Germany’s largest tax evasion investigation: Challenges and delays in cum-ex prosecutions

Leaders League: How large is the scope of cum-ex-trade investigations in Germany?

Björn Kruse: The individuals concerned and the corporates involved are accused of deliberately trading large volumes of shares over the dividend record date in order to receive refunds of capital gains tax, even though the tax had previously already been paid – a so-called “double dip”. Amongst other things, investment funds worth millions were set up with the sole aim of carrying out cum-ex trades during what is known as divided season. In this context, German and non-domestic banks, brokers as well as legal and tax advisors are alleged to have been involved in setting up these funds and their trades.

On July 28th 2021, the Federal Court of Justice (Bundesgerichtshof) found – as expected –  Cum-Ex transactions unlawful from a criminal law perspective due to incorrect or incomplete applications for tax returns and the involvement of short-sellers who were not debited with the capital gains tax.

Currently, the Cologne Public Prosecutor’s Office is conducting particularly extensive investigations, which involve over 1,700 suspects. Individuals face prison sentences of up to 10 years. Moreover, income derived from cum-ex trades is subject to disgorgement.

The prosecutorial enforcement measures are far-reaching. Numerous searches were carried out in private homes and financial institutions. In addition, email accounts, data and documents of numerous employees, including those of financial companies, were seized for a period reaching back many years.

The unprecedented scope of these criminal investigations has made cum-ex proceedings very challenging for the authorities, leading to a de facto standstill of certain proceedings for months and sometimes years.

What are the reasons for this?

First, the flood of data: The investigating authorities have requested or secured large amounts of data with a significantly wide scope. The evaluation of this data is obviously very time-consuming and cost-intensive. Furthermore, the investigation teams seem to be understaffed.

Secondly, the rather unspecific and broad nature of the allegations: This does obviously not refer to the core cum-ex case, in which trading strategies were demonstrably and deliberately implemented by individuals in order to obtain an unlawful tax refund. Unspecific and broad allegations refer to alleged “modifications” of the classic cum-ex trade, including trading in ADRs (American Depository Receipts), reverse market claims and connections to cum-cum trades. As a result, even after years of investigations, the specific allegations are often unclear.

Thirdly, investigations against secondary actors: The delays in the investigations are also due to the fact that a large proportion of the investigations concern individuals who had mainly administrative tasks. Those individuals are accused in cum-ex proceedings (in relation to alleged tax evasion in the millions) because they received copies of emails, in some cases over 15 years ago. These individuals were by no means decision-makers in the design and execution of cum-ex transactions. In fact, the individuals involved understood nothing about cum-ex at the time. There were also no special bonuses or benefits from cum-ex for many of them. The investigative theory that “everyone knew everything” is therefore – in the authors view – incorrect.

As a result, many investigation proceedings will most likely last for a number of more years, without an unforeseeable outcome. In many cases, criminal defense attorneys hardly make any substantive submissions during the investigation because prosecutorial authorities oftentimes fail to respond adequately or at all. Furthermore, the involved criminal defense attorneys question whether cooperation of individuals or companies leads to any significant benefits.

Notwithstanding the above, prosecutorial authorities have achieved significant successes in the investigation and prosecution of cum-ex on a nationwide level. While this is commendable, the rule of law requires criminal prosecution to be conducted in an efficient and effective manner within a reasonable timeframe in all cases. The German statute of limitations of up to 37.5 years, must not lead to a lack of commitment to conclude criminal proceedings and to focus on major players, especially in light of the life expectancy and recall capabilities of potential witnesses.