In the years since the years since the Global Financial Crisis, bankers have often been attacked and maligned as criminals and fraudsters. Various allegations of criminal misconduct have emerged, linked to both the crisis itself and various events which have occurred since then, such as the recent LIBOR rigging scandal in the UK.
German Tax Scandal Reported
In the last week, it has now emerged that bankers in Europe are being targeted by the press following the report of a massive 32 Billion Euros tax scandal which, incredibly, has been active since 2001 and is reported to be the largest tax-scandal in German post-war history. The astonishing claim was made by Manheim University Professor Christoph Spengel who shared his research with German newspaper Die Zeit who commissioned at the team of reporters to investigate further.
Cum- Cum & Cum-Ex Trades
The fraud was conducted during transactions known as “cum-cum” and “cum-ex” trades. During “cum-cum” trades, a German bank borrows shares in a company, from a foreign investor, right before a scheduled dividend payment. This allows them to use a loophole in German law which means the domestic investor is able to claim a credit against taxes on dividend payments which foreign investors can’t claim. Essentially, the foreign investor is able to avoid paying tax on the dividends. Fraudulent transactions of this sort are estimated to have cost Germany roughly 25billion Euros since 2001 according to Spengel’s research.
“Cum-ex” trades are similar, but the main feature of these transactions is that they allow for multiple refunds to be filed on capital gains taxes that were only paid to the authorities once. These transactions are estimated to have cost Germany around 7 billion Euros between 2005 and 2012. As of 2012, cum-ex traders are prohibited in Germany and cum-cum trades prohibited as of 2016. It might come as a surprise that it took so long for authorities to ban these transactions seeing as Commissioner August Schafer first warned against these illegal practices in 1992, nearly 20 years earlier. Indeed, since that time, five whistleblowers have reported such illegal practices but to no avail.
Authorities Didn’t Notice
Despite the size of the fraud, the illegal operation went unnoticed by German authorities and was instead uncovered by an administrative assistant in the German revenue office who identified that a particular US pension fund was getting abnormally large rebates. The assistant in questions revealed that she had been threatened for her investigation into the issue.
According to her digging, as many as 40 German banks and a range of other financial institutions around the world are through to be involved. Consequently, 30 German officials are now investigating these transactions and are building cases. Research carried out by German reporters has so far highlighted a network of around 12 bankers based in London who are the heart of the majority of the transactions.
German Finance Minister Responds
In response to the reports, the newly sworn in German Finance Minister Edward Scicluna has declared that tax avoidance is “not an issue of morality” and as such there should be greater emphasis on closing down loopholes and strengthening directives. Scicluna did admit that it is normal practice for companies to look to minimise their tax exposure by utilizing experts saying that there are “lines which are sometimes crossed”. Scicluna added that “It’s not only from a legal perspective. Sometimes very aggressive tax planning or even tax evasion is not acceptable to the man in the street.”
It is unclear yet how long it will take for German officials to build their cases but we will update you with further details as soon as they are available.
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