Inside Europe’s biggest tax scandal and its increasing fallout

In the heart of Europe’s financial landscape, Anne Brorhilker, head of Cologne prosecutors’ office, becomes a harbinger of upheaval with each train ride to Frankfurt. The ash-blond woman’s presence signals an impending raid on international investment banks. Delving into the complex world of Cum-Ex, a tax-driven trading strategy, Brorhilker’s team navigates a web of suspects spanning London to Frankfurt. As September brings new high-profile trials and investigations across Europe, the fallout from Cum-Ex continues to unfold, revealing a saga of financial intrigue and legal tenacity.

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Fallout From Europe’s Biggest Tax Scandal Is Only Getting Larger

By Karin Matussek

When the defence lawyer spotted the woman with long ash-blond hair on the train from Cologne to Frankfurt, he was alarmed. Her presence could only mean one thing: another raid was in store for an international investment bank.

The woman was Anne Brorhilker, head of the department at the Cologne prosecutors’ office currently overseeing the biggest Cum-Ex investigation in Europe. For more than a year, her unit had been targeting the German offices of international banks, raiding one after another. The first hit were Bank of America’s Merrill Lynch and Barclays Plc, then, in monthly instalments, Morgan Stanley, BNP, Nomura and many of their peers.

These multiday sweeps always start early on Tuesdays, so lawyers with Cum-Ex clients know when they see Brorhilker on the Monday train to Frankfurt, or in the hotel where she and her colleagues usually stay, that something is up. Cologne prosecutors have conducted at least 13 raids since March 2022, targeting law firms and auditors as well as big banks – and there seems to be no end in sight.

Authorities still have much more to do when it comes to dealing with the fallout from Cum-Ex, a controversial tax-driven trading strategy that was in use for more than a decade. The tactic, which originated with traders in London who took Germany as a prime target, exploited the way dividend tax was collected so that multiple investors could claim refunds on a tax that was only paid once. Scores of European and American banks participated at various levels, and by the time Germany stopped the trades in 2012, the practice may have cost the country as much as €10 billion ($10.9 billion).

The issue will return to the limelight in September when three new high-profile Cum-Ex trials kick off in Germany, adding to the two that are currently in process. 

Brorhilker’s raids are part of a legal dragnet that has sprawled beyond Germany. Officials in the Netherlands, Finland and Belgium have launched their own probes, and Denmark, seeking to recoup €2 billion in losses, has filed about 500 civil suits in the US, UK, Dubai, Denmark, Malaysia and Canada related to dividend-tax refunds. In March, French authorities raided five banks in a single day to gather information about Cum-Cum, a similar transnational trading strategy that takes advantage of tax breaks intended for locals.

It’s taken years to get to the point where Cum-Ex cases are being investigated at all. The deliberately complicated structure of the trades made it difficult to understand how they worked or who was behind them, and Germany’s intricate tax laws and decentralized system of tax collection made following the money even more challenging. “Cum-Ex is a league of its own — in terms of magnitude and the way the deals were set up,” said Rolf Raum, a former judge at Germany’s top criminal court.

Until around 2011, when authorities grew increasingly suspicious about the enormous amounts being paid out, German officials routinely signed off on hundreds of millions of euros in tax refunds. Banks and traders, meanwhile, were emboldened by the fact that Cum-Ex trades weren’t effectively banned, and that changes in the tax code always seemed to leave a backdoor open for the strategy.

In light of all this, Raum had a blunt interpretation of why participants got involved: “They wanted to cash in, no matter what.” 

The Cologne operation is by far the most ambitious of Germany’s three regional Cum-Ex probes. Brorhilker launched her first investigation in 2013. By 2017, the year Cologne prosecutors convinced the first suspects to cooperate, she was overseeing five. In 2020, armed with significantly better intel, Cologne had 500 people on its suspect list and a unit dedicated to Cum-Ex. Things have only expanded since then. As of July 2023, Cologne was overseeing 120 probes with 1,700 suspects, most of whom are in London.

Brorhilker’s team files its indictments in Bonn, a 30-minute train ride from Cologne in the western state of North Rhine-Westphalia. Bonn is home to the Federal Tax Agency, which handles tax matters for individuals based outside Germany. It is also the epicenter of Cum-Ex litigation. The city hosted Germany’s first-ever Cum-Ex trial nearly four years ago, and two former M.M. Warburg bankers and two ex-partners at London-based Duet Asset Management Ltd. are currently facing charges there. The Warburg bankers will be followed on Sept. 18 by their former boss, Christian Olearius, who owns 40% of the company.

Bonn is home to the Federal Tax Agency, as well as the epicenter of Cum-Ex litigation. Photographer: Andreas Rentz/Getty Images

As the number of suspects climbs, the former West German capital is stretching to accommodate its new local industry. Bonn’s court is increasing the number of chambers specializing in Cum-Ex from two to ten. Judges are being trained in the minutiae of finance, including derivatives trading and short-selling. Construction has begun on a €43 million Cum-Ex courthouse in the suburb of Siegburg that is expected to open in 2024.
The ‘Cum-Ex’ and ‘Cum-Cum’ Tax Dodges Haunting Banks: QuickTake

And as the train to Frankfurt has become the place to spot Cum-Ex prosecutors, so too might the high-speed railway station in Siegburg become the place to find suspects. That connects the Bonn area to the Frankfurt Airport, making it easy for London-based defendants to fly in and out on trial days.

