Germany's highest court: CumEx trade is a crimal offence

The ruling of the Federal Supreme Court in Karlsruhe is crucial, as it confirms earlier judgements of the Landgericht Bonn in which CumEx trading was qualified as tax fraud. The defence of the defendants, two British former stockbrokers, that they were operating within the loopholes of the law and were not doing anything criminal, has been rejected by the highest court.

Earlier, Judge Roland Zickler of the Landgericht Bonn said about this argument of the traders: 'From the beginning CumEx was illegal. All participants in that trade knew the intention of the legislator. There are no loopholes. If I don't lock my front door when I leave home, that's a bit stupid, but no reason for someone to sneak in.'

The court in Karlsruhe also ruled that the offences, committed between 2007 and 2011, were not statute-barred and that the prosecution may recover the loot from the suspects.

Ingenious constructions.
In CumEx fraud, ingenious financial constructions are set up to reclaim dividend tax several times, while only once - or even not at all - dividend tax has been paid.

The fraud is estimated to have cost the German treasury between 5 and 12 billion euros over the past 20 years. Across Europe, the damage is estimated at around 55 billion euros. The Netherlands was also affected.

The verdict of the Bundesgerichtshof has major consequences. In several German states, the public prosecutor's office has over a thousand suspects in mind: bankers, stockbrokers, lawyers, tax specialists but also a range of financial institutions such as banks, hedge funds and pension funds. Among those suspects: ABN Amro and Frank Vogel.

Now that the highest German court has ruled that CumEx trading is punishable, the criminal prosecution can be taken to a higher level. In March Peter Biesenbach, the Minister of Justice of the German state of North Rhine-Westphalia, announced that he was deploying six more prosecutors and forty more police officers to intensify the hunt for CumEx fraudsters at home and abroad.

The main driving force behind the criminal prosecutions in North Rhine-Westphalia is Cologne prosecutor Anne Brorhilker. She has been on the case since 2012 and last year had the privilege of being the first prosecutor to be able to write convictions in the CumEx affair to her name.

Two London stockbrokers were given suspended prison sentences. The sentences were favourable because both defendants, both during interrogations and in court, were open about the operation of the CumEx trade. However, the two maintained that they had not done anything criminal and that they had only exploited loopholes in the tax legislation, loopholes that were closed in 2012.

Inspiration from Amsterdam
Among other things, the stockbrokers talked in full about their former boss: the New Zealander Paul Mora. Since February, he has been on the German government's most wanted list and since March he has also been on the investigation lists of Europol and Interpol.

The fugitive Mora drew his inspiration from Fortis GSLA in Amsterdam, as was revealed during the court hearings in Bonn.

On 18 July 2005, he asked the bankers of Fortis GSLA whether so-called double dippings are legal: transactions in which dividend tax is reclaimed several times when only one payment has been made. The answer was that double dipping was 'not a problematic transaction', according to the bank's external lawyers.

Fortis GSLA was led at the time by the duo Frank Vogel and Olaf Ephraim. The latter surfaced in November 2019 as treasurer of Forum for Democracy. In the Lower House election, he landed in the Chamber. In May, Ephraim separated from FvD. Since then he has been a member of Groep Haga. As far as we know, he is not the subject of a criminal investigation in Germany.

Millions in earnings
This does not apply to his former boss Frank Vogel, who has been officially designated as a suspect in at least one criminal case. Vogel insists that he has never done anything illegal and has 'always acted correctly'.

At the beginning of this century, Vogel and Ephraim were at the top of Fortis GSLA where they staged and executed large-scale CumEx transactions. The two earned millions for the bank and made a lot of money themselves.

According to Ephraim, he stopped CumEx trading in 2005 after he left Fortis. His former boss Vogel continued with his own company Global Securities Finance Solutions (GSFS), which later became a partner of the listed corner-stock company Van der Moolen.

Vogel's name resurfaced when the German judiciary investigated CumEx transactions by Swiss bank Sarasin in 2011. A salient detail is that the distinguished Swiss private bank was a Rabobank subsidiary at the time.

In the German criminal files, another Dutch bank is to be found: ABN Amro. German investigators have already raided the ABN Amro office in Frankfurt three times. The bank's consistent response to such reports is: 'We are transparent and fully and constructively cooperating with the German authorities'.

The latest raid, on 27 February 2020, at the initiative of the Public Prosecutor's Office in the federal states of Hesse and North Rhine-Westphalia, was not preceded by a warning. The show of force was huge: dozens of armed police officers and investigators were involved.

The judicial investigations into ABN Amro focus on the former Fortis GSLA that ABN Amro took over in 2008. But although GSLA was renamed, the stripping of dividends from large listed companies as a subsidiary of ABN continued.

One more name comes up in the criminal files: that of the Kirchberg Group from Luxembourg, until early 2010 also a full subsidiary of ABN Amro.

Kirchberg was also involved in CumEx transactions. After a management buyout, Kirchberg continued to do business exclusively with ABN Amro. It was only at the end of February 2016 that the bank suddenly informed the Luxembourgers that they wanted to sever all ties. The reason: Kirchberg was engaged in 'dividend stripping', according to ABN Amro.

According to German media, Cologne officer Brorhilker is also investigating a senior manager of ABN Amro's German branch for his role in suspicious share transactions between 2010 and 2015.

The Bundesgerichtshof in Karlsruhe also had to rule on the appeal filed by private bank M.M. Warburg. Earlier, the court in Bonn ruled that this bank, because of its share in the CumEx trade, must pay 176 million euros to the German treasury. This judgement was also upheld on appeal.

Extended limitation period
Due to the number of cases and suspects, staff shortages in the police and judiciary, and the corona crisis, many CumEx cases threatened to lapse. But on the initiative of the aforementioned Peter Biesenbach, the Minister of Justice of North Rhine-Westphalia, the Bundestag decided at the end of last year to extend the limitation period for serious tax offences, such as CumEx fraud, from 20 to 25 years.

In addition, as of 1 July 2020, for CumEx cases that have already been brought before a regional court, the money earned through fraud can be recovered even though the case itself is statute-barred. In this way the German legislator wants to prevent CumEx suspects from profiting with impunity from the millions they have earned.

CumEx transactions took place all over Europe. Between 2001 and 2016, gangs of bankers, traders and hedge funds managed to take at least 55.2 billion from European coffers. This makes it the biggest tax scam in the history of Europe. This was revealed in research by the international journalism project The Cumex Files, of which Follow the Money is part. The suspicion is that CumEx transactions in new and even more ingenious variants are still taking place.