The vast so-called cum ex tax scandal which has rocked Germany in the past decade has already cost the country an estimated €30 billion. It was assumed that a change in the law in 2016 definitively outlawed such trades. But as a cross-border and undercover investigation now reveals, the trade is still flourishing and has targeted far more countries and has cost far more than was previously thought, affecting nearly all of the biggest economies in Europe. Is this the heist of the century?
London, 7 August 2018: the sting
They’ve turned the AC in the hotel suite down to 18ᵒC. Any hint of sweat on their foreheads would betray them. They can’t appear nervous. That’s how they want their guest to feel.
The air is heavy with the smell of orchids arranged in a crystal vase, a bottle of Veuve Clicquot stands cooling in an ice bucket on the low glass table.
The spectacular glass-wall vista on the 37th floor of the European Union’s tallest building, the Shard, takes in many of London’s most famous sights: the River Thames, St. Paul’s Cathedral, Tower Bridge and to the east, Canary Wharf. The glass fronts of the City, London’s financial district, reflect the sun’s rays. A glance down to street level makes one’s head spin. Without the telescope thoughtfully provided by the hotel, the people appear absolutely tiny, like an army of worker ants scurrying about their business. But the two men aren’t here for the view.
Nor are they part of this world of the super-rich. They’re here to understand how it feels to look down not only on London but an entire continent. They’re here to figure out the methods and mentalities of the bankers, brokers, lawyers and investors who have plundered billions from the treasuries of Europe.
There are five cameras in the set-up. One is concealed in a designer label shopping bag seemingly carelessly left on the table. Another is inside a hollowed out book on a shelf. Three more are strategically placed to record what is about to happen next. All pointed at the one empty place on the sofa.
The phone rings at 1:51pm, nine minutes early. Their assistant from Singapore says: “He’s here.”
"Tell reception that we’ll go and get him in five"The two men look at each other and smile. It’s on.
One is Oliver Schröm, editor-in-chief of the German non-profit newsroom CORRECTIV, and the other Christian Salewski, a reporter from the German public sector broadcaster ARD TV’s Panorama programme.
But today, they’re brothers. Oliver is ‘Otto’, the elder of the two. Christian is ‘Felix’, his younger sibling. ‘Otto’ and ‘Felix’ are heirs to a German steel fortune worth billions, here to discuss a grey-area investment scheme running into the hundreds of millions of euros. Their supposed assistant, ‘Munirah’, dressed in a neat black dress, is actually the wife of one of their colleagues.
They let their guest sweat in the lobby for another 15 minutes.
The guest, let’s call him ‘Amal Ram’, will have 45 minutes to sell his financial product to the ‘billionaires’. That is 45 minutes for the two journalists to obtain proof for a suspicion they’ve been trying to validate for over a year now: that the biggest tax fraud of all time is not over yet.
If ‘Amal Ram’ is up to what they think he is, then the next phase of the cross-border mega-swindle is about to begin....MUCH MORE
‘Otto’ retires to the suite’s bedroom. The elder of the billionaire ‘brothers’ will enter the discussions only later on.
‘Amal Ram’ finally enters the hotel suite at 2:20pm.
Germany 2017: The First Scoop
€31.8 billion. This is how much a network of equity traders, tax advisors, bankers, lawyers, and investors has removed, many - including prosecutors - say stolen, from the German state’s tax coffers, said a team of eight journalists from Panorama and newspaper Die Zeit after analysing data leaked to them on a USB drive.
Cum-ex – this is the name German media have given to this scam. Internationally the different variants of these trades are known as dividend arbitrage.
Cum-ex and its variant cum-cum were highly complex share deals with no economic purpose other than to receive tax ‘reimbursements’ from the state – but for tax that had never in fact been paid. This is how it went. The participants would lend each other shares of major corporations, creating the appearance for the tax authorities that there were two owners of the shares when in fact there was only one. The bank which settled the trades would then issue a ‘confirmation’ to the investor that tax on the dividend payment had been paid to the tax office – when in fact it had not. With this confirmation in hand, the investors were then ‘reimbursed’ by the state. It’s a bit like parents claiming a child benefit for two – or more – children when there is only one child in the family.
The federal German government only called a stop to the practice in 2012 by making adjustments to the tax code, then making another adjustment in 2016 after one variant of the trade had continued. Its response had been so slow that a parliamentary inquiry was set up. Some critics think the finance ministry was fully aware of cum-ex all along but hesitated to close it down as it was one of the few profitable business lines of banks after the 2008 financial crisis.
Either way, cum-ex has been one of Germany’s biggest scandals in recent years, involving virtually the entire banking sector and many high-profile individuals and companies. But strangely it has gone largely unnoticed outside of Europe’s biggest economy.
What drives the traders and bankers behind this scandal? So far none of them has broken their silence. Schröm and Salewski wanted to know how far they went – and what they might be up to next.
Capital markets are global; trades cross borders in milliseconds. It is simply impossible for a single country’s media to investigate what’s happening. To overcome national barriers, CORRECTIV decided a year ago to coordinate a team of journalists from twelve European countries. 38 journalists have followed the traces that cum-ex, cum-cum and similar trades have left across Europe.
And that is why on 7 August 2018, Schröm and Salewski disguised themselves to try to discover the negotiations behind these trades and to understand the psychology of the people who created it. They’ve assumed false identities, helped by one of the trade’s insiders. They have also found a former major player who has decided to talk. For the interview, which is broadcast on Panorama, they had to disguise him as well. He offered to tell the story, exclusively on camera for the first time, of how the traders create their own belief system and build the “devil machines”, as he calls the trades. But only from behind a mask.
But first, back to the beginning....
HT: FT Alphaville's Further Reading post
