With years of litigation ahead, two architects of an aggressive tax fraud that enveloped Europe will learn the consequences of their free-wheeling and profitable scheme as their trials get underway.
Once upon a time, or maybe in 2004, at Merrill Lynch, two men met who would perpetrate a tax crime that eventually involved hundreds of investors, financial advisors, and lawyers from throughout the European Union (EU). These two men, Martin Shields and Paul Mora, devised a scam whereby a financial transaction could be manipulated so that two parties could claim refunds for dividend taxes that were paid only once. And it worked—a lot.
The scam was called “cum-ex,” which means “with-without” in Latin. According to The New York Times, the scheme netted an astounding $60 billion over the years for those who dipped their toes in what was termed by one financier as “the devil’s machine.”
A cum-ex trade is complicated but essentially involves the rapid trade of specific shares prior to the payout date of the dividend. Manipulation of the shares allows participants to claim two refunds on the transaction. Overall, the German treasury lost the most money, followed by France, Italy, Denmark, and Belgium.
On trial in Bonn, Germany, the two men are charged with “aggravated tax evasion.” The scam involved banks across financial markets including Bank of America, Merrill Lynch, Morgan Stanley, JP Morgan Chase, UniCredit, Deutsche Bank, and Santander. Banks are expected to be sued for the return of money paid, and those expectations have already driven two institutions into insolvency.
According to German authorities, prosecutors expect to pursue another 400 suspects identified in ongoing investigations. During the term of the scam, numerous lawyers wrote supportive opinions of the practice that may have convinced financial institutions and investors to join in the lucrative network. Since then, the opinions have been sacked and the practice declared illegal. Noted Julian Dixon, CEO of Napier, “Tax arbitrage structuring is commonplace in many financial organizations and this is just another way of circumventing tax regulations.”
So far, Mr. Shields has cooperated extensively with authorities and provided a statement of his knowledge of the activities. In early February, Mr. Shields agreed to pay back $16 million that he calculated he had gained as a result of his involvement. The German panel adjudicating the case against Mr. Shields has not yet come for a final verdict.
An expected conviction will open the door to require investors and institutions involved in the practice to repay the money and potentially pay fines. While Mr. Shields is hoping for leniency, Mr. Mora insists he has not committed any tax crime. For both men, and the likely hundreds of suspects who face future prosecution, investment in experienced criminal tax defense is their next best bet.
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