Deutsche Bank broke its own rules in enabling tax fraud, internal probe finds
Inquiry reveals lender’s exposure to ‘cum-ex’ scandal involving banks across Europe
Deutsche Bank staff broke regulatory rules and company policy to enable clients to siphon off millions of euros in government revenues, according to an internal investigation on its role in one of Europe’s biggest tax scandals. More than 70 current and former employees are under investigation by public prosecutors in Cologne over the scandal, highlighting the German bank’s exposure to the multibillion-euro “cum-ex” tax fraud scheme that is the subject of a sprawling inquiry by law enforcement authorities.
Cologne public prosecutors are investigating 1,500 people as part of a broader inquiry into the scheme, which misappropriated government revenues in a long-running fraud involving leading banks including Barclays, Macquarie and UniCredit’s HypoVereinsbank.
Prosecutors have been investigating the scandal for years, but the inquiry stepped up this month when a former senior banker from Fortis bank was arrested in Mallorca at the behest of Frankfurt prosecutors.
Deutsche’s internal investigation, which dates back to 2015 and was conducted by law firm Freshfields, was shared with public prosecutors.
It forms a key part of the criminal investigation against the bank’s employees by the law enforcement authority in Cologne, said people familiar with the matter. The tax fraud is estimated to have cost the continent’s taxpayers billions of euros and involves share deals executed before and after a stock’s dividend payment that duped governments to reimburse taxes that were never paid in the first place.
The fraud has been dubbed cum-ex, which is derived from Latin meaning “with without”, and refers to the disappearing nature of the dividend payments. Deutsche’s tax department early on tried to keep the bank away from cum-ex activities after its investment bankers requested permission to directly engage in such trades, the investigation found. The lender’s tax specialists argued that the refunds, while technically possible under the German tax code at the time, were fraudulent and created a massive reputational risk. However, London-based investment bankers at Deutsche worked around that ban, according to the probe.
“We identify a number of breaches of legal or regulatory requirements or internal policies,” Freshfields said. In Germany, tax authorities refunded at least €3.9bn in illicit tax refunds between 2001 and 2011, according to the finance ministry. The Freshfields report found that Germany’s largest lender generated millions of euros in fees by knowingly providing investment banking services to clients who specialised in cum-ex trading. The bank also engaged in derivatives trading that indirectly exploited loopholes that have been declared illegal.
Between 2008 and 2011, Deutsche even held a 5 per cent stake in Luxembourg Financial Group Holding, the owner of one of the cum-ex focused investment funds that was also one of Deutsche’s problematic investment banking clients, according to a previous Freshfields investigation concluded in 2013 and also seen by the Financial Times. Deutsche told the FT that it “has not engaged in cum-ex transactions on its own accounts”, but acknowledged that it “was involved in cum-ex transactions by clients”, including financial services such as the financing of cum-ex transactions.
“Today Deutsche Bank takes a very critical view of these financing activities and is co-operating with the investigations by the authorities in this regard,” the bank said. Germany’s highest court, in a landmark ruling in 2021, declared that cum-ex transactions have always been fraudulent, dismissing dissenting opinions from various law firms including Freshfields.
Among the deficiencies listed in the Freshfields report was a lack of controls that ensured bankers would actually abide by the lender’s internal policies. Instead of relying on the relevant desk to “police its own activities”, Deutsche “ought to have put systems in place to ensure that the desk traded within the parameters set in transaction approvals”, the law firm argued. Freshfields criticised the lender for accepting clients that clearly specialised in cum-ex trading and borrowed heavily from Deutsche to fund the transactions.
Deutsche also provided shares used in cum-ex deals and sold hedges required to protect against sudden price swings on the stock exchange. The report said “senior business managers discussed the reputational issues relating to providing leverage to potential cum-ex purchasers” and concluded the “risks were acceptable”. Those senior bankers “fully understood the nature of cum-ex trading and were aware that [some clients] would indirectly engage in such trades”.
Moreover, the report said, Deutsche’s fee arrangements with those clients were not properly documented. The Freshfields probe found that Deutsche itself engaged in derivatives trading that exploited the tax loophole. In 2007 an internal memo seen by the FT described it as an “ongoing opportunity”.
