against Hanno Berger, commonly described as the legal mastermind behind the cum-ex trade structure. Berger is currently residing in Switzerland and claims his poor health, combined with the COVID-19 pandemic, make it impossible to attend court in Wiesbaden.
Beyond the man himself, the Berger case is believed to be pivotal in determining the level of seniority when a trader involved in cum-ex trades tips from simply ‘following orders’ to being liable for executing the strategy and all that that entails. The case could potentially offer a stronger appeal case for the Bonn defendants, for example, if the court finds that traders or senior traders cannot be expected to question the legal opinions of their firms, as they argued.
The Berger case was delayed twice last year and then again in January. It is currently scheduled to begin in March but few believe it will. The case could go ahead in absentia given its importance to potentially hundreds of other cases that may be coming down the pipe but whether the German judiciary allows this is still unknown.
Elsewhere, a case against six former employees of Maple Bank and two former Freshfields Bruckhaus Deringer tax lawyers over tax evasion charges linked to cum-ex that was revealed in December 2020 was meant to follow once the legal foundation was laid by the Berger ruling. This case may now be heard before Berger is brought to Germany, which may cause some complications down the road.
Sanjay Shah
Other than Berger, no name is more synonymous with cum-ex than Sanjay Shah, founder of now-defunct hedge fund Solo Capital. Shah is wanted in connection with allegations of orchestrating one of the most comprehensive known cum-ex schemes where he is understood to have controlled every link in the transaction chain in what is believed to be the lowest of low-hanging fruits for the Danish prosecutors that are after him.
Moreover, the vast network of relationships Shah enjoyed with individuals and international banks also mean this case and any evidence that may come to light as a result could offer prosecutors new avenues for many other cases to come.
However, the activities in question took place in London and Shah is now firmly ensconced in Dubai, leaving the Danish tax man limited avenues to pursue him, for now. Reports indicate he may not fight extradition orders to attend court in Denmark but no such order has been filed, yet.
Danish authorities have been after Shah for years and some activity to claim his UK assets were taken in coordination with the Financial Conduct Authority (FCA) but little else. But, recent action indicates Danish prosecutors may finally be ready to act. So far this year, those in the crosshairs of the Danish authorities are facing the most heat and further developments in this arena are appearing almost daily with much more expected.
“It’s only a matter of time before the noose really starts to tighten around the dramatis personae,” Kazimi says.
“The reality is that everyone knew what was going on”, he adds stating that many believed they could hide in the crowd and would miss out on easy profits by not pursuing this strategy. “It was about gaming the system.”
Kazimi argues that even before the rules were tightened it was clear that although the cum-ex strategy may not have been explicitly forbidden it was plainly against the spirit of the rules to seek to exploit tax profiles and submit multiple tax reclaims on a single item of income. The challenge prosecutors face now is proving intent by an individual who could claim to have no visibility of whether a lent or borrowed asset had already had tax credits claimed against it. The courts will have to decide.
Brexit
The Brexit transition period concluded in the UK 11 PM on 31 December and while much of the nation celebrated a socially-distanced New Year’s Eve, some were seeking to escape European Arrest Warrants in their name by manoeuvring to position to legal split to their advantage.
A legal team from business crime solicitors Rahman Ravelli recently argued in the UK’s High Court that their client Vijaya Sankar, a London hedge fund employee, could no longer be forced to appear in Germany to face tax fraud charges as the EU’s Extradition Act 2003 no longer had jurisdiction.
After a two-day hearing, the judges firmly rebuffed the argument. The ruling means that, as of 31 December, the UK’s new extradition arrangements with EU states are governed by Title VII of part three of the Trade & Cooperation Agreement (TCA).
These arrangements were ratified into domestic law by the EU through the Future Relationship Act 2020 and were given Royal assent on 30 December 2020. The new arrangements under the TCA do not apply to European Arrest Warrant cases where a person is arrested before 31 December.
Warrants issued before this date will be treated as arrest warrants for the purpose of the new surrender arrangements. The surrender arrangements under the TCA are sufficiently similar to that under the previous framework decisions, which means only a few changes to the extradition act.
Elsewhere, Kazimi additionally notes that corporate criminal offences as part of the Criminal Finances Act 2017 had laid out that if a firm is found guilty of aiding, abetting or facilitating tax evasion, then it is “all over”.
Simultaneously, to the Sankar case, a former employee of Shah was fighting extradition in Westminster Magistrates’ Court. Guenther Klar is sought for questioning by Belgian prosecutors about his time working at Solo Capital and a reported €20 million cum-ex scheme. Klar is not currently facing criminal charges. An extradition order was filed in the UK and the court found in favour of prosecutors. The ruling will be a boon to other European prosecutors seeking to follow suit this year.
The legal framework of the UK compared to other European countries means it was largely unaffected by the raid on tax coffers that cum-ex represents. As such, the Financial Conduct Authority (FCA) has taken a much more laissez-faire approach, despite a significant portion of the actual cum-ex trading occurring in
London offices
Brexit may now encourage the UK regulators to pursue its own legal actions and more than a dozen investigations are understood to be underway into the activities of individuals and firms.
A report into the investigation was due last year but nothing has so far been produced. FCA declined to offer SFT any indication of when it may hit our desks.
“What is for sure is that the action will continue in the EU and the UK,” says Azizur Rahman senior partner at Rahman Ravelli. “We know the FCA is involved. We expect legal cases to resume at a good pace as the COVID-19 vaccine is rolled out and social restrictions are eased.”
In the UK, those charged face double jeopardy, Rahman explains, as assets identified as “proceeds of crimes” that are moved around as part of a cum-ex trade structure can also be liable for money laundering charges.
“My prediction is there will be further action, either in the form of civil penalties or criminal enforcement, or both. The FCA will want to be seen as cooperative with the EU, especially because of Brexit.”
