The cum-ex scam stole $60b from European tax authorities: it's monumentally boring, complicated, and very, very important

By Cory Doctorow

Cum-ex (previously) is a technical, boring financial engineering technique that lets fraudsters file multiple tax-refund claims for the same stock transactions (they called it "dividend arbitrage"); from 2006-2011, the EU's largest, most respectable banks, law firms, and investors used the scam to steal $60,000,000,000.

Cum-ex is the kind of scam that the finance sector excels at: a socially useless financial engineering marvel that makes staggeringly rich people much richer, protected by a thicket of dull, deliberately complexified terminology and tactics that exist solely to obfuscate the obvious fraud underway.

A few bankers have gone on trial for criminal fraud for their role in cum-ex, but so far most of the perpetrators have gotten away with it, keeping the money (one trader, Sanjay Shah, relocated from London to Dubai and bought a $1.3m yacht he calls the Cum-Ex).

But German prosecutors have embarked on an aggressive program of prosecutions for everyone who profited from cum-ex, including the prominent lawyers who wrote legal opinions arguing that cum-ex was legal. They are launching 400 prosecutions stemming from 56 investigations. Among those is Hanno Berger, a former German state tax auditor who switched sides and became a key player in the theft.

Berger is a revered European finance law scholar, and his work was key to conferring a halo of lawfulness to the otherwise obvious scam. In private, Berger was more frank. One of the lawyers who worked with him says that he told the lawyers he supervised that they should quit if they didn't have the stomach for raiding the German state's coffers: "Whoever has a problem with the fact that because of our work there are fewer kindergartens being built, here’s the door."

The masterminds of the scam have roots in New York finance, but their perpetrated their crimes in the EU, where they believed that regulators would be less diligent and also less vengeful, should they get caught out.

The worst of the cum-ex raids took place immediately after the 2008 crash, when the same institutions that were stealing billions from national treasuries were also relying on those treasuries for massive bailouts that kept them from going bankrupt.

The lawyers who backed these firms threatened tax-inspectors who flagged their transactions: one clerk in the Bonn Federal Tax Office was threatened with "criminal, disciplinary and liability law" if she pursued her complaint.

Many of the banks that participated are now out of business, others are cooperating with authorities.

“Anyone who stood in the way of this trade was swept aside, and those who enabled it were promoted,” the whistle-blower said in a follow-up phone call. “But it was widely regarded as insanity inside the bank for it to be extracting money from sovereign treasuries, particularly after the entire sector had been supported by the public purse.”

American banks conducted their cum-ex trades overseas, rather than at home, out of fear, the whistle-blower said. Specifically, he mentioned a 2008 Senate investigation into “dividend tax abuse” that found it was depriving the Treasury of $100 billion every year. The report led to a ban on dividend arbitrage tied to stock in United States corporations.

But nothing prevented American bankers from conducting such trades with foreign companies on foreign soil.

It May Be the Biggest Tax Heist Ever. And Europe Wants Justice. [David Segal/New York Times]

(Image: Adam Smith, CC BY-SA)