Most of the cum-ex transactions at Barclays took place in London, but some German employees are also said to have been accused.
(Photo: AP)
Dusseldorf The public prosecutor’s office in Cologne is speeding up the investigation in the Cum-Ex tax scandal. After she searched Bank of America last week, according to information from the Handelsblatt, there was a raid on the British Barclays Bank on Tuesday.
In both cases, the authority expects indications of involvement in illegal cum-ex deals. At Barclays, the investigations are based on Handelsblatt research against a mid-double-digit number of suspects from the bank’s environment.
“We can confirm the search of our Frankfurt office by the Cologne public prosecutor’s office yesterday morning,” said a spokeswoman for the bank. It’s about cum-ex activities from the past. One continues to cooperate with the German authorities. The public prosecutor’s office in Cologne announced that since yesterday morning search warrants against a bank in Frankfurt and against an auditing company have been enforced. In addition, the private homes of two suspects would also be searched.
Ingrid Hengster, who has been head of Barclays Germany for almost a year, now has to deal with a legacy that arose long before her time. Although most of the transactions took place in London, German employees are said to have been accused in some cases. Due to errors in issuing bonds and as a result of the withdrawal of a major investor, the financial group is currently under a lot of pressure anyway.
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The cum-ex affair is about share group transactions related to the distribution date – with (cum) and without (ex) dividends. The aim was a double refund of capital gains tax that had only been paid once. For years, the shops were considered a profit machine. An entire industry of sellers and buyers, consultants and investors, lawyers and arrangers was involved.
Barclays’ Bad Boys in London
Barclays bankers had a nickname when doing business: Bad Boys. The Structured Capital Markets division specialized in tax arbitrage and tax mitigation. The German stock market in particular has long been considered an Eldorado for traders from the City of London.
According to the investigators’ findings, Barclays was one of the busiest short sellers on the market. The short sale was crucial for the cum-ex trades. Shares were sold that the participants had only borrowed. In this way, the tax authorities were led to believe that there were two owners for one share. One of them then paid the capital gains tax, both of them had it “reimbursed”.
Hengster has been head of Barclays Germany for almost a year and now has to deal with a legacy that arose far before her time.
(Photo: KfW)
The volumes with which Barclays Bank participated in the cum-ex trade are said to have been enormous. Under project names such as “Cumex” and “Schumann”, the bank generated more than one billion euros in dividends per year with the dubious share deals up until 2009. The transactions with Barclays participation should therefore involve wrongly reimbursed capital gains taxes amounting to several hundred million euros.
Documents documenting meetings between bankers and representatives of the Deutsche Börse subsidiary Clearstream show how important the solely tax-motivated stock transactions were for the British. After a change in the law, the Barclays people were looking for ways to safely carry out their cum-ex plans.
Reliable business partners in Germany
From now on, the Clearstream specialists explained to the British bankers, it is no longer advisable to process cum-ex trades via Clearstream accounts in Frankfurt. If a customer then applies for a tax refund, he has to prove that this tax was paid beforehand.
This was unfavorable for any cum-ex player, since the profit was based primarily on paying capital gains taxes once but being reimbursed several times. In the meeting on February 19, 2007, Clearstream indicated a way out: Luxembourg. Clearstream was also active there.
After the classic cum-ex phase up to and including 2011, Barclays also did questionable deals with MM Warburg. The traditional Hamburg company now has an unpopular pioneering position. All three criminal proceedings in the matter of cum-ex that have been carried out so far concerned MM Warburg or former employees.
The Bonn Regional Court demanded a repayment of unlawfully refunded taxes in the amount of 176 million euros. An indictment is expected against the long-time boss and owner of the bank, Christian Olearius, even if he denies the allegations.
In March 2012, the Hamburg-based company launched two funds, each worth 75 million euros: Souda Fund and Ayn Euro. The latter was named after Ayn Rand, advocate of an ultra-liberal market economy from the USA. Both funds are on the Bafin list of “supervised capital management companies with potential exposure to so-called cum-ex or dividend stripping transactions”.
Warburg’s business partner was Barclays Bank. Warburg was intended as the custodian bank, and a subsidiary, Warburg Invest, as the fund manager. Barclays provided the capital. These funds are also the subject of ongoing investigations. According to reports, Warburg only provided the structure in this case, but did not benefit directly from tax effects.
The necessary tax assessments for the structure came from Freshfields Bruckhaus Deringer, among others. The top law firm was the first address for franking cum-ex transactions, and numerous banks were among their clients for cum-ex issues. Today, two former tax partners in the Maple Bank case have been charged, and three other ex-Freshfields attorneys have been charged.
More: The Federal Fiscal Court eliminates the last doubts – why cum-ex deals were illegal