Person of Indian Origin (PIO) figures in Europe’s biggest tax heist
The two met while working out of the Merrill Lynch’s London office and devised a scheme called “cum-ex trading” (from the Latin for “with-without”). It is a monetary manoeuvre to avoid double taxation of investment profits that plays out like high finance’s answer to a David Copperfield stage illusion. Through careful timing and the coordination of a dozen different transactions, cum-ex trades produced two refunds for dividend tax paid on one basket of stocks.
The process was repeated over and over, as word of cum-ex spread like a quiet contagion. Germany was hardest hit, with an estimated $30 billion in losses, followed by France, taken for about $17 billion. Smaller sums were drained away from Spain, Italy, Belgium, Austria, Norway, Finland, Poland and others.
A third man, Dubai-based British citizen Sanjay Shah, is alleged to have copied their methods to defraud the Danish treasury of $2 billion. Shah denies wrongdoing but has never been shy about the source of his wealth. When he bought a $1.3 million yacht a few years ago, he found the perfect name: Cum-Ex.
Shah was raised in London by parents of Indian ancestry who had immigrated from Kenya. He dropped out of college in 1992, citing a lack of motivation, and worked at a number of large financial firms. In 2007, he landed a job at the London office of Rabobank, a Dutch company, on the dividend arbitrage desk where he learned about cum-ex trades.
According to his Twitter page, he is currently based in Dubai and dubs himself an entrepreneur and philanthropist who raises money for autism research.
No criminal charges have been filed against Shah. However, German prosecutors have charged Shields, a 41-year-old Oxford-educated math whiz, and Mora, a 52-year-old New Zealander with a fondness for Hawaiian shirts, with “aggravated tax evasion” that cost the German treasury close to $500 million.
Last month, the presiding judge issued a preliminary ruling that, for the first time, declared cum-ex a felony, calling it a “collective grab in the treasury.” German prosecutors say they will pursue 400 other suspects, unearthed in 56 investigations.
Precisely who invented cum-ex trading, and when, are mysteries, but ground zero for this scandal may have been the London branch of Merrill Lynch.
At Merrill, Shields’ job was to identify “tax-attractive trades”, as he put it in his testimony. He had joined one of the least visible sectors of the financial world looking for ways to reduce clients’ tax bills. Many of these were variations of a strategy called “dividend arbitrage”, and right before Shields left Merrill in 2004, he learned about a new one, cum-ex.
Academics have struggled for years to explain the trade but suffice it to say, the goal was to fool the financial system so that two investors could claim refunds for dividend taxes that were paid just once.
With the financial crisis in full swing, cum-ex was one of the few reliable moneymakers, and the trade boosted careers throughout the City of London. Prosecutors have reportedly opened investigations into transactions handled by Bank of America, JPMorgan Chase, Morgan Stanley and many others. Dozens of German banks participated in cum-ex deals, too, gobbling up German taxpayer money at the same time they received a rescue package worth more than $500 billion.
American banks conducted cum-ex trades overseas, rather than at home, out of fear, a whistleblower said. Specifically, he mentioned a 2008 Senate investigation into “dividend tax abuse” that found it was depriving the US treasury of $100 billion annually. The report led to a ban on dividend arbitrage tied to stock in US corporations. But nothing prevented American bankers from conducting such trades with foreign companies on foreign soil.
Eventually, American investors joined in, too. German efforts to stamp out cum-ex with legislation, in 2007 and 2009, left holes through which certain types of financial players could still crawl. This included private pension plans in the US, a niche financial product for wealthy people who want the kind of privacy, and exotic investment options, that Fidelity doesn’t offer.
“These US pension plans became the holy grail for cum-ex trading,” said Niels Fastrup, a co-author with Thomas Svaneborg of “The Great Tax Robbery”. “They were perceived by tax authorities as very trustworthy, and all European countries had agreements with the US, so these plans could claim 100% of withheld taxes.”
But in 2011, a clerk in the Bonn Federal Central Tax Office, who was interviewed by the German media team and has remained anonymous, came across tax refund applications that looked dubious. They were from a single American pension fund that had bought, then quickly sold, $7 billion in German stock. Now it wanted a tax refund of $60 million. The fund had just one beneficiary.
Instead of paying the refund, the clerk made inquiries. She soon received a peppery letter from a German law firm that threatened to hold her “PERSONALLY” accountable “under criminal, disciplinary and liability law”. The clerk reported all of this to prosecutors, which ultimately led to the trial in Bonn.
The cum-ex reckoning has already begun. Several banks have been fined (Deutsche Bank, UniCredit), one has apologised (Macquarie), others have pledged cooperation with investigators (Santander, Deutsche Bank) and two are insolvent. If the Bonn trial ends in convictions, stiff penalties are expected.
“They won’t even have to prove that the banks were complicit or that the banks were trying to evade taxes,” said Dierk Brandenburg of Scope, a credit-rating agency in London. “The fact that they benefited means they have to give the money back.”