7th October 2021
It’s considered one of the biggest trading scheme tax fraud examples of most recent times, costing German authorities millions of euros in lost dividend tax revenue. The so-called ‘Cum-Ex’ scandal – also widely referred to as the German dividend tax scandal or the ‘Cum-Ex files’ – has sent shockwaves throughout Europe. Implicating financial institutions and investment bankers, this complex web of tax evasion and fraud serves as yet another stark reminder for recruitment companies placing contractors abroad that they must remain tax compliant and not get caught up in any kind of tax evasion or money laundering.
So how exactly did the scheme and ‘cum-ex’ transactions work?
Cum-ex trading scheme
Also known as ‘dividend stripping’, these fraudulent deals took place prior to 2012 and came to light much later with the perpetrators exploiting a loophole in the German tax system, which allowed more than one party to claim back the capital gains tax – which had only been paid once – on dividend payments. The ‘cum’ and the ‘ex’ refers to the ‘with’ and ‘without’ dividend rights as banks and stockbrokers trading shares in such a way wanted to hide the identity of owners while creating massive profits for everyone concerned.
Up to 100 banks and financial institutions were allegedly embroiled in the scandal, with German tax authorities estimating that these ‘cum-ex’ trading deals, which took place between 2001 and 2011, cheated the government out of an estimated €12bn in tax revenue, an astonishing figure by anyone’s standards. Even the part played by accountancy and law firms, who were involved in creating the tax models used, has been scrutinised. Although this type of trading was blocked back in 2012, the aftershocks are still felt today as authorities continue to examine trades to unearth tax evasion.
In one of the most high-profile cases in the ongoing court cases to bring those accused of carrying out illegal cum-ex transactions to justice, four ex bankers of Hamburg-based MM Warburg, the German independent private bank which dates back to 1798, were charged for their part in the scheme which robbed the German tax authorities of €157m in lost tax income. Among those indicted was the former managing director of Warburg Invest, the investment arm of the company, who appeared in a Bonn court in September 2021. One of his colleagues was previously sentenced to five and a half years in prison.
The collateral damage from the dividend tax ‘cum-ex’ scandal, which Germany’s top criminal court referred to as a “blatant money grab”, has also been felt outside the country. Two former London bankers, Martin Shields and Nicholas Diable, both employees of HypoVereinsbank, Germany’s fifth largest financial institution, were found guilty of tax evasion back in 2020 with both men receiving suspended jail sentences after cooperating with German prosecutors. Shields was ordered to pay back €14m he made, with the court referring to these illicit ‘cum-ex’ dividend schemes as ‘organised crime’.
‘Cum-Ex’ trading scheme arrests and prosecutions
As recently as September 2021, the Frankfurt office of respected global law firm Freshfields Bruckhaus Deringer was searched by German authorities and is cooperating with the Cologne public prosecutor’s office as two former German partners of the firm were allegedly involved in the scandal. The firm has already made significant payments, including a civil law claim, in respect to its involvement with the now defunct German subsidiary of Canada’s Maple Bank. Konrad Rohde, former co-managing partner of another multinational law firm, DLA Piper Germany, stepped down from his role in 2019.
There have been other casualties of the scandal, which has completely shaken up the country’s financial sector. Another German banking behemoth and Germany’s second biggest lender, the Frankfurt headquartered Commerzbank, hit the headlines earlier in 2021 when Andreas Schmitz, who was in line to become the company’s chairman, resigned from his post. Alongside others, Schmitz has been under investigation since 2016 for purported activity that took place in 2011. HSBC Deutschland is another top bank to be investigated although it denies any involvement in the scheme while 80 former and current employees are under investigation at fellow banking giant Deutsche Bank.
Another key protagonist, the German leading tax lawyer Hanno Berger who was living in Switzerland, was arrested in July 2021 following an extradition demand by German authorities. Berger and his Frankfurt based law firm were implicated in post-war Germany’s biggest tax fraud scandal for his participation in transactions worth €278m. His legal team can appeal the extradition request, which was approved by the Swiss Federal Office of Justice, which reached its decision on 20th August. Following an international arrest warrant in early 2021 by German authorities, Interpol added New Zealander Paul Mora (Shields’s former boss) to its list of most wanted criminals.
As the ‘Cum-Ex’ dividend payments trading scandal in Germany has shown, the institutions, banks, their advisers and individuals involved in the facilitation of tax evasion and tax fraud to profit illegally from illicit schemes, will be targeted, pursued and prosecuted by government authorities. In this case it was claims for the return of withholding tax filed by multiple parties, but any form of fraud and wrongdoing that involves not paying the appropriate amount of tax will lead to internal investigations and prosecutions.
Recruitment companies must make sure that they remain tax complaint, especially in matters to do with their contractor workforce. If you’re looking for compliance advice covering over 70 countries, our 6CATS International experts can help.