Bankers or mobsters becomes question in German Cum-Ex probe

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Germany’s biggest tax scandal has landed the masters of the financial universe with an unflattering label: criminal organizations.

It’s an allegation not leveled by finger-wagging populist crusaders, but prosecutors seeking to push their case beyond a probe of lost revenue. Now two dozen financial institutions caught up in the so-called Cum-Ex dragnet are suspected of forming criminal organizations, money laundering, and in some cases investor fraud, a court document shows.

Equating bankers with behavior associated with mobsters lets prosecutors pack more punch into a case exploring whether financial institutions and wealthy individuals illegally engaged in controversial transactions that allowed multiple dividend-tax refunds. The Cum-Ex deals, which peaked between 2007 and 2011 before the government shut them down, cost the German treasury more than 10 billion euros ($11 billion) in lost revenue, lawmakers estimate.

While tax crimes remain the central issue, prosecutors have also found evidence that some private investors may have been duped and that the trading strategy may have entailed money laundering by sharing illicit profits, the ruling, a search warrant, seen by Bloomberg News says. The warrant was used by the authorities to raid the offices of Deutsche Boerse AG’s Clearstream unit last month, the central depository for any shares in Germany. The court document mentioned more than 50 probes by Cologne prosecutors.

Adding crimes

The investigations focus on banks, brokers and asset managers over various roles that were necessary for the Cum-Ex transactions, including buyer, short-seller, custody bank and providers of leverage. According to the latest findings, affiliated companies within a group often took on several of these roles, according to the document. Besides brokers and investment companies, the warrant list more than 20 lenders, among them Morgan Stanley, JPMorgan Chase & Co. and Bank of America Merrill Lynch.

JPMorgan, Bank of America and Morgan Stanley declined to comment. Deutsche Boerse is fully cooperating with the authorities, a company spokesman said, declining to comment further.

A spokesman for Cologne prosecutors said each investigation determines whether probing additional offenses besides tax evasion is warranted, depending on the circumstances. He declined to comment on individual cases.

Separately, Peter Biesenbach, the Justice Minister of North-Rhine Westphalia, told reporters on Tuesday that Cologne prosecutors are now conducting 56 probes with a total of about 400 suspects related to Cum-Ex. The staff devoted to these cases is being doubled from five prosecutors to 10, according to a transcript of his speech. North-Rhine Westphalia is Cologne’s home state.

“The Cologne investigations have now reached a point that prosecutors say that Cum-Ex wasn’t a legal tax-driven trading strategy, but organized white-collar crime of unimaginable magnitude,” the minister said.

Prosecutors like to add crimes like money laundering in complex investigations because they hand them an investigative toolbox that’s out of reach when only tax crimes are involved, said Marco Mansdoerfer, a criminal law professor at Saarbruecken University. It also makes it easier to add more suspects, he said.

Complex structure

“There’s a clear tendency to use it in white-collar crime probes, though originally it was intended only for mafia-type of action,” Mansdoerfer said. “It’s a tactical move, because you want to investigate more broadly and use these intelligence methods.”

Targeting high finance in a similar vein to drug cartels or the mafia would have few tangible material effects should prosecutors decide to charge banks, since possible fines are mostly based on overall profits made, regardless of the number of offenses involved. For employees and managers who are probed individually, on the other hand, a conviction for additional crimes would typically increase prison terms.

Before prosecutors file charges, they often drop the additional crimes again to reduce complexity during trial, said Mansdoerfer. As useful as prosecutors may find it at the investigative stage, it’s easier to try a case under tax crimes alone, according to the professor.

The first trial looking into Cum-Ex started on Sept. 4 in Bonn, where the court is hearing a case against two former traders, who are cooperating. Their indictment only cites aggravated tax evasion as the alleged crime.

Tomorrow, one of the main defendants, Martin Shields, is scheduled to testify. His appearance, slated for two consecutive days, marks a hotly anticipated moment in the Cum-Ex saga, which relied on a complex web of interactions by different financial institutions, many of which have now been caught up in the investigation.

— Karin Matussek
Bloomberg News

Bloomberg News
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