When the defense lawyer spotted the woman with long ash-blond hair on the train from Cologne to Frankfurt, he was alarmed. Her presence could only mean one thing: another raid was in store for an international investment bank.
The woman was Anne Brorhilker, head of the department at the Cologne prosecutors’ office currently overseeing the biggest Cum-Ex investigation in Europe. For over a year, her unit had been targeting the German offices of international banks, raiding one after another. The first hits were Bank of America’s Merrill Lynch and Barclays Plc, followed by Morgan Stanley, BNP, Nomura, and many others.
These raids, which typically last for several days, always start early on Tuesdays. Lawyers with Cum-Ex clients have come to recognize the telltale signs of an impending raid when they spot Brorhilker on the Monday train to Frankfurt or see her and her colleagues in the usual hotel. The Cologne prosecutors' office has conducted at least 13 raids since March 2022, targeting not only big banks but also law firms and auditors. It seems that there is no end in sight for these investigations.
Cum-Ex is a controversial tax-driven trading strategy that was employed for more than a decade. It originated with traders in London who targeted Germany as a prime location. The strategy took advantage of the way dividend tax was collected, allowing multiple investors to claim refunds on a tax that was only paid once. Many European and American banks participated in these trades, potentially costing Germany up to €10 billion ($10.9 billion) before the practice was halted in 2012.
Not only Germany is affected by Cum-Ex. Authorities in the Netherlands, Finland, and Belgium have launched their own investigations, and Denmark has filed civil suits in several countries seeking to recoup €2 billion in losses related to dividend tax refunds. French authorities also conducted raids on five banks in March to gather information about a similar trading strategy known as Cum-Cum.
Unraveling the Cum-Ex cases has been a complex task due to the deliberately complicated structure of the trades. Germany's intricate tax laws and decentralized system of tax collection further complicate the matter. Until around 2011, German officials routinely approved hundreds of millions of euros in tax refunds, unaware of the scale of the scheme. Banks and traders took advantage of the lack of effective bans on Cum-Ex trades and exploited changes in the tax code that left loopholes for their strategies.
Brorhilker and her team in Cologne have been at the forefront of Germany's Cum-Ex investigations. They launched their first investigation in 2013 and gradually expanded their efforts. By 2020, they had a dedicated unit and were overseeing 120 probes with 1,700 suspects, most of whom are located in London. The city of Bonn, home to the Federal Tax Agency, has become the center of Cum-Ex litigation, with the first-ever trial taking place there four years ago. The city is now expanding its court facilities to accommodate the increasing number of Cum-Ex cases.
Besides criminal charges, authorities also focus on recouping the lost funds through government-issued repay orders and refund denials. By the end of 2021, the German Finance Ministry had identified 429 cases resulting in tax losses of €4.5 billion. Approximately €3.1 billion has been successfully recovered so far. Some banks, like BNY Mellon and Credit Agricole's Caceis unit, have been found liable and asked to repay substantial amounts.
The legal consequences of Cum-Ex are significant. Frankfurt-based Maple Bank GmbH went bankrupt after being ordered to return €392 million. The former CEO of the bank, Wolfgang Schuck, was convicted and sentenced to prison. Frankfurt prosecutors have secured seven convictions related to Cum-Ex, while Cologne prosecutors have obtained six. Munich authorities are also investigating dozens of individuals but have yet to bring charges against anyone.
The next high-profile Cum-Ex trials are scheduled to begin in September, including the trial of Ulf Johannemann, a former global head of tax at Freshfields, who advised clients on pursuing Cum-Ex tax refunds. With the number of suspects steadily increasing, Bonn's court system is struggling to keep up, leading to the construction of a new Cum-Ex courthouse in Siegburg.
While the investigations and legal proceedings continue, the burden falls on the approximately 1,800 suspects in Germany. They must cope with the uncertainty and potential damage to their reputations, even if they are never charged or are eventually acquitted. Banks, too, face reputational risks, particularly if they were heavily involved in Cum-Ex trades.
As Brorhilker and her team continue their work, there is no doubt that it will take many more years to untangle the damage caused by Cum-Ex. With her retirement still years away, Brorhilker is determined to pursue justice, no matter how long it takes.