Cum-Ex Case to Review Banks’ Role in $500 Million Tax Loss

(Bloomberg) -- The most advanced case in a German probe of controversial Cum-Ex tax deals covers as much as 447.5 million euros ($500 million) of losses to government coffers, and will give broader details at how financial firms allegedly helped clients cheat the system.

An indictment of two former London investment bankers filed by Cologne prosecutors in April lists 34 cases of tax evasion via the transactions, according to people familiar with the proceedings.

While the case focuses on the pair who structured the deals, prosecutors have outlined the roles of several financial institutions in the complex transactions. They include M.M. Warburg & Co., Deutsche Bank AG, BNP Paribas SA, Societe Generale SA, Merrill Lynch & Co. and others, according to the people who declined to be identified as the filing isn’t public.

The two bankers, who can’t be named in full under German law, have given Cologne prosecutors details on the structure of the deals and the participants. A decade ago, when Cum-Ex transactions were at their peak, the pair worked for Ballance Group, an asset management company that orchestrated the deals. The charges also cover an earlier period when the two worked for UniCredit’s HVB unit in London.

‘Organized’ Market

A Deutsche Bank spokesman said that while the lender didn’t participate in an “organized” Cum-Ex market as a seller or buyer, it was involved in Cum-Ex transactions of its clients. The bank is cooperating with authorities, he said.

BNP, Bank of America Merrill Lynch and Societe Generale declined to comment Tuesday when contacted about the court case. A spokesman for HVB referred to the bank’s latest report which stated that it settled all criminal probes against it.

M.M. Warburg never participated in transactions that were aimed at having tax refunded multiple times, a spokesman for the bank said. "Our business partners always conveyed that the share deals were impeccable."

10 Billion Euros

Cum-Ex transactions took advantage of a now abandoned German practice for tax refunds on dividends. At the time, a corporation paying dividends automatically withheld the tax but the tax payment was certified by the shareholder’s bank.

The Cum-Ex deals were set up around dividend day in a way that enabled a buyer in a short sale and the actual stock owner to both get a certificate stating that the dividend tax was paid. While the tax was paid only once, both could use the certificates to claim full refunds. The practice ended in 2012 when Germany revised its rules, and lawmakers estimate the government may have lost out on at least 10 billion euros in tax revenues.

M. M. Warburg or people associated with the Hamburg-based lender played a role in more than a dozen of the cases listed in the Cologne indictment. The bank acted as a buyer in short sales aimed at generating the tax certificates and used them to get refunds on dividend tax that was never paid, according to the findings. It also handled funds that did the trades.

Tax Refunds

The indictment also cover funds which were set up to do the trades and allow investors to profit. Ballance advised these units, which often only existed for one dividend season and were closed once the tax refunds were cashed in. To do the trades, banks were needed in various roles, like acting as custodians, providing leverage or lending shares for the short sales. Brokers also had a role.

The charges discuss various funds, among them one called BACA which was set up in 2009 and administered by a unit of Societe Generale. Ballance was the fund’s investment adviser and BNP the fund’s custodian bank.

The principle investor in that fund was BCF Fund Ltd, a Gibraltar-based company. BCF collected money from wealthy clients for Cum-Ex deals. The individuals invested almost 60 million euros. Deutsche Bank acted as prime broker, granting a loan of 942 million euros, according to the findings.

Thus, BCF had purchasing power of about 1 billion euros to use for trades of BACA in 23 German shares during the dividend seasons from April to June 2009. The overall trade volume was worth more than 6 billion euros, leading to allegedly illicit tax repayment of 58 million euros. BNP handled filings with German tax authorities for BACA which led to the refunds.

The banks or their employees working on those transaction aren’t charged in the current case but most are under review by Cologne prosecutors.

The indictment was filed with a court in Bonn, Germany, which now has to rule whether the charges may go to trial.

To contact the reporter on this story: Karin Matussek in Berlin at kmatussek@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Christopher Elser, Marion Dakers

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