‘The men who plundered Europe’: bankers on trial for siphoning €60bn

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Financial sector 'The men who plundered Europe': bankers on trial for siphoning €60bn

Martin Shields and Nick Diable are accused of tax fraud in ‘cum-ex’ scandal that exposes City’s pursuit of profit

The regional court in Bonn where two British bankers are on trial.
The regional court in Bonn where two British bankers are on trial. Photograph: Wolfgang Rattay/Reuters

They have been called “the men who plundered Europe”: a group of cowboy traders, seasoned tax lawyers and mathematical whizz kids who are alleged to have conspired in the heart of the City of London to siphon at least €60bn in taxpayers’ money from the state coffers of several EU countries.

In Britain, the so-called “cum-ex” scandal, named after the complex derivatives juggling act employed, gained little attention amid the frenzied debate around the UK’s departure from the European Union when the fraud scheme was discovered in 2017.

But in continental Europe what Le Monde has described as the “robbery of the century” has done almost as much to shape the view of Britain as Brexit itself. Dutch media has called it “organised crime in pinstripe suits” and one of the original German whistleblowers saying he now welcomes Britain’s exit from the EU in the hope it could weaken the influence of London investment banking on European financial institutions.

This week, a British former investment banker involved in developing the scheme for the first time gave the public an insight into how the scheme worked and what spurred on its architects.

Speaking at a regional court in Bonn, Martin Shields, one of two former bankers on trial for 34 instances of serious tax fraud between 2006 and 2011, painted a picture of a London banking scene which lured in the brightest scientists from the country’s top universities and used them to boost their profit margins – without teaching them about the moral and legal consequences of their actions in return.

Q&A

What is a cum-ex deal?

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A cum-ex deal, from the Latin meaning with-without, is a complex set of share transactions with the purpose of getting the state to reimburse a tax that was never paid in the first place.

Cum-ex transactions work by trading shares at high speed on or just before the dividend record date – the day the company checks its records to identify shareholders – and then claiming two or more refunds for capital gains tax which had in fact only been paid to the state once. Because the payout is automated, the trade can be repeated again and again.

Some financial experts have likened the practice to the banking equivalent of parents claiming child benefit for multiple children when they only have one.

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“This was the environment at that time: a financial industry that – at least as far as I could see – was geared towards maximum profit optimisation,” the 41-year-old told a packed courtroom on Wednesday.

“One tool to achieve this goal was tax optimisation: avoiding taxation as far as possible – and taking advantage of any opportunities that could be found or created. This was not the clandestine approach of a few. Rather, I saw it as the clear and openly communicated expectation of most major banks and their customers.”

Hailed as a maths prodigy at school, Shields accepted a junior position at Merrill Lynch after studying engineering, economics and management at Oxford University because the trading room floor offered him a thrilling, dynamic environment. He was not alone: of 120 engineers in his year group at university, Shields added, only five went into engineering.

Wearing a navy blue suit and the latest Apple Watch 5 with a white strap, Shields on Wednesday used a Powerpoint presentation to talk the court through the “cum-ex ecosystem” of labyrinthine trade chains he helped conceive and control, which prosecutors say cost the German state €450m. A translator tasked with rendering City trader jargon into German legalese was struggling to keep up.

The financial rewards were breathtaking: for the five years in which Shields practised cum-ex trades through Gibraltar-based investment vehicle Ballance Capital, his personal income amounted to €12m. In 2010 Shields and his wife managed to purchase a £9.7m mansion on Chelsea’s Egerton Crescent, followed by a €6m Edwardian terrace on Shrewsbury Road, Dublin’s most expensive residential street.

While Shields did not respond directly to the charges of serious tax fraud this week, he said in hindsight he had started to feel regret about devising the schemes, which hoovered up money that could have otherwise been spent on building roads, hospitals or nurseries.

He told the court: “I often ask myself whether if I had my time again I would do things differently. Knowing what I now know, the answer is obvious. I would not have involved myself in the cum-ex industry.”

