In the latest news report by Bloomberg, dozens of employees of many of the leading banks in the world are being probed by German regulators for tax-evasion. According to people familiar with the matter, German prosecutors are getting their first indictments ready in a tax-evasion investigation that involves employees from the biggest banks which has caused losses worth billions of Euros for the German treasury.
In this investigation, German prosecutors are looking at the role of dozens of banks, accounting companies, brokerages as well as law firms. The sources also told Bloomberg that this investigation is probing hundreds of employees across dozens of organizations, some of which are Barclays, Bank of America Corp., BNP Paribas, Goldman Sachs and Macquarie. Initial indictments are expected to be this very year.
This investigation has been on for the last 5 years but has finally picked up speed now after several industry witnesses have agreed to cooperate with German authorities. The team of prosecutors at Cologne is working alongside prosecutors from Frankfurt and Munich, who have already charged 6 people in relation to these investigations. Some of these people facing charges are former investment bankers with UniCredit SpA in the firm’s HVB division in London.
The background to this investigation actually started about 15 years ago, when the major banks across the industry helped their investors take advantage of a loophole in the German tax code. According to this loophole, two parties could claim ownership of shares. More importantly, they utilized the right to refunding withheld taxes that were paid on dividends.
This entire process has come to be known as Cum-Ex, Latin for “with-without”, referring to the vanishing dividend payouts in the trades. The thing is, dozens of banks across Europe and the US took advantage of this loophole in some way, either dealing themselves, conducting the transactions on behalf of their clients, by issuing tax certificates and even financing some of the transactions. All in all, this practice is estimated to have cost the German taxpayers more than €10 billion (~$11.6 billion).
How this practice worked was simple. Short sales were made just before dividends were due to be paid out. Then, companies held back the taxes on dividends and the banks gave out certificates which shareholders redeemed from the tax office in case of overpayments. According to prosecutors, multiple parties were issued tax-refund certificates, which compounded the damage done.
Banks such as Deutsche Bank, Commerzbank, private lender MM Warburg & Co. as well as Clearstream Banking all have admitted that transactions that they were involved in are now being probed by the German prosecutors.
Deutsche Bank said that while it was not involved in any cum-ex short sells, it was involved in some deals for its clients. The bank said that it was cooperating with the prosecutors in this case. Goldman Sachs denied any knowledge of any of its employees being investigated in relation to this case. Warburg stated that all trades made were completely legal. Clearstream only stated that it was cooperating with the authorities. Other banks that were contact refused to comment.
While the Cologne team of prosecutors have already settled cases with some banks as well as individuals, other banks and individuals are now looking for ways in which they can cut deals with the authorities to avoid a settlement. According to sources, the prosecutors are unwilling to cut deals especially considering the magnitude of damage caused by the practice.
At the end of the day, settlements are inevitable since there are just too many people suspected to have taken advantage of the tax code and German courts do not have the capability of handling these volumes.