Buried in news surrounding the UK election result and Brexit is a major scandal in Germany involving an international group of bankers, lawyers and stockbrokers, who appear to have fiddled the German tax authorities out of around €32bn over a period dating back to 2001. Whether you take the view of broadcaster ARD, that that would pay for repairs to a lot of schools and roads, or that of Die Zeit, that it would cover the cost of the refugee influx for a year, it is a lot of money.
As always with these scandals, it begs two questions:
- How did they do it?
- Why was it not spotted?
The answer to the first is that it involved two complex and decidedly dodgy and little known banking and broker practices known as cum/cum trades and cum/ex trades. None the wiser? I'll explain.
"Cum-cum" trades involve a German bank effectively borrowing a foreign investor's shares just before a dividend payment is due. They then use a loophole in German law that enables domestic investors to claim tax relief on dividends that foreign investors aren't entitled to. The shares are later returned to the foreign investor who has avoided the tax that would have been due. According to Mannheim University Professor Christoph Spengel, this cost the German tax authorities €24.6bn, up to 2016 when the trades were made illegal.
"Cum-ex" trades are similar, but allow for there to be multiple refunds filed on capital gains taxes that were only paid once to tax authorities. Spengel claims that these trades cost the German government €7.2bn between 2005 and 2012, when they were also made illegal.
So what about the second question? It seems that it was all taking place right under the noses of the German authorities, and even that they seem to have turned something of a blind eye. Indeed, it seems that the practices continued for years despite a warning from a State Commissioner and the testimony of five separate whistleblowers.
So how did the scandal eventually comes to light? In fact it was a young and junior admin assistant in Germany's central tax office, who noticed very large claims for tax rebates coming in from a single US pension fund. The case was picked up and investigated by a group of German journalists, together with Professor Spengel at Mannheim University.
German prosecutors are now investigating a number of banks, and in particular a criminal network of about a dozen investment bankers based in London, who are now giving evidence to Cologne public prosecutors.
At a time when the public's impatience with tax avoidance strategies is matched by a populist tendency to blame the banks for all our ills, it is a case that looks set to run and run in the German news.
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