Banker Calls Out Barclays, ICAP Among Players in Cum-Ex Scandal

(Bloomberg) -- A banker on trial over controversial dividend taxes in Germany used his first testimony in court to expose an array of financial institutions he said took part in the practice that has cost taxpayers billions in lost revenue.

Addressing a court in Bonn Wednesday, Martin Shields, 41, laid out the inner workings of deals known as Cum-Ex, rattling off names including Barclays Plc, TP ICAP Plc, Commerzbank AG, Sweden’s SEB AB and more than half a dozen others. Participants acted as short sellers, share lenders, prime brokers and buyers, Shields said, describing a vast network of companies, individuals and entities acting in different roles and often competing with one another.

Shields is a key defendant in the first major Cum-Ex trial in Germany, which seeks to understand how participants in the financial-services industry were able for years to get multiple tax refunds on dividend payouts, a practice the government has since sought to abolish. To make his point, Shields gave a detailed presentation of how Cum-Ex worked, sharing complex organizational charts and tables with the court that listed the role of participants and the flow of funds.

“It was really done on an industrial scale,” said Shields, who has said his aim is not to distract from his own role by naming others involved.

Because the complex practice required the interplay of many characters, the trial has become a tantalizing examination of the financial industry at large. The back of the court room was packed with dozens of lawyers dispatched by banks and brokers probed in an investigation featuring more than 500 suspects in Germany. Shields is cooperating with Cologne prosecutors in a bid to avoid a lengthy prison term, helping uncover crucial elements of the transaction, as well as people and financial-industry players that were involved.

Barclays and Commerzbank declined to comment, while ICAP didn’t immediately respond to a request for comment. SEB said it has no information about lending to short sellers involved in Cum-Ex transactions.

Shields, who will continue his testimony Thursday, used his early comments to describe how he came to his role in the trading environment and how the deals were set up. Standing trial on charges that he helped orchestrate transactions that led a tax loss of more than 400 million euros ($442 million), Shields said he has a different view on the practice now than he did early on in his career.

“With the benefit of age and experience, and as a father, with very different perspectives and priorities, I look differently on the role and responsibility of financial markets, and of Cum-Ex in particular,” Shields said. “I often ask myself whether if I had my time again I would do things differently. Knowing what I now know, the answer is obvious.”

Key Defendant

Lawmakers estimate the financial engineering cost the government more than 10 billion euros in lost revenue, a shortfall the treasury is keen to recoup. The Cum-Ex scandal has caught up multiple financial institutions, including Deutsche Bank AG, Bank of New York Mellon Corp. and Societe Generale SA.

Painting a picture of a young man whose quick grasp of numbers and problem-solving landed him in world of London investment banking, Shields described how he secured his first job in finance. At the age of 21, he was armed with an engineering degree from Oxford and a keen interest in solving complex issues.

“What has always interested me was the challenge of dealing with problems and processes,” Shields told the court. “I always hoped that engineering would give me that. But I found that the routine and tempo didn’t suit my 21-year-old self.”

Hard Choices

Shields has already provided prosecutors with a deep dive into the world of Cum-Ex, based on what he described as more than 30 interview sessions and hundreds of hours of submissions that created almost 1,000 pages of documentation.

“I had to make a difficult decision: To remain silent or to testify,” Shields told the judges. “Given I stand here today I clearly decided on the latter.”

The trial is scheduled to last into next year.

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