€32bn tax scandal under the nose of German Finance Ministry

An international group of bankers, lawyers and stockbrokers appears to have fiddled the German tax system at 32 billion euros over a period of 15 years. Right under the nose of the German finance ministry. A report by German media state broadcaster ARD and weekly DIE ZEIT claims that the German state lost at least €31.8 billion since 2001 through tricks by bankers and brokers to manipulate tax payments and refunds.

Prosecutors have been investigating for some time. And gradually it is emerging that large-scale tax avoidance was taking place right under the noses of the authorities. In some cases , authorities reportedly turned a blind eye to practices employed, not just by individuals out to make a fortune, but by some of the country’s biggest banks and respected businesses.

At the same time, a joint investigation was conducted over a period of six months by reporters of ARD “Panorama” magazine and Die Zeit alongside with professor Christoph Spengel at the Mannheim University  in USA, Switzerland. Germany and London City.

“Why were politicians and authorities unable to do anything about it for over 25 years?” DIE ZEIT asks and notes:

“To answer this question, a team of reporters from ZEIT ONLINE, ZEIT and the German public broadcaster ARD spent half a year examining secret investigation documents, transaction tables, emails, account statements, certificates, records of police searches and seizures and logs of intercepted telephone calls. Reporters traveled to the sites where such transactions originated, including the United States, Britain and Switzerland, and spoke with state prosecutors, the accused, those who were financially disadvantaged, whistleblowers, researchers and a former German finance minister.”

“This is the biggest tax scandal in the history of the Federal Republic of Germany,” professor Spengel said.

The German state has lost at least €31.8 billion since 2001 through certain banking and broker practices called “cum/cum” and “ex/cum” trades.

According to Spengel calculations, cum/cum’ trade deals are estimated to have cost Germany €24.6 billion since 2001, while “cum-ex” trades are estimated to have cost the German state €7.2 billion between 2005 and 2012.

Cum-ex trades were prohibited in 2012, cum-cum trades in 2016.

In the first type, German banks and stockbrokers bought and sold shares for foreign investors in a way which allowed them to claim a tax refund for which they were not eligible. Many question the legality of the practice.

In the second (a more complicated variation), investors and banks bought and sold shares just before and just after dividends were paid. With a bit of imaginative paperwork, and by exploiting a procedure which allows more than one person or institution to simultaneously own a share, they were able to claim numerous tax refunds.

German prosecutors are investigating a number of banks – among them institutions which were bailed out by the state – and individuals.

The German reporters found evidence of a presumed criminal network of about a dozen investment bankers in London who were at the root of most of the billion-euro losses.

Their investigations, broadcast on Thursday night, reveal that, despite a warning from State Commissioner August Schäfer in 1992 and the testimony of five whistleblowers, the practices continued and were widespread.

Many large banks likewise earned money from the deals.

The BBC reports from Berlin, that it wasn’t a national authority, a finance minister or the justice system who finally exposed the practice but a young administrative assistant in Germany’s central tax office. She noticed that she was receiving claims for huge tax rebates from a single US pension fund.

The employee dug further and, despite threats, began to uncover other cases.

Now 30 of her colleagues are now dedicated to trying to recover some of the money, and prosecutors are building their cases against some of those involved.

“The reporting fills a gap in our previous knowledge: Nobody knew until now in such detail how the alleged tax cheats went about their business and why officials failed to put a stop to their activities,” ZEIT ONLINE notes.

Some reader, KTG included, may wonder, why the German reporter do not include also acting finance minister Wolfgang Schaeuble in the list of the finance ministers who “could have stopped the theft.” He has been finance minister since 2009. He prohibited prohibit cum -ex trades three years after he resumed post and cum-cum trades even seven years later.

The tax scandal is not new. Already in February, finance minister Wolfgang Schaeuble had to testify in front of a Parliamentary committee investigating the issue. He received warnings in March and June 2011. One of the warnings referred to a bank the German state had bailout. According to a Spiegel report citing Schaeuble’s testimony, the finance minister looks as if  he did not dig deep on the issue.

“Schaeuble was less brisk than when he dealt with international tax issues,” Der Spiegel notes.

PS Of course. In 2011, Schaeuble was very busy to draft plans and have Greece out of the eurozone. And he is still obsessed with Greece, the usual mean Greeks claim..