Several European countries are taking a close look at their financial institutions over a tax fraud scheme involving tax refunds on the sale of stocks.
The so-called “cum-ex trading” or “with-with” scheme is a method by which shareholders in a country like France or Germany were able to transfer stock abroad to investors who eventually sell the stock back to the original shareholders. By doing so, the original shareholders avoid paying tax on stock dividends and sometimes qualify for a tax refund. Working in tandem, shareholders and investors split the largesse.
The EU parliament describes the method as “Dividend arbitrage is an often-used method by traders to hedge the difference in value between shares cum- (with) and ex- (without) dividend, making use of put options. Dividend arbitrage, which is also known as dividend stripping, is practiced throughout the world in many different forms.”
The scam is estimated to have cost European countries approximately $60 billion since it rose to prominence about 20 years ago. Countries that have lost significant sums from the scheme include Spain, Great Britain, Germany, France, Norway, and Belgium. The trading dodge has been called the largest tax theft in European history.
The mastermind behind it all is Hanno Berger, a 72-year-old lawyer currently behind bars for eight years for tax evasion. While Mr. Berger did not invent the tax fraud, he exploited it on a grand scale, taking aim at national treasuries and the billions that could be made from public funds. The regulatory gap that allowed the trades to occur has since been closed in the countries affected, but the prosecution of institutions and individuals who profited from the trades are under active investigation.
At present, efforts to investigate and prosecute those involved is taking place on four continents and involves approximately 1,500 suspects and the banks with which they were involved.
In March, French investigators—including 16 magistrates and 150 tax investigators—took over the headquarters of BNP Paribas, HSBC, and Société Générale, two of the country’s largest banks. In France alone, prosecutors suggest the amount of redress, in fines and fees, will top $1 billion.
The fallout from this tax crime will continue to roll out with arrests, prosecution, and financial penalties for years to come. If you had involvement in these trades, speak with an experienced tax attorney about potential exposure and your options.
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