Late last year, German tax authorities carried out several brazen raids of some of the country's largest lenders - including Commerzbank - tied to an investigation into so-called "dividend stripping." The practice, which was commonplace before German authorities clarified tax laws about five years ago, allowed wealthy individuals to take advantage of a loophole allowing them to buy a stock just before losing rights to the dividend, then sell it short. Both the buyer and seller could then claim certain tax credits. Before German tax authorities revised the rules, large banks regularly advised their German clients about the practice.
Fast forward five years, "dividend stripping" has been made retroactively illegal, and prosecutors in Cologne are preparing to issue their first indictments in a wide-ranging tax-evasion probe that has ensnared many of the biggest names in finance. According to Bloomberg, the scheme cost the Germany Treasury more than 10 billion euros ($11.6 billion).
Investigators are looking at the role of dozens of banks, brokerages, accounting companies, and law firms in the deals, and the cases involve hundreds of individuals, said the people, who declined to be identified because they’re not authorized to discuss the probe. The investigations include transactions handled by lenders including Barclays, Goldman Sachs Group, Bank of America Corp., Macquarie, and BNP Paribas, and initial indictments are likely as soon as this year, the people said.
The probe, which has been underway for about a half-decade, is picking up speed as several witnesses have agreed to cooperate. The Cologne team is working in parallel with prosecutors in Munich and Frankfurt, who last month charged six people, including former investment bankers at UniCredit SpA’s HVB unit in London. The Cologne investigators are focused on bankers in London because the tax office for non-residents is located in nearby Bonn.
Dozens of banks in Europe and the US engaged in the practice on some level - either doing the deals themselves or arranging them for clients. Many of the banks acted as custodians for the shares as they facilitated the "cum-ex" (with-without) transactions. The custodian banks would even issue certificates for the dividend withholding-tax redemption that shareholders could redeem at the tax office. All of these transactions were purportedly "legal" with lawyers and advisors issuing opinions declaring them such.
Given that the German justice system doesn't have the capabilities to process hundreds of subjects, settlements are inevitable. The case being brought by prosecutors also doesn't sound like it's airtight: The practice largely ended after Germany reformed its tax code in 2012. And there's still some debate about whether the transactions were legal before that. Indeed, despite leading to raids in 14 countries back in 2014, it sounds like the Cologne investigation would've died on the vine if it wasn't for a breakthrough last year, when prosecutors secured the cooperation of a handful of traders and advisors.