A share trading scheme that took advantage of a legal loophole has led to a loss of US$62.5 billion for 11 European countries. Nearly 100 banks are under investigation for facilitating the share transactions, with Spain’s Santander being the latest financial institution to be targeted by authorities.
“Cum-Ex trades 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,” according to Dac Beachcroft. This allows investors to make multiple returns of capital gains tax, which was paid to the tax authorities just once.
The Cum-Ex trading method was reportedly conceived by German lawyer Hanno Berger, who identified that the process allowed for stocks to change hands so quickly that tax authorities would be unable to track the owner of the share. Working as a group, investors can conduct transactions between themselves, claim rebates for the taxes paid on dividends, and finally share the profits. The treasury ends up footing the bill.
Germany was the most affected by these transactions. According to Christoph Spengel from the University of Mannheim, it is estimated that Germany lost about US$36.2 billion between 2001 and 2016, making it the biggest tax robbery in the country’s history. France lost US$19 billion while Italy lost about US$5 billion. In total, eleven European countries have been affected by the trades. Germany prohibited Cum-Ex trading in 2012 and is investigating the role of banks that had executed such trades between 2001 and 2012.
Santander from Spain is the latest bank that has come under the purview of the investigation. According to prosecutors, the bank carried out trades as one of the several parties involved. A spokesman for Santander stated that the bank is cooperating fully with the investigation and that appropriate action will be taken if any misconduct is identified. However, the spokesman remained silent when asked whether the bank had broken any law.
The investigation has also extended to Australian bank Macquarie, which is accused of having forwarded loans to three pension funds that participated in the Cum-Ex trading activity. “Macquarie will continue to co-operate fully with the German authorities… It has already resolved its two other matters involving German dividend trading that took place between 2006 and 2009,” said a bank spokesman quoted by Independent.ie.
In Germany, Deutsche Bank and UniCredit have been on the radar of authorities. While UniCredit admitted having been involved in Cum-Ex trading, Deutsche Bank denied any direct participation, but agreed that it was “involved in some of its clients’ Cum-Ex transactions.”
The scale of financial damage could have been minimized if the authorities of different countries had exchanged information about the trading activity on a timely basis. However, that was not the case. “Germany is said to have informed its European neighbors of the Cum-Ex transactions through an OECD database only in 2015, even though the Finance Ministry had known it since 2002 at the latest,” according to DW.
Since authorities are treating the Cum-Ex trades as tax evasion, they can go back up to 10 years and seek financial compensation for profits that were deemed secure and closed.