Through cum-ex deals, banks, financial advisors and managers have enriched themselves for years – at the expense of the taxpayer. Now, for the first time, a German banker has to be arrested for this. t-online explains the background.
In the recent past, financial fraud has increased in Germany. The best-known example is bankruptcy of the ex-DAX group Wirecard in June 2020. Yet another affair cost taxpayers billions: the cum-ex scandal.
What sounds strange means businesses that have for years exploited a legal loophole around the day of the dividend payment of stocks. Participants pushed back and forth shares with a claim to the dividend (“cum”) and without a claim (“ex”).
Your goal: multiple tax refunds from the tax offices. Banks, financial advisors, lawyers, notaries – they all made money from the business. Now, for the first time, a German banker has been sentenced to a long prison term. t-online explains how these businesses work exactly, how high the damage was – and what role SPD politician Olaf Scholz plays in the scandal.
How do cum-ex deals work?
Listed companies usually pay a dividend to their shareholders once a year. In this way, the shareholders participate in the profits. The cut-off date is the day before the dividend is paid. Anyone who owned the shares at that time will receive the dividend.
Withholding tax is due on this. The shareholder receives a certificate of this, which the bank issues. This is what the parties involved in the cum-ex deals have in mind. Because they can offset losses that they incur elsewhere with the tax deductions.
The aim and purpose of the cum-ex deals – also known as dividend stripping – was to create as much confusion as possible. With the rapid circulation of shares between beneficiaries and non-beneficiaries around the dividend payment date, the tax office should ultimately no longer know who is a shareholder in the company at this point in time.
The result: the tax authorities issued more tax refund notices than legally required. Taxes that actually had to be paid escaped the tax authorities. This practice was stopped in Germany in 2012. However, the other European countries were only warned against the dividend tax tricks by Germany in 2015.
What has short selling got to do with it?
Short sales also played a central role. That means: Investors sell paper they don’t own and then get them on the market. If the price is below the original selling price, they make a profit. Read here how short sales work.
In the case of cum-ex deals, the short sale was started before the dividend date. The seller and buyer agreed on the price and timing of the transaction, but concealed who owned which share and when.
What does the cum-ex scandal have to do with me?
Nothing directly. However: According to estimates, the damage to the German tax authorities from cum-ex deals amounts to ten billion euros.
That means: This tax money was not available to the German state – for urgently needed investments in schools, roads or the expansion of the mobile phone network. Through cum-ex deals, fraudsters have enriched themselves for years at the expense of German taxpayers.
Is cum-ex fraud a criminal offense?
Yes, at least when it comes to tax evasion or commercial gang fraud. However, the legal interpretation is controversial.
Last year, the Bonn district court issued a groundbreaking verdict: Two British stock traders were sentenced to probation – that would make the business a criminal offense. However, the Federal Court of Justice (BGH) still has to decide on the revision of those involved in mid-June 2021.
German banker sentenced to prison term
And at the beginning of June this year, the Bonn Regional Court sentenced a German banker to a long prison term for the first time. The former general representative of the Hamburg private bank MM Warburg was sentenced to five years and six months in five cases for tax evasion through cum-ex transactions.
He also has to pay a fine of 100,000 euros. The Warburg Group declared that the Bonn judgment would have no economic consequences for them. The co-owners of Warburg Bank, Christian Olearius and Max Warburg, are also accused of having been involved in cum-ex deals (see next chapter). They reject that.
Gerhard Schick, board member of the “Bürgerbewegung Finanzwende” sees a “decisive milestone in the cum-ex scandal”. “The first cum-ex offender receives a prison sentence for his criminal activities. It cannot be the last person,” he said, according to the statement. The first criminal judgment last year and now the first prison sentence are the first steps to make amends for years of neglect.
The public prosecutor’s office is investigating around a thousand people involved
But the following applies: the legal processing is only just beginning. The Cologne public prosecutor’s office is investigating around 80 cases against almost a thousand participants – but it is highly questionable whether they will all be prosecuted.
Because: For years there was a loophole in the law that they exploited. It is therefore controversial among lawyers to what extent the cum-ex deals are actually targeted tax evasion.
What does Olaf Scholz have to do with the cum-ex scandal?
That is a crucial question. It’s not that Scholz was involved in the entire cum-ex scandal – it spanned hundreds of banks, stock traders and tax advisors at home and abroad.
Scholz is specifically about a meeting between the SPD politician, then First Mayor of Hamburg, and the co-owner of the Hamburg Warburg Bank, Christian Olearius, in 2016 and 2017. At that time, Olearius was already being investigated on suspicion of serious tax evasion.
Warburg Bank was involved in cum-ex deals for years. The meetings are explosive because the city of Hamburg later allowed possible tax claims of 47 million euros to expire, and a further 43 million euros was only requested after the Federal Ministry of Finance intervened. The bank has now paid all claims, but continues to deny any debt. A committee of inquiry in Hamburg is supposed to investigate the implications of politics.
Olaf Scholz (SPD): The Federal Minister of Finance and former First Mayor of Hamburg testified before the Cum-Ex committee in Hamburg. (Source: Christian Charisius / dpa)
In this U-Committee at the end of April 2021, Scholz rejected any suspicion of influencing the tax treatment of Warburg Bank. An influence would have been a “political stupidity”, so Scholz. “I don’t tend to.” Other accusations are “unfounded horror fairy tales”.
Party friend Tschentscher also has to testify
Scholz had only admitted the meeting with Olearius retrospectively and referred to gaps in memory. Previously, entries from Olearius’ diary had become known, which indicated the meetings and a possible special treatment of the bank by the tax authorities.
Scholz also repeated in the U Committee that he could not remember the specific content after so many years. But one thing is certain: “I never influenced the Warburg tax procedure.”
The current mayor, Peter Tschentscher (SPD), was the Senator of Finance at the time. He also rejects the allegation of possible influence. Tschentscher should appear before the committee in December 2021, Scholz then a second time.
Scholz was recently criticized in the scandal surrounding the billions fraud at the bankrupt Wirecard – this time as Federal Minister of Finance. Here, too, Scholz had to answer to the U-Committee of the Bundestag.