The headquarters of HypoVereinsbank (HVB) in Munich. Facebook Twitter Pinterest
The headquarters of HypoVereinsbank (HVB) in Munich. Photograph: Johannes Simon/AFP/Getty Images

He had made the “difficult decision” to cooperate with the investigation, which increases his chance of reducing a potential 10-year jail service. Co-accused Nick Diable (39), who worked with Shields for Germany’s fourth largest bank HypoVereinsbank (HVB), will also give a testimony in the trial, which is expected to last until next year.

Shields said cum-ex trades were practised on an “industrial scale” in the first decade of the 21st century, and involved a vast network of banks, companies, brokers, lawyers and financial advisers. Even the most basic cum-ex deal involves at least 12 transactions.

The banks and financial institutions he mentioned in Wednesday’s and Thursday’s court session included Clearstream AG, a 100% owned subsidiary of Deutsche Börse AG that processes the dividend compensation payments and which Shields appeared to suggest played an active part in keeping the cum-ex bonanza going after German lawmakers tried to close a loophole in 2007.

A spokesman for Deutsche Börse, which was raided in connection with the wider investigation in August, said it was cooperating with the authorities.

During Shields’s appearance this week, the back benches of the court were packed with numerous lawyers representing high-profile banks and financial institutions that could be dragged into the scandal if the judge in Bonn rules that cum-ex trades did not merely exploit a legal loophole but violated the law at the time.

Three characters mentioned in the testimony were notable by their absence from the court proceedings: Shields’s long-time boss and later business partner Paul Mora, and the renowned German tax lawyer Hanno Berger, who allegedly introduced him to cum-ex methods at HVB. A third man, Dubai-based British citizen Sanjay Shah, is alleged to have copied their methods to defraud the Danish treasury on a vast scale.

Until 2015, Mora was a director of the Cinnamon Club, an opulent ​Indian restaurant located in a grade II-listed Victorian building next to the Department for Education and popular with politicians and business people. According to Die Zeit, the restaurant was where cum-ex deals were contrived and later celebrated, and one insider referred to it as the “cum-ex lounge”. Mora has denied wrongdoing, telling New Zealand media that all his trades were “approved by legal experts and undertaken in accordance with advice”.

In separate investigations into the same scheme, the justice minister of North-Rhine Westphalia said that Cologne prosecutors are now conducting 56 probes with a total of about 400 suspects related to cum-ex. More than 400 individuals and companies have been charged in connection with the scheme in Denmark.

Estimated losses include an estimated €31.8 bn Germany, at least €17bn for France, €4.5bn in Italy, €1.7bn in Denmark and €201m for Belgium

“The Cologne investigations have now reached a point that prosecutors say that cum-ex wasn’t a legal tax-driven trading strategy, but organised white-collar crime of unimaginable magnitude,” the minister said.

The alleged architects of the scheme

Hanno Berger

A prominent German tax official turned tax lawyer whose past clients include the owners of BMW and companies like Adidas, Berger has been described as the mastermind behind the cum-ex scheme and was charged with tax fraud at a court in Wiesbaden last year. Based in Switzerland, he insists all of his dealings were within the law and has not appeared in court so far.

Paul Robert Mora

A 51-year-old Kiwi with a penchant for rugby and Hawaiian shirts, Mora had a background in tax law before moving into investment banking in the City of London. At HypoVereinsbank and his own investment vehicles Ballance Capital and Arunvill, Mora is alleged to have worked with Berger to construct a vast number of cum-ex trades. Believed to have returned to New Zealand, where he has property investments in Christchurch, Mora has also not appeared in the German courts to far.

Sanjay Shah

A British-born son of Indian immigrants from Kenya is the key figure for investigations in Denmark, where prosecutors say he defrauded the treasury to the tune of €1.3bn, mainly through his hedge fund Solo Capital LLP, by copying the system used by Berger. Shah has denied any wrongdoing.

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