Dividend stripping German police raids Freshfields law firm in tax-avoidance probe

Investigations into a tax scandal led to a second raid on the Frankfurt office of British law firm Freshfields Bruckhaus Deringer. It is suspected of providing legal cover for dividend stripping.
Quelle: dpa
(Source: dpa)

For the second time in a year, prosecutors this week raided the Frankfurt offices of the prestigious law firm Freshfields Bruckhaus Deringer. The raid marked an extension of the investigation of Freshfields’ involvement in dividend stripping, Frankfurt state prosecutors confirmed to Handelsblatt.

Although authorities refused to name individual suspects, there are now more than one hundred people under investigation in the probe. Dividend stripping (also known as “cum-ex”) was a form of tax minimization which claimed duplicate tax refunds on certain types of share dealing. The practice is now illegal and is thought to have cost the German taxpayer €12 billion ($13.7 billion).

Dozens of German banks and financial firms have been investigated, including Commerzbank, Deutsche Bank and the private bank M.M. Warburg. HSH Nordbank and LBBW, two state-backed regional banks, have been forced to repay hundreds of millions of euros. This month, prosecutors raided the Munich offices of asset manager BlackRock. Senior executives at the Australian bank Macquarie have been targeted by Cologne prosecutors.

Partners and tax experts under investigation

Handelsblatt has learned that the Freshfields raid focused on the firm’s relationship to Maple Bank, a Canadian lender whose German subsidiary was suspended by authorities investigating dividend stripping. It declared insolvency shortly thereafter. Those under investigation include two partners of the UK-based law firm, as well as one of its leading taxation specialists, prosecutors said.

Freshfields confirmed that the raid had taken place, but refused to answer specific questions. A spokesman for the firm said: “We remain convinced that our advice was legally sound. It was always in keeping with the current state of the law. We look forward to any court case with complete confidence.”

Until recently, the British law firm had every reason to be confident. As well as a distinguished, 175-year history, the German subsidiary had annual revenues of €405 million, with profits running at around €1.9 million per partner. Its declared goal is to be the best law firm in the world. But an unblemished reputation is crucial for this, and this has been thrown into doubt by the scandal.

“Tax optimization” was the technical term for Freshfields’ service to many dividend stripping clients. In other words, it advised them on the legal ramifications of the practice. As well as Maple Bank, clients included Deutsche Bank, Commerzbank, Dekabank, Barclays and Macquarie.

Trusting Freshfields' judgment

For many institutions, Freshfields’ judgment was enough to allay any doubts. Defense lawyers for Hanno Berger, a lawyer accused to masterminding many dividend stripping deals, including for Maple Bank, have submitted expert opinions from Freshfields as exonerating evidence in his case. They claim that Berger put absolute faith in the law firm's professional advice.

Berger is the main defendant in the Frankfurt dividend stripping investigation and co-accused in several other cases. After legal proceedings began, he moved to Switzerland, from where he continues to deny all charges, partly by referring to Freshfields’ expertise.

The first Freshfields raid took place in October 2017. A lawyer familiar with the Maple Bank case told Handelsblatt that the second raid suggests prosecutors have new prima facie evidence. Raids on major law firms are extremely rare, he said, and this one indicated that prosecutors had lost faith in Freshfields’ position.

In the past, Freshfields has had a close relationship with the German government. During the 2008 financial crisis, the company gave legal advice to the government, for which it was paid more than €5 million. In a widely-criticized move, the then finance minister later gave a well-remunerated speech at the firm.

In 2016, a parliamentary committee investigating dividend stripping found that Freshfields’ legal advice had regularly been used to assuage the doubts of auditors, regulators and investors. The parliamentary report condemned the law firm for continuing to support dividend stripping long after the practice was under legal investigation.

After Freshfields repeatedly refused to submit documents to the parliamentary inquiry, the committee took the unusual step of taking legal action against the firm to force disclosure. Ultimately Germany’s Federal Fiscal Court found in favor of Freshfields in 2016.

Ironically, documents which the law firm successfully withheld from parliament have now been seized by Frankfurt prosecutors.

Sönke Iwersen leads Handelsblatt team of investigative reporters. Volker Votsmeier is an investigative reporter with Handelsblatt. To contact the authors: [email protected], [email protected]