Deutsche Bank staff broke regulatory rules and company policy to allow clients to siphon off millions of euros in government revenue, according to an internal investigation into their role in one of Europe’s biggest tax scandals.
More than 70 current and former employees are being investigated by Cologne prosecutors over the scandal, highlighting the German bank’s exposure to the multibillion-dollar “cum-ex” tax fraud scheme that is under extensive investigation by the police authorities.
Prosecutors in Cologne are investigating 1,500 people as part of a wider investigation into the scheme, which misappropriated government revenue 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 investigation intensified this month when a former senior banker at 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 prosecutors. It is a key part of the criminal investigation into the bank’s employees by Cologne police authorities, people familiar with the matter said.
The tax fraud is estimated to have cost the continent’s taxpayers billions of euros and involves share transactions executed before and after the payment of share dividends that tricked governments into refunding taxes that were never paid in the first place place The fraud has been dubbed ex, which is derived from the Latin meaning “with without”, and refers to the disappearing nature of dividend payments.
The investigation found that Deutsche’s tax department tried to steer the bank away from com-ex activities after its investment bankers sought permission to participate directly in those operations. The lender’s tax specialists argued that the refunds, although technically possible under the German tax code at the time, were fraudulent and created a massive reputational risk.
However, Deutsche’s London-based investment bankers worked around that ban, according to the investigation. “We identify a number of breaches of legal or regulatory requirements or internal policies,” Freshfields said.
In Germany, tax authorities refunded at least 3.9 billion euros in illegal 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 specializing in cum-ex trading. The bank also engaged in trading derivatives that indirectly exploited the loopholes that have been declared illegal.
Between 2008 and 2011, Deutsche even had a 5 percent stake in Luxembourg Financial Group Holding, which owns one of the cum-ex-focused investment funds that was also one of the bank’s troubled clients. ‘investment by Deutsche, according to previous research by Freshfields concluded in 2008. 2013 and also seen by the Financial Times.
Deutsche told the FT that it “has not carried out cum-ex transactions on its own account” but acknowledged that it “was involved in cum-ex transactions on behalf of clients”, including financial services such as financing cum- ex.
“Deutsche Bank today takes a very critical view of these financing activities and is cooperating with the authorities’ investigations in this regard,” the bank said.
Germany’s highest court, in a landmark ruling in 2021, ruled that cum-ex transactions have always been fraudulent, dismissing dissenting views from several law firms, including Freshfields.
Among the deficiencies listed in the Freshfields report was a lack of controls to ensure bankers actually followed the lender’s internal policies.
Instead of relying on the relevant desk to “monitor its own activities”, Deutsche “should have put in place systems to ensure that the desk traded within the parameters set out in the transaction approvals”, the firm argued of lawyers
Freshfields criticized the lender for taking on clients that clearly specialized in cum-ex trading and borrowed heavily from Deutsche to finance the transactions. Deutsche also provided shares used in cum-ex transactions and sold hedges needed to protect against sudden price swings on the stock market.
The report said that “senior business executives discussed the reputational issues associated with providing leverage to potential com-ex buyers” and concluded that “the risks were acceptable.” Those senior bankers “fully understood the nature of cum-ex trading and were aware of it [some clients] would be indirectly dedicated to these trades”.
Additionally, according to the report, Deutsche’s fee arrangements with these customers were not properly documented.
The Freshfields investigation found that Deutsche itself engaged in derivatives trading that took advantage of the tax loophole. In 2007, an internal memo seen by the FT described it as a “permanent opportunity”.
Deutsche estimated it could generate an annual profit of €50m for 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 investigation, 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 which, according to research, was widely ignored.