London Investment Bankers Charged in German Cum-Ex Tax Case

(Bloomberg) -- Frankfurt prosecutors have charged six people -- including three former London-based investment bankers -- for allegedly getting improper refunds on taxes on dividends.

The charges cover 61 short sales of shares of companies listed on the German benchmark DAX between 2006 and 2008. The trades were valued at 15.8 billion euros ($18.7 billion), costing tax authorities 106 million euros, the Frankfurt General Prosecutor’s Office said Tuesday in an emailed statement that didn’t identify the suspects.

The indictment targets a group of former bankers at UniCredit SpA’s HVB unit who were behind the alleged scheme and Hanno Berger, who was Germany’s most profitable tax attorney before being embroiled in the probe, according to a copy of the charges viewed by Bloomberg News. Prosecutors see Berger as the brains behind the tax strategy they say crossed the line to tax evasion.

Banker Paul Mora, a New Zealand native who has also previously been linked to the probe, worked with two London-based co-workers to set up the trades at HVB’s investment bank unit. The indictment targets those three as well as two Germans who also worked at HVB. All have left the bank.

First Indictment

Lawyers for Berger, Mora and two of the HVB employees didn’t immediately reply to emails seeking comments. Hellen Schilling and Stefan Kirsch, defense attorneys for two of the investment bankers, declined to comment. Berger has denied the allegation in several interviews with the German press, saying the strategy was legal, citing a 1999 ruling of Germany’s top tax court on taxation of dividend payments in short sales.

“Cum-ex” transactions relied on language in German tax laws that seemed to allow both the actual holders of shares and someone who bought them from a short seller to claim tax credits on a dividend that was only paid once. The strategy made use of tax certificates issued by banks involved as custodians of the buyers. While Germany eliminated the rules in 2012, there has been debate as to their legality before that time.

In March 2017, Germany’s top court backed 2012 raids by prosecutors in the current case, saying the searches were compatible with the country’s constitution and upholding a lower tribunal’s finding that there was “a suspicion of especially grave tax evasion.” Berger was trying to have the judges stop prosecutors from using documents seized during raids.

The indictment, which was filed in September and has been previously reported in the German media, is the first to come out of German probes into the trades. Prosecutors in Frankfurt, Munich and Cologne are looking at hundreds of suspects.

Translation Delay

The indictment’s announcement was delayed to ensure the men knew of the charges before they were disclosed. Three of the six suspects aren’t native German speakers, and the court required that almost 1,000 pages be translated for them before being released.

Many German banks were involved in cum-ex transactions in various roles, and may face a hit of 1.9 billion euros from their actions, according to figures released by country’s financial-market regulator in February. The amount reflected the exposure of 24 German banks involved in the transactions as calculated by regulator BaFin using figures provided by the lenders. Many international banks were also involved in the deals at some point.

HVB spokeswoman Marion Nagl declined to comment. HVB repaid the tax damage caused by the scheme, prosecutors said in the statement. Shortly after tax authorities started to question the practice, HVB began its own internal review.

Bank Settlement

Berger and the former HVB team are being targeted by the three German prosecutors’ offices but the bank was able to settle. The lender is now suing some of its former managers to make them pick up some of the tab.

The bankers and Berger cooperated with a German businessman who acted as the investor buying the stock. He applied for the tax refunds and the profits from the scheme were split. The investor received about one third and HVB about two thirds of the money, according to the statement. The individual bankers profited via their bonus payments, prosecutors said.

Berger charged 332,000 euros in legal fees for tax advice but also received a “separately processed” kickback of 2.4 million euros from the investor, according to prosecutors. The investor who was also being probed died before charges were filed.

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