London Arrests in Tax Scandal Are ‘Tip of the Iceberg’ as Brexit Looms

(Bloomberg) -- A few months after a landmark trial in the sprawling German Cum-Ex scandal, the multi-billion dollar tax probe is showing no signs of slowing down.

The arrest warrants issued for Duet Group Chief Executive Officer Henry Gabay and another official at the London hedge fund company may have been the first sign that prosecutors are accelerating their probe as they faced looming deadlines from a 10-year statute of limitations and Brexit.

“It is the tip of the iceberg,” said Aziz Rahman, a London lawyer who represents people caught up in the Cum-Ex probes. “It wouldn’t be just Duet, there will be a series of companies and individuals that will be looked into.”

Probes into the discredited tax strategy -- which may have cost Germany more than 10 billion euros ($11.3 billion) -- have already resulted in the conviction of two bankers, who are appealing the verdict. In addition, four M.M. Warburg & Co. bankers were indicted last month.

“It’s not at all surprising that having successfully prosecuted one case, the German authorities are looking to prosecute more,” said Neil Swift, a lawyer at Peters & Peters in London. “This was a widespread activity, and German prosecutors are unlikely to stop for some time.”

Cum-Ex transactions took advantage of a now-abandoned method of taxing dividends, which seemed to allow multiple tax refunds through a combination of short sales and other transactions.

Gabay, who was apprehended while on holiday in France in late June and then released on bail, hasn’t been charged with a crime. He told a French court that he was in talks with Cologne prosecutors to go to Germany.

Another official at the hedge fund appeared in a London court last month and faces an extradition hearing later this year.

Gabay and a spokesman for Duet declined to comment when contacted for this story. He has previously said that he “had no role in any part of the business that dealt with dividend arbitrage strategies.”

Renewed Push

But prosecutors’ confidence stemming from the March convictions in a Bonn court of two London bankers are only part of the reason for the renewed Cum-Ex push.

One factor may be the 10-year statute of limitations on tax crimes. Cum-Ex trades had peaked by 2010, before the government outlawed the practice in 2012.

German lawmakers may have eased that restriction last month, extending the maximum time prosecutors have to tackle Cum-Ex cases.

Brexit

The U.K.’s impending departure from the European Union might also be forcing prosecutors’ hand. There is confusion about whether the European Arrest Warrant will still be valid in Britain after Brexit.

“Legal assistance with the U.K. will definitely become more difficult after Brexit,“ said Anna Oehmichen, a defense lawyer in Mainz, Germany. “It’s quite possible that prosecutors with suspects in England will try to have them speedily arrested and extradited under the EU warrant rules that still apply.”

If the German prosecutors felt pressure to step up their probes, U.K. regulators may have slowed down their investigation amid the coronavirus pandemic.

Mark Steward, the Financial Conduct Authority’s director of enforcement, said in a speech in February that he was close to a decision on “abusive share trading in London’s markets” linked to Cum-Ex.

But Rahman, who advertises for Cum-Ex clients online, said the respite is temporary.

“They’re ready to move to the next stage,” Rahman said.

Danish tax authorities are also suing hedge fund managers in London to recoup losses. At a hearing Tuesday, lawyers debated whether to break up the proceedings or hold a single “massive commercial” trial that could potentially last as long as 50 weeks.

“This is a lot wider” than Germany, Rahman said. “It will have rippled around Europe and certainly the United States as well because huge amounts of funds have been lost to the taxpayers.”

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