Raid on major US banks BNY Mellon and Oddo BHF

Oddo BHF

Illegal cum-ex deals call the investigators onto the scene.

(Photo: IMAGO/Westlight)

Dusseldorf Around 120 investigators from the Cologne public prosecutor’s office, the tax investigation department and the police have been searching the premises of the BNY Mellon and Oddo BHF banks in Frankfurt since Tuesday. The reason is illegal cum-ex transactions, in which the financial institutions are said to have participated.

These are share group transactions in which banks and investors have capital gains tax refunded that they had not paid at all. Bloomberg first reported on the search.

The public prosecutor announced that two banks in Frankfurt and the private homes of several employees were being searched as suspects. “The measures are related to cum-ex transactions that are the subject of the proceedings and related tax evasion models,” said a spokesman for the authority. Oddo BHF announced that it is about business that ran well before the merger and that there is full cooperation. BNY Mellon also said it was fully cooperating with the authorities. The bank described the transactions as “legacy tax burdens”.

The Cum-Ex tax scandal has occupied public prosecutors for ten years. There are more than 100 procedures and more than 1600 suspects. According to information from the Handelsblatt, BNY Mellon and Oddo BHF came into focus because the BHF Bank they swallowed or the companies attributed to them were active in cum-ex transactions.

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In 2004, Sal. Oppenheim took over the BHF Group, after which it became part of Deutsche Bank in 2010. BNY Mellon took over the custodian bank business and Frankfurter Service Kapitalanlage Gesellschaft (FSKAG), while other parts of the bank went to Oddo BHF in 2016.

Great damage to the state

The custodian bank BHF Asset Servicing is said to have been particularly busy in the cum-ex business, for example by storing the shares of a fund called BC German Equity Special Fund in 2009. This was managed by the MM Warburg subsidiary Warburg Invest.

The fund was developed by the finance company Ballance. The investment banker behind it, Paul Mora, is currently being sought internationally. The district court has already convicted his ex-colleague Martin S. of tax evasion.

The Federal Central Tax Office refunded a good 60 million euros in taxes for the BC German Equity fund. The basis was allegedly false tax certificates issued by BHF Asset Servicing. Investors in the fund earned a return of up to 30 percent within a few months – BHF Bank also earned.

It took around 13 years for the tax authorities to be able to make up for the damage they had suffered: BNY Mellon – as the legal successor to BHF – and MM Warburg recently transferred a total of 60 million euros to the tax authorities. Warburg contributed 77.5 percent, with the remainder coming from BNY Mellon.

The banks hope that other parties involved will also contribute to the costs. BNY Mellon was able to pass on part of the repayments due to Deutsche Bank. The contract of sale contained an exemption from liability for tax debts.

BHF was also on hand as the custodian bank for the funds Hl Aktien 1 from Hansainvest and for the BC Pro Rent – ​​managed by FSKAG. According to investigations by the public prosecutor’s office, the tax damage in these two cases should amount to around 30 million euros.

“Dangerous, possibly illegal”

The deals were not without controversy internally. On the evening of March 31, 2009, the head of compliance at BHF Bank informed a person responsible at Hansainvest that he had legal concerns about the capital gains tax (KESt) reimbursed to the fund because it was “duplicated in tax statements or twice Reimbursement” for the same shares could come, “although capital gains tax was only paid once to the tax authorities”. They considered such applications for reimbursement of capital gains tax “questionable, possibly even illegal”. The deals went through anyway.

In 2009 there was another deal in which FSKAG from the BHF Group got involved. The investment company acted as manager of a fund called the JS Futures Fund. The investors pooled their funds in the company Jay Say Investments Limited.

The fund volume was one billion euros, of which 950 million euros was debt capital provided by Deutsche Bank. Those involved had taxes reimbursed of 28 million euros. The law firm Norton Rose and the auditing firm KPMG acted as advisors in this cum-ex deal.

Trading phantom stocks

When searching BNY Mellon, the investigators should not only be concerned with the classic cum-ex business, but also with new models. Among other things, she is interested in transactions with so-called phantom shares, in technical jargon pre-released ADRs.

The abbreviation stands for American Depositary Receipts. The securities serve as a substitute for stocks that are not traded in dollars. Pre-Released ADRs are issued when the shares are not yet available.

There is also the suspicion that the banks involved were unlawfully reimbursed with capital gains tax. The US Securities and Exchange Commission imposed penalties on four major banks in 2018.

BNY Mellon was fined $54 million. It was $135 million for its competitors JP Morgan, $75 million for Deutsche Bank and $40 million for Citi. These transactions are not BHF legacy issues: they ran between 2011 and 2016.

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