As a bank partially-owned by the German state, Commerzbank may have come clean a little late. About six years too late, in fact.
Commerzbank, Germany’s second-largest bank, was bailed out by the German government at the end of 2008 and the state still owns 17 percent of the bank. On Tuesday, more than a hundred government tax investigators and police raided the bank’s headquarters in Frankfurt on suspicion the bank facilitated tax evasion through dubious offshore deals that were processed through Luxembourg.
The cases stem from nearly 10 years ago, Commerzbank said, and insists it no longer engages in any such questionable practices. But the fact that the bank failed to disclose its role over the past six years of government control has left politicians and policymakers in Germany up in arms.
Many politicians are calling for new and tougher regulations, including stiffer punishments for wrongdoing.
The German bank may not have not done enough to take less risks and act more responsibly, something the financial sector has promised to do following the financial meltdown and bank bailouts of 2008 and 2009. Germany's Süddeutsche Zeitung reported that Commerzbank only began cutting customers that are still under scrutiny from the tax authorities this year.
We need better control mechanisms for the supervisors in the German banking act, which should include the option to revoke a license. Norbert Walter-Borjans, Finance minister of German state North Rhine-Westphalia
“Over the past decades, a financial industry has emerged which has offered profits for a few to the dismay of many,” Norbert Walter-Borjans, finance minister of German state North Rhine-Westphalia, told news agency Reuters.
“We need better control mechanisms for the supervisors in German banking law, which should include the option to revoke a license,” said Mr. Walter-Borjans, who is a member of the federal ruling coalition party Social Democrats.
The German union of criminal investigators, Bund Deutscher Kriminalbeamter, also called for stricter laws. “The federal government has to acknowledge now that only corporate law, which includes new means of sanctions, can protect against organized financial crimes,” the group’s deputy chairman, Sebastian Fiedler, said in a statement.
Currently, only a maximum fine of €10 million, or $11.4 million, was possible in cases of money laundering or tax evasion, which “of course is a joke” when compared with money flows running in the hundreds of millions, Mr. Fiedler said.
As the searches of Commerzbank's offices will take a few more days, it is still difficult to assess the full scope of the scandal. While many in financial circles are expecting more raids in the coming weeks, it is unclear to what extent the suspicions will also be directed against other lenders. Some German media have reported that as many as three other banks in Germany could face raids by the tax authorities.
Deutsche Bank, which is involved in hundreds of other investigations and law suits in Germany, Britain and the United States over other issues, has not been a target of the tax investigators, financial insiders told Handelsblatt.
Politicians also argued the government should have spotted the problems at Commerzbank sooner. Though it has the largest stake in the bank, Berlin has stayed out of the day-to-day management of the financial firm.
Axel Troost, deputy chairman of the opposition Left Party, said the German state has acted too late. “The ironic thing is that the federal government, as an owner following partial nationalization, should have cleared up and abolished such activities long ago. Instead, it preferred not to exert any influence over business operations.”
Fighting tax evasion and closing legal loopholes has become a major political theme since the financial crisis. Relatively low tax payments by large corporations or wealthy individuals have exacerbated government budget deficits and are unpopular with the electorate, which has felt the brunt of the economic downturn.
Banks in Luxembourg, Switzerland have largely been forced to give up their bank secrecy laws, while the leaders of the world’s top 20 nations, who come together as a bloc known as the G20, agreed in September to exchange tax information in a bid to crack down on tax avoidance by companies and individuals.
As in other Western countries, Germany has increased investigations into tax evasion. Over the years, states have received or bought data of Germans holding assets in Luxembourg, Switzerland or other tax havens, such as Liechtenstein. Data bought in 2008 led to the resignation of the then-chief executive of Deutsche Post, Klaus Zumwinkel, who was found on the list.
Fighting tax evasion and closing legal loopholes has become a political theme since the financial crisis.
Faced with the risk of getting caught, some Germans have admitted to hiding money. The former president of top soccer club Bayern Munich, Uli Hoeness, ended up in jail last year after admitting he hid €28.5 million from tax authorities. Currently, the chief executive of London-based bank HSBC, Stuart Gulliver, is under scrutiny for having money in a Swiss account, according to British newspaper The Guardian. HSBC has said Gulliver has paid taxes on the assets.
This week’s investigations in Germany are believed to be focused on Commerzbank and the former Dresdner Bank subsidiary in Luxembourg, which Commerzbank acquired six years ago. Germany's second-largest lender stressed that it is cooperating fully with authorities.
Because the dubious activities occurred in 2005 and earlier, current Commerzbank chief executive Martin Blessing isn’t the only executive affected. Supervisory Board Chairman Klaus-Peter Müller, who was CEO of Commerzbank from 2001 to 2008, could also come under pressure.
Three examples show just how expensive aiding and abetting tax evasion can be: Swiss banking giant UBS has already been ordered to pay the German treasury €300 million, or $342 million. Credit Suisse has paid €150 million and Julius Bär €50 million.
The Commerzbank investigations are based on a data set the state of North Rhine-Westphalia acquired for close to €1 million in 2014. With its new Organized Crime and Tax Evasion (EOKS) special unit, the state is now a pioneer in the fight against organized tax fraud. \
The current investigation is the unit's first big coup. EOKS and the Cologne public prosecutor's office cooperated in conducting the large-scale raid.
The investigations are aimed at loopholes that customers continued to exploit even after an amendment of the law in mid-2005. Since then, a European Union guideline has required withholding tax to be reported to the country where the bank customer lives. But many companies used complex corporate constructs to continue hiding their earnings. Companies in Panama apparently played an especially prominent role in the process.
The case casts Luxembourg in an unfavorable light, once again. The country's courts did not support the tax investigations, arguing that an initial suspicion was not sufficient. The Grand Duchy has been under pressure ever since it emerged in November that multinational corporations had used it to avoid paying taxes, at the expense of other E.U. countries.
Elisabeth Atzler, Frank Drost, Laura de la Motte, Diana Niedernhöfer and Volker Votsmeier are editors and correspondents with Handelsblatt. Gilbert Kreijger, an editor with Handelsblatt Global Edition, also contributed to this story. To contact the authors: [email protected]