SPAIN’S Santander is the latest bank to be caught up in Germany’s biggest post-war fraud investigation involving a share-trading scheme that the authorities say cost taxpayers billions.
In June, prosecutors in Cologne opened a tax investigation into Santander, confidential documents relating to a state prosecutors’ investigation seen by Reuters and other European news organisations reveal for the first time.
Santander’s role in the scheme was to carry out trades, the prosecutors say, as one of many parties involved. They are also looking at Australia’s Macquarie Bank and Germany’s Deutsche Bank, as part of the broader investigation.
A letter from prosecutors to Santander’s lawyers sent on June 4 shows that they suspect the bank of having “planned and executed trades” that facilitated “severe tax evasion” from 2007 through 2011.
The cases relate to so-called “cum-ex” dividend stripping, a practice of buying shares shortly before a dividend is declared (cum-dividend) and selling them when they go ex-dividend – which can mean booking a notional loss on the shares while pocketing the shareholder payout.
A Santander spokesman said that the bank was “fully co-operating” with German authorities and conducting its own internal investigation. The bank “doesn’t tolerate behaviour” that fails to comply with the rules and laws in the market where it operates, he said, adding “if our investigations do identify misconduct, we will take appropriate action”.
Reuters spoke to bankers, officials and people directly involved in the probe and reviewed thousands of pages of internal bank files, correspondence and legal papers obtained as part of a European media investigation called the “cum-ex files”, co-ordinated by non-profit newsroom Correctiv. The prosecutors say the players in the cum-ex scheme misled the German government into thinking a stock had multiple owners on its dividend payday who were each owed a dividend and a dividend tax credit.
The prosecutors say the scheme was illegal and misled the government into paying tax refunds. A spokesman for Santander declined to comment on whether it had broken the law while a spokesman for Macquarie, which is also under investigation, said it had believed the practice to be legal.
The documents show that the Cologne prosecutors closed in on Santander and other banks this year as the investigation, which began in April 2013, rapidly accelerated.
The models were designed to generate multiple tax rebates, prosecutors say. In essence, here is how it worked, according to the documents viewed by Reuters:
A bank would agree to sell a company stock, for example to a pension fund, before the dividend payout but delivered it after it had been paid. The bank and the fund would both reclaim withholding tax.
Sometimes banks sold shares they did not own and agreed to buy them later in a legitimate practice known as short selling. The stock was then traded rapidly around a syndicate of banks, investors and hedge funds to create the impression of numerous owners, prosecutors say. The profits from the deals were shared.
To generate bigger profits, the pensions funds could also buy large volumes of stocks, using loans from banks.
The German tax office wrote to the Cologne prosecutors to say there were “concrete indications” that Santander had acted as a short seller. Three pension funds had also used loans from Macquarie, people with direct knowledge of the matter say.
“Macquarie will continue to co-operate fully with the German authorities,” a Macquarie spokesman said. “It has already resolved its two other matters involving German dividend trading that took place between 2006 and 2009.”
The spokesman declined to say how they were resolved.
Similar investigations have been opened in Frankfurt and Munich, but Cologne, whose prosecutors specialise in international tax crime, made a breakthrough when at least six people involved in the trading gave detailed evidence, according to the documents.
Other banks, including UniCredit’s German arm, have acknowledged they were also involved in such trading.
A spokeswoman for UniCredit said its German unit had been involved in cum-ex trading but that all criminal proceedings had since been terminated after, among other things, the payment of fines. She declined to comment further.
A spokesman for Deutsche Bank said it had not participated in an “organised cum-ex market” but that it had been “involved in some of its clients’ cum-ex transactions”. It said it was co-operating with the authorities.
Referring to all the banks involved, Norbert Walter-Borjans, the former finance minister of North Rhine-Westphalia, which includes Cologne, said: “They grabbed the kitty that had been paid for by ordinary tax payers.
“It is clear that it was against the law. How can it be legal to get something back twice or three times that has been paid only once?” he said.
According to the prosecutors, the scheme was promoted by German tax inspector-turned-tax adviser Hanno Mr Berger and others.
He advised Macquarie on cum-ex trading, according to a letter seen by Reuters which was sent by Mr Berger to a Macquarie employee in March 2008.
Mr Berger told Reuters he also provided advice to Macquarie on the scheme in later years but he said he was not paid for it. The Macquarie spokesman declined to comment on Mr Berger or the letter.
Macquarie said last month its incoming and outgoing chief executives are expected to be named as suspects by prosecutors. The pair were aware of the reputational risk to the bank of the trades, the documents show.
Mr Berger, the central suspect in the investigation who is living in exile in the Swiss Alps, said the banks used a legitimate loophole, which was closed in 2012, and did not break the law.
“They (the German state) cannot punish others for their mistakes,” he told Reuters.
Some German officials and prosecutors refute this claim, noting that Germany made attempts to stamp out the practice by changing and clarifying the law in 2007, 2009 and 2012. One top German official, who asked not to be named, said those efforts made clear the trading was illegal.
German authorities estimate the scheme cost the state €5.6bn in tax rebates that should never have been paid, while some experts believe the damage could be €10bn.
The state prosecutor in Cologne declined to comment.
The documents show that the prosecutors in Cologne made a major breakthrough last year when a group of bankers, including a former Macquarie employee, offered information that showed Santander, Macquarie and others profited from the scheme.