In addition to bringing criminal charges, there’s also the matter of recouping money, which happens through government-issued repay orders and refund denials. By the end of 2021, the German Finance Ministry had counted 429 cases amounting to tax losses of €4.5 billion. Of this, authorities have successfully recovered about €3.1 billion – not including payments clawed back through criminal trials.

While the recipients of repay orders are confidential, some banks have chosen to step forward: BNY Mellon Corp. was found liable in 2020 and in 2023 for $150 million, and in April 2019, Bavarian tax officers demanded that Credit Agricole’s Caceis unit repay €312 million plus interest, which by then had accumulated to an additional €148 million. Both banks have appealed, and BNY Mellon has said it has obtained an indemnity from the sellers of the unit that originally incurred that liability.

In some instances, such orders have been fatal. Frankfurt-based Maple Bank GmbH went bust after it was ordered to return €392 million. Wolfgang Schuck, the bank’s 69-year-old former CEO, was convicted last year over transactions that allegedly cost German taxpayers about €388 million. A Frankfurt court sentenced him to four years and four months in prison, a €96,000 fine, and seized €2.9 million in assets, which it said had been paid for with Cum-Ex profits.

Schuck has appealed his verdict, but the odds of it being overturned are slim: Germany’s top criminal court has expressed strong support for Cum-Ex probes, and in appeals, judges have consistently upheld Cum-Ex convictions.

Schuck’s was among the seven convictions that have been secured by Frankfurt prosecutors, and one of thirteen total obtained in Germany. (Six were won by Cologne prosecutors; officials in Munich are investigating 45 people but haven’t yet charged anyone.) Among the early convictions were Christian S., an ex-managing director at Warburg who was sentenced to five-and-a-half years in prison over Cum-Ex deals that cost taxpayers about €326 million, and his former colleague Detlef M., who was given three-and-a-half years for his role in a €109 million tax scheme.

When S. started his term in January, the 80-year-old became the first person to serve prison time for Cum-Ex charges. Detlef M. started serving his sentence at the beginning of August.

M.M. Warburg and Co. bank in Hamburg, Germany. An ex-managing director at Warburg was sentenced to five-and-a-half years in prison over Cum-Ex deals. Photographer: Morris MacMatzen/Getty Images

The next marquee case will begin on Sept. 7 in Frankfurt. Taking the stand will be Ulf Johannemann, the former global head of tax at the law firm Freshfields, who advised clients – including Schuck’s Maple bank – that it was legal to pursue tax refunds generated through Cum-Ex. On that same day,  a second trial will begin in the city against a former Fortis banker who fled to Spain where he was arrested and later extradited. The trader is currently in pre-trial detention. 

For Brorhilker and her colleagues in Cologne, the risk now is that the rapidly expanding scale of their operation could complicate efforts to prosecute quickly.  

The case of Australian lender Macquarie Group Ltd. is a revealing example of how the investigation has mushroomed. In 2018, the bank said that about 30 staffers — including then-CEO Nicholas Moore and his successor, Shemara Wikramanayake — would be named as suspects in Cum-Ex probes. Sixteen months later, the lender said that German prosecutors were targeting about 60 current and former staff as suspects, including Wikramanayake, who had by then replaced Moore. Less than four months after that, in May 2020, the lender disclosed that the number had climbed to 100 – “most of whom are no longer at Macquarie.”

Yet no charges have been filed. And Cologne has only submitted one new indictment this year. It’s expected that if suspects at Macquarie and other big banks — including Barclays and Deutsche Bank AG, which employed 124 and 100 bankers who were later named as suspects – are charged, that would happen in 2024 at the earliest. 

Barclays, along with Caceis, BNY Mellon and Macquarie, declined to comment on Cum-Ex. In an emailed statement, Deutsche Bank wrote that takes a very critical view of the services it provided to clients involved in Cum-Ex trades, and is cooperating with the investigations.

For the approximately 1,800 suspects in Germany, waiting indefinitely is a heavy burden to bear. There is a psychological toll as well as a practical one – in some jurisdictions, bankers applying for jobs are obliged to disclose that they’re being probed, meaning that the damage is done even if charges never come to pass, or are ultimately dismissed. For banks, depending on their size and involvement, the issue can threaten their reputation or prospects. Regardless, nobody wants their name in a Cum-Ex headline.

One reason why Brorhilker’s office has been quick to name suspects is because doing so hits pause on the statute of limitations, giving prosecutors more time to work cases. Alongside a new law that further extends the investigation period, Brorhilker is well-positioned to keep banks from buying their way out of trouble. She wants justice, even if it takes a long time to get it.    

Cologne’s top Cum-Ex prosecutor turned 50 at the end of July. She has 16 more years before she reaches retirement age. To Brorhilker, it’s clear that she’ll spend them unwinding the damage from Cum-Ex. 

–With assistance from Demetrios Pogkas.

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