Now You See It, Now You Don’t: A look at the “CumEx” scandal

October 15, 2019

3 min read

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What's going on here?

Involving an extensive network of bankers, tax lawyers and traders (dubbed by Danish Broadcasting Corporation the men who plundered Europe) the CumEx scandal refers to a tax fraud scheme that was purportedly operated across a large number of European countries. It may have netted its operatives upwards of €60 billion.

What does this mean?

Though described by the Guardian as a “complex derivatives juggling act”, the CumEx scandal is in many ways a standard fraudulent tax rebate scheme. The difference is that it’s just on a much larger scale and to a degree of sophistication never previously encountered. With “cum” being Latin for “with” and “ex” meaning “without”, the scam involved participants lending each others shares in large companies so that it appeared to tax authorities that there were two owners of the shares, when in fact there was only one. As a result of this, the trading bank can issue a “confirmation” to the investor that tax on the dividend payment had been paid (when in fact none had). Then, the scammers would receive a simple tax reimbursement, completing the fraud.

What's the big picture effect?

First reported in Die Zeit (a German national newspaper) as long ago as 2017 (after the revelations of a whistleblower), the huge impact of this Leviathan-esque crime has to a large extent been buried by news of Brexit. Yet with the five hardest hit countries having lost around €63 billion (Germany the hardest hit with around €36.2 billion withdrawn from the German treasury, €17 billion for France, €4.5 billion in Italy, €1.7 billion in Denmark and €201 million for Belgium) the impact on banks and financial institutions cannot be underestimated. In Germany alone, up to 100 banks are under investigation.

International law firm DAC Beachcroft’s William Allison clarifies the modus operandi admirably: CumEx trades [formally prohibited in Germany since 2012] involved the acquisition of shares with (“cum”) dividends (due on or just before the dividend record date) and delivery of these shares after the dividend record date without (“ex”) dividends, which made it possible to obtain multiple returns of capital gains tax that had in  fact only been paid to the German tax authorities once. Elsewhere, CumEx scandals have been likened to parents claiming a benefit for two or more children when there is only one child in the family.

September saw two British bankers, Martin Shields (ex-Merrill Lynch) and Nicholas Diable, appearing in the regional court in Bonn (in Germany) to clarify their involvement. Painting a picture of the “labyrinthine trade chains” that were involved, and the “breathtaking” financial rewards (allowing Shields to purchase a house upwards of £9m), the true extent of the fraudulent network is finally becoming apparent. Shields is now cooperating with authorities to bring down the CumEx trades that were said to be practised on an “industrial scale”.

With the trial scheduled to last at least a year, just where the investigation will lead is as yet unclear. However, one thing is for sure; perpetrators can no longer hide their fraudulent dealings. As a result of the scandal, Canadian Maple Bank has already filed for bankruptcy and the consequences for a multitude of D&O (Directors and Officers) insurers are set to be far reaching. Indeed, UniCredit and HypoVereinsbank are already bringing claims for damages amounting to €140m against three former board members for their role in shaping the bank’s policies on such trades. Unlikely to be resolved quickly, this appears to be an issue which is likely to be the focus of attention for D&O insurers for some time to come.

Report written by Mark Pummell

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