The list of international suspects is illustrious: Deutsche Bank in Frankfurt, Barclays of London, BNP Paribas in Paris, Goldman Sachs in New York, UBS in Zürich. These are just a few of the 129 financial institutions implicated in wholesale tax manipulation in share dealing between 2007 and 2012, Handelsblatt has learned.
The companies are accused of lowering capital-gains taxes by manipulating shareholdings around dividend payment dates. Insiders say dividend stripping may have cost the German taxpayer about €700 million (about $750 million) in dishonestly acquired tax reimbursements. A bank heist on a huge scale, they say, but with the banks as perpetrators rather than victims.
Tax investigators in the industrial city of Wuppertal in western Germany believe they have all the evidence they need to put a definitive end to a lucrative tax dodge going back almost 20 years. In September of last year, the state government of North Rhine-Westphalia paid €5 million ($5.4 million) for a USB stick containing years' worth of detailed information about banks’ and their clients’ dividend stripping.
Insiders say dividend stripping may have cost the German taxpayer about €700 million.
The material sold by the tipster included details on where to find more evidence in bank computer networks. This should be enough, investigators said, to reveal in detail how middlemen colluded to arrange complex swap and share resale deals to generate illicit dividend payments.
The deals generated huge tax reimbursements, with tax authorities sometimes paying several times on the same transaction. Sums of €30 million may have gone to Deutsche Bank alone, according to this information. In a statement, Deutsche Bank said it never participated in “organized” dividend stripping, although it was possible some customers did. Commerzbank, which may have gained €11 million in ill-gotten rebates, declined to comment on the reports.
In recent years, some companies and wealthy individuals have come clean about dividend stripping. HSH Nordbank, based in Hamburg, has already returned €127 million to the tax authorities. The state-owned Landesbank Baden-Württemberg, or LBBW in Stuttgart, paid back €150 million. And in the biggest case of its kind, Hypo-Vereinsbank, a unit of Italy's UniCredit, paid back €250 million last summer, as well as a fine of around €10 million to settle criminal prosecutions.
But all this may be small compared to the new wave of investigations and possible prosecutions. The new information marks a turning point, thanks to information from a single source with apparently excellent access to many institutions active in dividend-stripping schemes.
Little is known about this source, except that he is a financial professional and is not German. His anonymity has been carefully guarded, with investigators referring to him only by a pseudonym: “Paul Smith.”
The hand-over of “Paul Smith’s” USB stick to tax authorities in September was the culmination of nearly a year of negotiations. The process of winning his cooperation, Handelsblatt has learned, unfolded over meetings in hotel lobbies and at other locations in southwest Germany close to the Swiss and French borders.
“Paul Smith” knew very well the value of the information he had. He also chose his customers with care. An energetic finance minister, Norbert Walter-Borjans, has led the state of North Rhine-Westphalia, home to Düsseldorf, Bonn and Cologne, to aggressively pursue tax evasion. In short, the state government offered top dollar to buy incriminating information from whistleblowers. This cash-for-data policy, condemned by some governments, is thought to have brought in €2 billion in fines and unpaid taxes.
The informant in this new round of investigation, according to insiders, initially demanded a breathtaking €35 million for the information.
His arithmetic was simple, and logical from his point of view. If the data was potentially worth €700 million to the tax authorities, then a 5 percent cut for a crucial intermediary was not unreasonable, he argued.
Apart from that, “Paul Smith” argued he would need a lot of money for his own protection. The danger here was less from potentially vengeful tax evaders than from other tax authorities. The Swiss government has been known to arrest and incarcerate financial whistleblowers that cause trouble for the nation's oh-so-private banks. One whistleblower killed himself in Swiss custody not long after receiving €2.5 million from North Rhine-Westphalia.
It took many months of haggling to bring down the price. Finally, at the end of August, the contours of a deal emerged. The tax authorities would pay €4 million up front, with another €1 million to follow, in return for a kind of after-sales service: “Paul Smith” would help to build prosecution cases, guiding investigators through the trove of transaction records and emails on his valuable USB stick.
Legally, the key to any criminal prosecution will be showing collusion between parties involved in dividend stripping.
His information may be the last nail in the coffin of a scheme that goes back to 1999, when Germany’s Finance Court opened a cluster of loopholes regarding the taxing of share sales. This paved the way for dozens of German banks to organize elaborate sale and re-sale schemes to create tax advantages out of thin air.
The trade in this kind of business got so big so fast that in 2002, the Federation of German Banks wrote a preemptive letter to the federal Finance Ministry. It more or less said: We know these deals might look sketchy, but they are legal, OK?
In 2007, the German parliament passed laws to try to end dividend stripping. But lawmakers neglected to address the activities of international banks until five years later. A host of prestigious foreign banks continued the trade. The Paul Smith USB stick has detailed information on the activities of many of these foreign entities.
Mr. Walter-Borjans, the finance minister in North Rhine Westphalia, has long had his sights on dividend stripping. In the past, he has called the practice “criminal fraud.” That’s easily said but hard to prove. In legal terms, the key part of criminal prosecution is to prove collusion between parties in dividend stripping arrangements.
The sense that they were buying concrete evidence of collusion is the real reason why tax investigators paid Paul Smith such a high price for his USB stick. The material they paid for can likely attach names and faces to anonymous dividend-stripping share deals over the last decade and a half.
Paul Smith last came to Wuppertal, a small industrial city in North Rhine-Westphalia, shortly before Christmas to give what in effect was a three-hour seminar on how dividend stripping worked. The tax authorities canceled a second meeting, saying they had all the information they needed. The cases were ready to go ahead.
Sönke Iwersen leads Handelsblatt team of investigative reporters. To contact him: [email protected]. Volker Votsmeier is an editor with Handelsblatt's investigative reporting team. To contact him: [email protected].