Dividend Stripping Tax Scandal Blamed on Communication Breakdown

The German government lost out on billions of euros because of a dividend-stripping scandal. Now a parliamentary committee investigating the affair has blamed federal regulators for not flagging up the matter.
Financial regulator BaFin has found itself in the firing line.

The biggest question over a massive dividend-stripping scandal rocking Germany is how it continued for so long.

For years the government unwittingly issued refunds on capital gains taxes that had never been paid in the first place, lining the pockets of investors and banks. In total, taxpayers lost up to €12 billion ($13.3 billion) between 2002 and 2012 because of the dividend-stripping practice.

One institution, Canada's Maple Bank, the first bank to be confronted with demands for high tax repayments, has already collapsed. German banks HypoVereinsbank, HSH, LBBW and DZ have all subsequently repaid taxes.

A parliamentary investigation committee was created in April to figure out just how this tax fraud could have gone on for years without anyone stepping in. The lawmakers have now found an explanation: the lack of cooperation between government agencies. The Federal Financial Supervisory Authority, or BaFin, which oversees banks, stayed away from cum-ex deals as they assumed it was a matter for the fiscal authorities.

"BaFin didn’t understand that cum-ex was a business model and not just a tax issue," Green Party fiscal expert Gerhard Schick told Handelsblatt.

In cum-ex transactions, shares with ("cum") and without ("ex") subscription rights were sold around the dividend payment date. Buyers and sellers claimed refunds on the capital gains tax, even though it had only been paid once. Law firms had long touted this as a legal practice and offered banks the corresponding tax savings models. The lucrative practice was not stopped until 2012.

I was surprised how difficult it was for BaFin to examine these cases. Andreas Schwarz, Social Democratic Party policy expert

BaFin only began to get alarmed by the scale of cum-ex deals last year, when it became evident that the banks that had offered the model to their customers on a large scale could face substantial tax and penalty payments. Public prosecutors in Cologne, Frankfurt and Munich pounced on the opportunity to collect billions for the treasury.

BaFin is defending itself against accusations from lawmakers, noting that it was only in November 2015 that laws were amended to allow representatives of the finance ministry and other fiscal authorities to exchange information. "The poor communication in the past was not due to a lack of willingness on BaFin's part, but to the legal requirements relating to confidentiality," a BaFin spokesman told Handelsblatt.

Since the change in the law, he added, open communication has been "actively experienced, and includes meetings with prosecutors, participating in training classes and administrative cooperation between BaFin and public prosecutor's offices and tax investigation authorities."

Mr. Schick is unwilling to accept BaFin's explanation. "In the cum-ex situation, BaFin completely disgraced itself through its disinterest, lack of knowledge and inactivity," he said, noting that in the business section of the finance ministry, one hand doesn’t know what the other one is doing. "There was and apparently still is no cooperation between the tax section and the banking section, even though banks' noxious tax tricks have been obvious for decades," said Mr. Schick.



Transcripts of investigation committee meetings and the assessments of coalition lawmakers validate this view. Investigation committee member Andreas Schwarz, a fiscal policy expert for the Social Democratic Party, the junior partner in Germany's coalition government, said he found it difficult to understand why the financial regulators were in the dark. "I was surprised how difficult it was for BaFin to examine these cases. I asked myself: Doesn’t anyone there read the newspaper? Why don't they just ask someone at the finance ministry, to which they report?" he told Handelsblatt.

The committee has now questioned former BaFin executive director Raimund Röseler and other employees, and has also analyzed internal emails. They conclude that the bank regulators did not communicate on a professional level with the fiscal authorities until November 2015. "A climate of open information sharing did not exist in the past," Mr. Röseler told the investigation committee.

Another problem the committee recognized is that BaFin relied very heavily on outside expertise and repeatedly commissioned expert reports from the four major accounting firms. "I see this as a conflict of interest, because the very same accounting firms also work for the banks," said Mr. Schwarz, adding that he found it "horrifying" that BaFin was so helpless in its interactions with banks.

Fritz Güntzler, a fiscal policy expert from the Christian Democrats, the senior coalition partner, partly defends BaFin over the accusation that it should have been aware of tax discrepancies. "It isn't BaFin's job to examine tax models. That's up to the tax administration," he told Handelsblatt.

"What we can learn from this is that the ties between BaFin and the tax authorities need to be stronger."


Donata Riedel covers economic policy for Handelsblatt. Frank Drost is a Handelsblatt Editor in Berlin, covering financial supervision and banks. [email protected] and [email protected]