It has been described as the “robbery of the century” and “the biggest tax theft in the history of Europe”. Behind it are two
, Britisher Martin Shields and Kiwi Paul Mora, who, along with hundreds of bankers, lawyers and investors, made off with a staggering $60 billion, all of it siphoned from the state coffers of
between 2006 and 2011.
The two met while working out of the Merrill Lynch’s London office and devised a scheme called “cum-ex trading” (from the Latin for “with-without”). It is a monetary manoeuvre to avoid double taxation of investment profits that plays out like high finance’s answer to a David Copperfield stage illusion. Through careful timing and the coordination of a dozen different transactions, cum-ex trades produced two refunds for dividend tax paid on one basket of stocks.
The process was repeated over and over, as word of cum-ex spread like a quiet contagion. Germany was hardest hit, with an estimated $30 billion in losses, followed by France, taken for about $17 billion. Smaller sums were drained away from Spain, Italy, Belgium, Austria, Norway, Finland, Poland and others.
A third man, Dubai-based British citizen Sanjay Shah, is alleged to have copied their methods to defraud the Danish treasury of $2 billion. Shah denies wrongdoing but has never been shy about the source of his wealth. When he bought a $1.3 million yacht a few years ago, he found the perfect name: Cum-Ex.
Shah was raised in London by parents of Indian ancestry who had immigrated from Kenya. He dropped out of college in 1992, citing a lack of motivation, and worked at a number of large financial firms. In 2007, he landed a job at the London office of Rabobank, a Dutch company, on the dividend arbitrage desk where he learned about cum-ex trades.
According to his Twitter page, he is currently based in Dubai and dubs himself an entrepreneur and philanthropist who raises money for autism research.
No criminal charges have been filed against Shah. However, German prosecutors have charged Shields, a 41-year-old Oxford-educated math whiz, and Mora, a 52-year-old New Zealander with a fondness for Hawaiian shirts, with “aggravated tax evasion” that cost the German treasury close to $500 million.
Last month, the presiding judge issued a preliminary ruling that, for the first time, declared cum-ex a felony, calling it a “collective grab in the treasury.” German prosecutors say they will pursue 400 other suspects, unearthed in 56 investigations.
Precisely who invented cum-ex trading, and when, are mysteries, but ground zero for this scandal may have been the London branch of Merrill Lynch.
At Merrill, Shields’ job was to identify “tax-attractive trades”, as he put it in his testimony. He had joined one of the least visible sectors of the financial world looking for ways to reduce clients’ tax bills. Many of these were variations of a strategy called “dividend arbitrage”, and right before Shields left Merrill in 2004, he learned about a new one, cum-ex.
Academics have struggled for years to explain the trade but suffice it to say, the goal was to fool the financial system so that two investors could claim refunds for dividend taxes that were paid just once.
With the financial crisis in full swing, cum-ex was one of the few reliable moneymakers, and the trade boosted careers throughout the City of London. Prosecutors have reportedly opened investigations into transactions handled by Bank of America, JPMorgan Chase, Morgan Stan