An earlier news item finally reached my consciousness this morning and gave me a déjà vu experience. A Freshfields (prominent law firm) former tax partner who gave legal advice for clients to exploit an abusive tax shelter (aka bullshit tax shelter) was sentenced to 3 ½ years incarceration for his role. The shelter has attracted the name “Cum-Ex.” See e.g., Tom Sims & Kirstin Ridley, Former Freshfields partner sentenced to jail for German tax fraud (Reuters 1/30/24), here; and Olaf Storbeck, Freshfields’ former tax partner sentenced to 3½ years in jail(Financial Times 1/30/24), here.
I don’t know exactly how the scheme worked but the generic description is summarily described in the Reuters article:
Using such dividend stripping schemes, banks and investors would swiftly trade shares of companies around their dividend payout day, blurring stock ownership and allowing multiple parties to falsely reclaim tax rebates on dividends.
The following is from the Financial Times article:
The fraud centred on share deals executed before and after a stock’s dividend payments that duped governments to reimburse taxes that were never paid in the first place.
Maple Bank’s cum-ex transactions were equivalent to “organised [financial] crime”, Gröschel [the judge' said, adding that they were highly organised, took part over several years and led to “ludicrous” financial damage.
The aim of the transactions, said Gröschel, was not just to cut the amount of tax paid but to steal from the government. Johannemann’s legal advice was “a central contribution” to that crime, he added.
“Paying [a tax] once but reclaiming [it] twice just does not work,” he said, and that “a halfway talented elementary school pupil” was able to understand that concept.
* * * *
During the trial, Johannemann acknowledged he had “glossed over the fact that my legal advice was used for illegal means”, and said he had “totally failed” as a lawyer. The judge took issue with that assessment, saying he was certain Johannemann had been aware of all relevant details of the fraudulent transactions when giving his advice.
In his ruling Gröschel also took aim at Freshfields, accusing the tax practice of one of the world’s most prestigious law firms of having developed “its own business model” that specialised in giving affirmative advice on cum-ex transactions. The fees the law firm generated from such business were “almost ridiculously low”, he said.
Freshfields Bruckhaus Deringer’s former global head of tax Ulf Johannemann was found guilty of aiding and abetting a multiyear dividend tax fraud and sentenced to three years and six months in jail in a landmark ruling by a Frankfurt court.
Johannemann, who until 2019 was the “magic circle” firm’s most senior tax partner, had been on trial since September over advice given to Maple Bank, a defunct German subsidiary of Canada’s Maple Financial.
From 2006 to 2009, Maple reclaimed more than €388mn in dividend taxes it never paid. Johannemann had issued legal opinions stating that those so-called cum-ex deals, which exploited a design flaw in the German tax code, were lawful.
The trial was the highest-profile yet stemming from the long-running cum-ex scandal, which cost German taxpayers €10bn according to an estimate by Finanzwende, a consumer protection lobby group.
Announcing the verdict and sentence on Tuesday, Werner Gröschel, the presiding judge, told the court it was “perfectly obvious” and “beyond doubt” that Johannemann’s legal advice had been fundamentally flawed.
The fraud centred on share deals executed before and after a stock’s dividend payments that duped governments to reimburse taxes that were never paid in the first place.
Maple Bank’s cum-ex transactions were equivalent to “organised [financial] crime”, Gröschel said, adding that they were highly organised, took part over several years and led to “ludicrous” financial damage.
The aim of the transactions, said Gröschel, was not just to cut the amount of tax paid but to steal from the government. Johannemann’s legal advice was “a central contribution” to that crime, he added.
“Paying [a tax] once but reclaiming [it] twice just does not work,” he said, and that “a halfway talented elementary school pupil” was able to understand that concept.
The sentence was below the
five-and-a-half years in jail that prosecutors had sought for Johannemann, who joined
Freshfields as a junior lawyer in his thirties. His lawyer had called for a suspended jail term of fewer than two years.
During the trial, Johannemann acknowledged he had “glossed over the fact that my legal advice was used for illegal means”, and said he had “totally failed” as a lawyer. The judge took issue with that assessment, saying he was certain Johannemann had been aware of all relevant details of the fraudulent transactions when giving his advice.
In his ruling Gröschel also took aim at Freshfields, accusing the tax practice of one of the world’s most prestigious law firms of having developed “its own business model” that specialised in giving affirmative advice on cum-ex transactions. The fees the law firm generated from such business were “almost ridiculously low”, he said.
Johannemann’s conduct had severely damaged the firm’s reputation, the judge said. He stressed that “many colleagues” at Freshfields were “doing a really good job” in other areas of law but were “measured by the same yardstick” as Johannemann in the court of public opinion.
Freshfields was not a defendant in the trial, having struck a €10mn deal in 2021 to settle criminal allegations, and paying €50mn to the administrator of Maple Bank to settle a civil lawsuit.
“We take our commitments to risk management, compliance, and ethical business seriously and we continuously seek to improve our systems,” Freshfields said in a statement on Tuesday. “We will of course consider today’s judgment carefully to understand what further lessons may be drawn.”
Gröschel said the wider message to be drawn from the verdict was that lawyers should become less obsessed with meeting every possible client demand. “The clients’ wishes must only be taken into account if they are really legally tenable.”
A lawyer for Johannemann declined to comment on the verdict. Under German law, the court’s verdict is not yet legally binding and can be appealed by the defendant.
I report this morning on United States v. Kelly, ___ F.4th ___ (6th Cir. 8/8/24), CA6 here and GS here. Kelly affirms the district court's approval of the FBAR willful penalty on motion for summary judgment.
I first offer the MS CoPilot (MS’s version of AI) explanation of the case:
Case Title: United States v. James J. Kelly, Jr.
Background:
• James J. Kelly, Jr., a U.S. citizen, opened an interest-bearing account at Finter Bank in Zurich, Switzerland in 2008.
• He designated the account as “numbered” to keep his name off the statements and requested that Finter retain account-related correspondence instead of mailing it to him.
