Cum-ex: legal opinions are no sure defence, warn tax experts
20 October 2020 London
Image: Maksim_Kabakou.adobe.stock.com
Individuals involved in cum-ex prior to 2012 will not be spared from prosecution by producing legal opinions from the time, warn Rahman Ravelli lawyers.
Up to 600 names are understood to be on a list in the German prosecutor’s office, representing the full gamut of individuals from all role functions and levels of seniority related to what is now perceived to be a wide-spread conspiracy to cheat European tax authorities by double-claiming on dividends.
“The complexity of the trade structure and the indemnity of legal advice gives a presentation of legitimacy, but now that the authorities are catching up and there have been whistleblowers they are picking away at the advice,” explained Neil Williams, legal director at Rahman Ravelli, on a recent webinar discussing the recent cum-ex cases in Europe.
Speakers pointed to the landmark case heard in Bonn, Germany, earlier this year where two former HypoVereinsbank (HVB) — now part of UniCredit — traders were found criminally liable of tax-related fraud and handed suspended sentences, to emphasise this point.
During this case, the defendants highlighted legal opinions gained at the time which stated that short-term trading over dividend dates was legally sound, but this was not accepted by the judge.
The legal stance in Germany is that these trades had no utility in terms of benefiting from voting rights or movements in share price due to the short holding period and therefore their only use was to gain a tax credit.
Also on the webinar, Syedur Rahman, legal director at Rahman Ravelli, reinforced this point, warning that the authorities “will not take this lightly”.
“As far as prosecutors are concerned entities that filed tax rebates must be held liable,” he told audience members. “Prosecutors won’t agree with the fact that you received legal advice approving these trades. As far as they are concerned, this was bad legal advice that was commissioned to interpret the law in favour of share traders and investment bankers.”
However, how prosecutors seek remedies and from whom will depend on the jurisdiction. In Germany, the market most affected by cum-ex, does not have the concept of criminal liability of corporations so it will always be individuals within them at risk.
Financial institutions can be handed fines — UniCredit paid a €9.8 million penalty for HVB’s cum-ex activities — but prosecutors are “more interested in going after individuals,” explained fellow webinar speaker Christian Pelz, a specialist tax lawyer at Munich-based Noerr.
That means “all hierarchical levels and all functions within the institutions,” he adds.
Legal experts predict the upcoming case of Hanno Berger, named as the legal mastermind behind the trade structure used in cum-ex, will shed more light on where culpability starts and ends in an entity's hierarchy.
The hearing was meant to start on 20 October but has been postponed until 20 January due to the COVID-19 pandemic.
Although European tax authorities are understood to be the worst impacted by double dividend claimants, many of the traders now potentially liable are based in London.
For those UK-based individuals, Williams says that what charges, if any, are brought will depend on the individual circumstances of the case.
“What is clear that merely going through the motions of obtaining advice, which on the face of it may provide some comfort, will not afford a blanket defence if the evidence and circumstances suggest that there were additional factors which would negate the reliance which could be placed upon the advice,” he tells SLT.
A junior trader, he explains, may be able to claim that they queried whether legal advice had been sought on trades and then relied upon that being given in good faith.
In terms of those giving advice, “questions regarding the legitimacy of the advice will focus on whether it was negligently provided, or whether there was greater culpability involved,” Williams says.
During the Bonn case, German prosecutors sought to indict some lawyers involved in providing advice, which Williams argues show that the authorities there suspect more than mere negligence in certain cases.
Webinar speakers advised audience members to begin internal reviews to define if any risk of culpability exists. Moreover, self-reporting to authorities and cooperating fully with an investigation is likely to result in a reduced penalty, such as was seen in Bonn.
Up to 600 names are understood to be on a list in the German prosecutor’s office, representing the full gamut of individuals from all role functions and levels of seniority related to what is now perceived to be a wide-spread conspiracy to cheat European tax authorities by double-claiming on dividends.
“The complexity of the trade structure and the indemnity of legal advice gives a presentation of legitimacy, but now that the authorities are catching up and there have been whistleblowers they are picking away at the advice,” explained Neil Williams, legal director at Rahman Ravelli, on a recent webinar discussing the recent cum-ex cases in Europe.
Speakers pointed to the landmark case heard in Bonn, Germany, earlier this year where two former HypoVereinsbank (HVB) — now part of UniCredit — traders were found criminally liable of tax-related fraud and handed suspended sentences, to emphasise this point.
During this case, the defendants highlighted legal opinions gained at the time which stated that short-term trading over dividend dates was legally sound, but this was not accepted by the judge.
The legal stance in Germany is that these trades had no utility in terms of benefiting from voting rights or movements in share price due to the short holding period and therefore their only use was to gain a tax credit.
Also on the webinar, Syedur Rahman, legal director at Rahman Ravelli, reinforced this point, warning that the authorities “will not take this lightly”.
“As far as prosecutors are concerned entities that filed tax rebates must be held liable,” he told audience members. “Prosecutors won’t agree with the fact that you received legal advice approving these trades. As far as they are concerned, this was bad legal advice that was commissioned to interpret the law in favour of share traders and investment bankers.”
However, how prosecutors seek remedies and from whom will depend on the jurisdiction. In Germany, the market most affected by cum-ex, does not have the concept of criminal liability of corporations so it will always be individuals within them at risk.
Financial institutions can be handed fines — UniCredit paid a €9.8 million penalty for HVB’s cum-ex activities — but prosecutors are “more interested in going after individuals,” explained fellow webinar speaker Christian Pelz, a specialist tax lawyer at Munich-based Noerr.
That means “all hierarchical levels and all functions within the institutions,” he adds.
Legal experts predict the upcoming case of Hanno Berger, named as the legal mastermind behind the trade structure used in cum-ex, will shed more light on where culpability starts and ends in an entity's hierarchy.
The hearing was meant to start on 20 October but has been postponed until 20 January due to the COVID-19 pandemic.
Although European tax authorities are understood to be the worst impacted by double dividend claimants, many of the traders now potentially liable are based in London.
For those UK-based individuals, Williams says that what charges, if any, are brought will depend on the individual circumstances of the case.
“What is clear that merely going through the motions of obtaining advice, which on the face of it may provide some comfort, will not afford a blanket defence if the evidence and circumstances suggest that there were additional factors which would negate the reliance which could be placed upon the advice,” he tells SLT.
A junior trader, he explains, may be able to claim that they queried whether legal advice had been sought on trades and then relied upon that being given in good faith.
In terms of those giving advice, “questions regarding the legitimacy of the advice will focus on whether it was negligently provided, or whether there was greater culpability involved,” Williams says.
During the Bonn case, German prosecutors sought to indict some lawyers involved in providing advice, which Williams argues show that the authorities there suspect more than mere negligence in certain cases.
Webinar speakers advised audience members to begin internal reviews to define if any risk of culpability exists. Moreover, self-reporting to authorities and cooperating fully with an investigation is likely to result in a reduced penalty, such as was seen in Bonn.
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