Financial institutions will soon be permitted to destroy records of cum-cum transactions.
Approximately 28.5 billion euros were allegedly illegally pocketed by banks through tax fraud tricks. Up until now, Finance Minister Lindner has only manage to recuperate a small fraction of this money, and the culprits may soon be granted the legal right to eliminate incriminating evidence related to their wrongdoings.
During the upcoming debate in the Bundestag on Thursday at 9 a.m., the focus appears to be on the 4th Administrative Burden Reduction Act, a measure by the traffic light coalition aimed at exempting businesses from unnecessary regulations. According to the proposal by FDP Justice Minister Marco Buschmann, this act could save around 950 million euros annually. However, hidden within the fine print of the proposal lies a controversial element that would significantly hinder future investigations into one of the most significant tax scandals in history.
With this law, the government plans to abolish various regulations, such as requiring Germans to report overnight hotel stays, digitizing passport scans at airports, and allowing electronic decision-making in associations through email. The act also proposes reducing retention periods for booking records and receipts from ten to eight years. While this apparent simplification of administrative procedures could be seen as a welcome relief for many, it could potentially serve as a legal loophole for perpetrators of years-long tax fraud.
Anne Brorhilker, a former prosecutor and managing director of the citizen movement Finanzwende, has voiced her concerns about this proposed change. According to her, the evidence that proves the complicity of financial giants in fraudulent stock deals worth billions is still hidden away on bank servers and in filing cabinets due to the inactivity of the judiciary over the years. This evidence could be critical in future criminal proceedings. Brorhilker fears that once the law comes into effect, the perpetrators will quickly destroy the evidence to evade prosecution.
Plans to destroy evidence of tax fraud
The focus is on uncovering one of the largest tax scandals of all time: "Cum-Ex" deals. In these deals, banks were able to obtain multiple refunds of previously paid capital gains tax by exploiting loopholes in the law. This was made possible through a combination of short sales with (cum) dividends before the ex-dividend date, followed by the delivery of the shares without (ex) dividends after the ex-dividend date.
An intricate network of bankers, consultants, and lawyers constructed a business model around this loophole. This complex scheme was only exposed in 2012, and by this time, more than 100 banks from around the world had participated in the unlawful trading of stocks on the dividend record date. Over a decade, estimated losses to the treasury are thought to amount to up to 12 billion euros.
Some of the masterminds behind these deals have since been imprisoned, such as the former tax official and creator of the Cum-Ex scheme, Hanno Berger, and the top lawyer Ulf Johannemann from the Freshfields law firm. Over a hundred criminal proceedings are currently underway against thousands of individuals involved.
Lack of prosecution for Cum-Cum crimes
Although the legal process for the Cum-Ex deals has progressed, the investigation into the second, much larger part of this organized plunder of the state treasury by the financial sector is still in its early stages. These "Cum-Cum" deals involve attempting to obtain tax refunds for dividends that the paper's owners never had a claim to. This was achieved by transferring shares from abroad to German banks just before the dividend record date. Unlike some foreign entities, such as US pension funds, German banks were able to recover capital gains tax paid on dividends from the tax office. Leveraging this advantage, financial experts devised a scheme that benefited all parties involved: annually, billions of shares would be sent to Germany for a "dividend holiday" just before the record date. Local banks would then receive a refund from the tax office for papers they never owned and subsequently transfer the shares back to their foreign owners. Both parties would share the profits, leaving the German taxpayer out in the cold.
Estimates suggest that these Cum-Cum deals cost the treasury even more than the Cum-Ex deals over time: up to 28.5 billion euros. In 2015, the Federal Finance Court ruled that these tax tricks were illegal, but so far, only a few hundred million euros of this stolen money have been recovered from the banks. No indictments have been made in these cases yet. Worryingly, it appears that the banks are now being granted permission to shred the records of their plunder of the state treasury in advance.
"Justice for the rich, injustice for the poor," Finanzwende laments, citing information from the finance ministry of the FDP finance minister. "After promising zero action on Cum-Cum, Lindner is now also making things difficult for investigators," criticizes Finanzwende founder and former Green finance expert Gerhard Schick. "Despite the urgent need for funds to balance the budget, it seems Finance Minister Lindner is not considering first targeting criminal activities where the state could potentially claim billions in compensation."
Based on Brorhilker's insights, numerous small financial institutions, including funds, savings banks, and regional banks, have been linked to Cum-Cum dealings. These entities are currently concerned about potential future discoveries by tax investigators and lawyers. If crucial documents disappear, investigations would essentially halt before they even start. Brorhilker believes that the true extent of Cum-Cum misconduct has yet to be uncovered, and the legislation could allow many offenders to escape unpunished, resulting in the loss of billions in tax revenue.
Until recently, Brorhilker served as the primary investigator for clarifying Cum-Ex tax offenses at the Cologne Public Prosecutor's Office and also handled Cum-Cum cases. Frustrated by the "ineffective justice system" that "holders small frys accountable while letting the big guns off the hook," she left her position and joined the Finanzwende citizen's movement.
The investigator's dire foreboding appears to be materializing. German FDP Justice Minister Marco Buschmann acknowledges that the state could suffer substantial financial losses if financial records cannot be examined in a timely manner. The proposed legislation is anticipated to decrease retention periods from 10 to 8 years, potentially resulting in an annual "tax shortfall" of 200 million euros. However, given the magnitude of tax crimes, this estimate might significantly underestimate the actual loss.
Though banks are granted a reprieve due to the delay in tax crime investigations, the new timeframe for the financial sector will not take effect until a year subsequent to the law's passage. With the deadline looming, if the legislation is passed this week and approved by the Bundesrat on October 18, financial officials and investigators would have only one year to expose the key players in Germany's biggest tax fraud scandal. Crippled by overwhelming workloads and short-staffed, the authorities are unlikely to be victorious in this race, according to Brorhilker. She deems it unrealistic to expect them to analyze a decade's worth of misconduct within a single year.
Initially, progress was being made. The Merkel government extended the statute of limitations for major tax crimes, such as Cum-Ex and Cum-Cum arrangements, from 10 to 15 years back in early 2021. However, the current ruling coalition threatens to reverse this decision, causing Brorhilker to lament. She considers it absurd that retention periods are now shorter than statute of limitations periods, and further shortening these periods is an irrational decision.
Despite the announcement of the 4th Administrative Burden Reduction Act aimed at exempting businesses from unnecessary regulations, which could save around 950 million euros annually, concerns have arisen regarding its potential impact on future investigations into tax fraud cases, such as the "Cum-Ex" and "Cum-Cum" deals. Anne Brorhilker, a former prosecutor and managing director of Finanzwende, expresses her worry that the proposed change could allow perpetrators of tax fraud to destroy incriminating evidence before investigations begin, potentially evading prosecution and resulting in the loss of billions in tax revenue.