Deutsche estimated it could generate €50mn in annual profit per year by trading certain derivatives around the dividend date, according to internal documents reviewed by Freshfields, stressing that “we do not physically buy the shares nor are we the person who has to apply the [tax claim]”. According to the Freshfields probe, the subsequent trading activity violated the “spirit and purpose” of Deutsche’s internal rules, which were designed to limit the bank’s involvement in cum-ex trading — a goal that according to the probe was widely ignored.
When elites are too effective for their own good
Technocrats soften the crises that voters need to take politics seriously
It wasn’t “Guernica”, said the critics, but the potato painting I made about acid rain at Elmwood Junior School circa 1988 had a primitive grace. If the fickle art world shuns it, blame the passing of that ecological horror from public discourse.
Blame the Montreal Protocol and the banning of chlorofluorocarbons. So well did global elites manage acid rain and the punctured ozone layer that, just this month, the rightwing US pundit Matt Walsh could scold them for hamming up these threats in the first place.
We This is the crisis of the west in miniature. Sensible leaders prevent a chronic problem reaching its acute stage. The public are spared grievous suffering. But they also miss out on a demonstration of how vital it is to choose sensible leaders.
As nothing ever goes existentially wrong — no world war, no depression — politics starts to feel like a simulation. The stakes start to feel liberatingly low. Vote for a rogue, by all means, or a charlatan. What is the worst that could happen? Each generation has its version of the acid rain parable. The banking crash of 2008 was vicious, no doubt. But emergency measures stopped it from immiserating people on a Grapes of Wrath scale. The pandemic caused avoidable deaths.
Within 18 months of this once-in-a-century shock, though, a night out in Los Angeles or London felt more or less normal. These are technocratic miracles. But they are also unprovable negatives. It is hard for even an engaged citizen to visualise the crisis that wasn’t, the agonies that might have been.
The result is that otherwise smart people fall for the populist fork: elites are held to be omnipotent when things go wrong and irrelevant in normal times. The crash? Their fault. The preceding boom? It fell from a tree. The Iraq war?
Elite hubris. Decades on end of peace? Would have happened anyway. A pandemic? Dereliction in high office. No pandemic? The natural order of things. This is what happens when your best and most important work is largely invisible.
Otherwise smart people fall for the populist fork: elites are held to be omni-culpable and impotent all at once
This all reads like a claim that elites are too effective for their own good. But elites are also too effective for our own good. Societies learn from existential crises (think of the political moderation across the west post-1945) and a human lifetime has passed since the last one. The better technocrats get at averting them, the more they store up other problems. The investor Ruchir Sharma has argued that semi-regular bailouts for companies and states have drained entrepreneurial vigour. It is not such a leap to think that these rescues have also exacted a cost in responsible voting. Unable to see that less responsible leadership would have led to mass suffering, we feel at liberty to take risks in the polling booth. And so the absence of disaster becomes its own kind of disaster.
There is a booming trade in apocalyptic visions of the near future. But the US is not going to have a civil war. It might have what a British home secretary once called an “acceptable level” of political violence. The UK is not going to combust. It is likelier to drift into chronic torpor. The climate might supply the transformative disaster in time. Barring that, though, the west will continue to go through a kind of Italianisation, in which things are bad enough to make voters angry but not so bad as to make them seek safety in grown-ups.
It is, perversely, a less governable state of affairs than an acute emergency would be. It is hard to write all this without seeming to call for a purgative crisis. And I wish nothing of the kind. Not while I’m alive and in the vicinity. I just wonder whether anything short of one will right the listing vessel of western democracy. Since populism broke through, the establishment has been said, even by some of its members, to have earned its widespread infamy through successive bungles: military, financial. In fact, something nearer the opposite might be the root of the problem.
The bungles are mitigated. Crises that would be educational have the edges taken off them. It is a wonderful thing, and not. Elites should blame themselves for their low reputation, say the populists, who can’t possibly know how right they are. Email Janan at janan.ganesh@ft.com
