Dividend stripping Swiss bank turns tables on German lawyer in tax evasion case

A German attorney faces an unusual trial in Switzerland for exposing a financial scandal involving J. Safra Sarasin, the Basel-based lender.
Quelle: Bloomberg
Worked magic with somebody else's money.
(Source: Bloomberg)

Eckart Seith helped to uncover one of Germany’s biggest tax avoidance scandals but now faces prosecution in Switzerland, home to the bank he identified as an alleged culprit, on a charge of industrial espionage.

The case is politically sensitive and the German embassy in Switzerland will dispatch an official to monitor proceedings that are due to open in a court in Zurich on March 26. If things turn out badly for Seith, a 61-year-old German lawyer, he could be sentenced to 3-1/2 years in prison.

His testimony contributed to uncovering so-called dividend stripping that deprived the German state of some €12 billion ($13.6 billion) through unwarranted tax refunds.

The practice, shut down in 2011 when authorities closed the loophole that had made it possible, involves buying shares in a company just before it pays out dividends to shareholders, and then selling them again shortly afterwards. By carrying out these transactions with borrowed money – short-selling – the investors were able to sell the shares at a loss without losing any actual money.

The “loss” led them to claim multiple tax exemptions, ultimately lowering the taxes they had to pay on their overall capital gains revenues.

Profits from German taxes

Prosecutors across Germany have opened investigations with mountains of files piling up in Munich, Stuttgart, Frankfurt and Düsseldorf. The biggest has been amassed by officials in Cologne following a criminal complaint filed by Seith.

The lawyer has delved into the bewildering jungles of German tax law for his client Erwin Müller, founder of the Müller drugstore chain. Müller had invested in a number of dividend-stripping deals and insisted he didn’t know that his profit on the deals in effect came from German tax coffers.

In 2011, when he invested a further €50 million in another dividend-stripping venture, the tax authority refused to play ball and Müller lost his return along with the bulk of his investment. That’s when he turned to Seith. The lawyer blamed Swiss bank J. Safra Sarasin which had recommended the deals and had earned a fee with its advice.

Müller sued the bank for damages and told Seith to inform the Federal Central Tax Office in early 2013. A criminal complaint against the bank followed at the end of 2013 on suspicion of “fraud in a particularly serious case.”

“We could prove with our findings that the bank and its helpers defrauded customers,” said Seith. He and Müller handed all the information he had gathered to Cologne state prosecutor Anne Brorhilker: internal Sarasin presentations, invoices, client lists and contracts.

Defendant strikes back

That, in turn, made Sarasin suspicious. Where did Seith get all those internal documents? It responded with its own criminal complaint – betrayal of secrets – against alleged informants.

Swiss authorities duly arrested Volker S., a former senior employee of Sarasin responsible for compliance, and customer adviser Bernhard V. on suspicion of meeting Seith and giving him incriminating documents about the bank. They will join him in the dock next month.

The gloves are off on both sides. Seith disclosed an email by a high-ranking Sarasin lawyer to a Swiss prosecutor dated July 30, 2014, in which he appeared to offer a surveillance service. “We have information that lawyer Eckart Seith is in Mallorca,” the lawyer wrote. “I can provide you with further details if that is of interest.” The prosecutor answered an hour later: “Thank you for your message.”

Seith doesn’t know what was in the further correspondence, but the tone suggests that the bank and the Swiss authorities were in touch about him. Did Sarasin have Seith spied on and then report back to the prosecutor’s office? Neither the bank nor prosecutors wanted to comment on the email exchange.

Swoop on Sarasin

The details Seith gave German prosecutors got the Swiss bank into a lot of trouble. German investigators and their Swiss colleagues searched more than 20 offices and homes in October 2014, including Sarasin offices in Basel and Zurich. They listed more than 30 people as suspects including Eric Sarasin, the deputy head of the bank. He left the lender in 2014 and the prosecutor’s office dropped its investigation against him for a payment of €200,000. But many other banks in Germany and abroad are under suspicion in the dividend-stripping scandal, with over 100 people facing charges in Cologne alone.

Eckart Seith believes the law is on his side. He has also managed to get back the millions of euros lost by his client, Erwin Müller. “The Stuttgart high court found that Herr Müller was not remotely aware of the true business model of the funds,” Seith said. “The court was also convinced that my client would never have taken up the bank’s offers if he had been.”

He sees the case against him as a test of Switzerland’s legal system. “This is about a German lawyer’s exposure of serious misconduct by a Swiss bank.” he said.

Sönke Iwersen leads Handelsblatt's team of investigative reporters. Volker Votsmeier is an investigative reporter for the publication. David Crossland adapted this story into English. To contact the authors: [email protected][email protected]