Dubious deals Macquarie CEO Moore likely a suspect in German tax investigation

German prosecutors want to question the outgoing CEO of Australian investment bank Macquarie, Nicholas Moore, and his successor. Tax avoidance deals were approved at the bank’s highest levels, Handelsblatt learned.
Looking forward to their trip to Germany.

A German prosecutor has set her sights on one of Australia’s most successful and best-paid executives: Nicholas Moore. Anne Brorhilker, a public prosecutor in the city of Cologne, wants to question the boss of Macquarie and dozens of other bankers over dubious tax deals.

The bank confirmed Friday that both Mr. Moore, who stands down as CEO in November, and his successor Shemara Wikramanayake, “are likely to be formally classified under German law as persons of interest or suspects.” The Cologne Prosecutors Office could interview up to 30 current or former Macquarie staff, said think tank Australian Institute. Macquarie, which is known as the “millionaires factory” down under, is cooperating with the authorities.

Handelsblatt obtained a large number of memos and emails related to the case, which indicate that the top of the Australian bank was aware of the transactions, including Mr. Moore and his successor, Shemara Wikramanayake. The latter led the business, which carried out the dealings.

After ten years as Macquarie CEO, Mr. Moore unexpectedly announced his resignation in July. The company, which operates as a retail and investment bank and as an asset manager, denied there is any connection between his decision and the tax investigation. Mr. Moore, who makes around €1 million ($1.2 million) a month, is an expert in Australian tax laws.

The Cologne Prosecutors Office, which declined to comment, suspects the bank and its partners of illegally claiming €462 million in tax benefits, according to the documents seen by Handelsblatt. Macquarie, tax advisors and investors, including US pension funds, engaged in share trading deals which ran into the billions of euros and date back to 2010 and 2011.

Informing the board

The German probe relates to Macquarie’s alleged participation in “cum ex” trading, also known as “dividend stripping.” It is a scheme in which investors borrow money to purchase shares shortly before the dividend payout date and then sell the shares at a loss afterward. (The Latin words cum and ex refer to buying and selling stocks with (“cum”) and without (“ex”) dividend.) Investors can offset the loss by claiming exemptions against capital gains taxes, which can be as high as 25 percent. The German government considers dividend stripping a form of tax avoidance and outlawed the practice in 2012, although regulators signaled its unlawfulness as early as 2010.

The hustle was widespread for at least a decade before the loophole was officially closed. Around 130 German and international banks, as well as investment funds and high-net-worth individuals, are thought to have participated. The cost to German taxpayers may have been as high as €12 billion.

Macquarie dealt with Germany’s cum-ex mastermind Hanno Berger, a former, German government tax inspector turned high-profile tax avoidance consultant. “Tax optimizer” was his preferred term. Mr. Berger’s relations with Macquarie go back as far as 2004, when he contacted the bank, promising to advise on “structuring and implementing various tax deferral models.” His key contact at the bank was Axel von Rosen, then head of Macquarie’s Munich office. Mr. von Rosen, who declined to comment, and Mr. Berger are now both under investigation. Mr. Berger denied all wrongdoing, telling Handelsblatt that “Macquarie’s behavior was clearly completely legal.”

The Australian bank had many irons in the cum-ex fire: it controlled the scheme, lent out capital to make it happen, and sometimes acted as a custodian bank, according to the documents. Over time, Macquarie’s cum-ex deals grew larger. Several offices coordinated their approach: The London office would buy German shares from the Sydney office, and vice versa. The key was to drive up the volume of stock traded: the bigger the volume, the bigger the tax reclaim. And the bigger the profits.

Profits increased so much that senior management was alerted. On September 20, 2010, Peter Lucas, head of Macquarie Specialized Investment Solutions, wrote a detailed memo to Mr. Moore. “The benefit derived by investors in the current transaction arises because there is effectively a double crediting of the tax credits attaching to the dividend,” he wrote. A month later, Mr. Lucas wrote a memo to the board, estimating the “net return on economic capital” to be 304.7 percent, but acknowledged there was a risk "German authorities may seek to deny tax reclaims and take some other action against parties involved."

In September of that year, Freshfields Bruckhaus Deringer, a prestigious London law firm advising Macquarie, wrote to Australian executives, advising them that German authorities would soon retrospectively invalidate multiple cum-ex reclamations. In October 2010, when Mr. Berger ran into problems with some cum-ex deals, Mr. von Rosen emailed him: “Nicholas Moore, our CEO, wants the transaction and that’s why it will happen."

Mr. Berger worked out a restructured form of the trade, going through American pension funds. Macquarie proceeded to lend six different American funds a total of €3.3 billion to continue the trade. Ms. Brorhilker, the Cologne prosecutor, and her team claim Macquarie’s cum-ex dealings would have cost the state €462 million in foregone taxes. However, by 2011 federal tax authorities were suspicious, and refused to pay out to Macquarie’s American partners.

So far, Macquarie has successfully brushed its German tax troubles under the carpet. In 2016, it paid around €100 million in fines, taxes and interest for its cum-ex dealings between 2006 and 2009, but this went unreported in the Australian press. Thanks to Ms. Brorhilker, this changed. Her case could haunt Mr. Moore and his successor, Ms. Wikramanayake, for years to come.

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