When BlackRock (BLK) offices were raided in Munich this week, it became the latest global financial institution to become ensnared in a long-running German investigation into shady tax practices that are estimated to have cost the German government and taxpayers more than €5bn (£4.4bn, $5.7bn).
All three banks told Yahoo Finance UK that they were cooperating with German authorities, who have been investigating this issue since 2013. Deutsche Bank specified that it didn’t actively participate in the market, but was involved with some transactions on behalf of its clients.
Here’s what you need to know:
What’s the problem?
Authorities say companies took advantage of a tax loophole in Germany by using a sneaky practice known as “cum-ex” to enrich themselves and take money from the state. Financial institutions allegedly conducted a series of trades with one another in dividend-paying shares, and the trading was timed in a way that multiple institutions were later able to apply for tax refunds linked to the dividends. In theory, each tax refund should have only been claimed by a single party, not multiple institutions.
“The government had a loss in revenue because they had to refund taxes multiple times when the tax was only paid once,” explained Sonja Klein, a Frankfurt-based lawyer and tax advisor at the international law firm, Baker McKenzie.
Klein said this technically wasn’t illegal at the time, but it took advantage of a weakness in the system.
“The law had not been properly drafted,” she said.
The BlackRock transactions under investigation in Germany took place between 2007 and 2011.
What kind of penalties could be expected?
If companies were found to have taken part in criminal activity through these trades and transactions, they could be ordered to repay any tax gains they made to the state, along with interest, said Klein.
Prison sentences for individuals could also be a possibility, she said.
What happens next?
Germany’s finance minister Olaf Scholz tweeted this week that countries across the European Union should cooperate to prevent new attempts to cheat Europe’s tax rules. He said the German Ministry of Finance would be vigilant in monitoring for shady cum-ex transactions and similar schemes.
Denmark is also investigating similar transactions, with authorities saying they lost about $2 billion in relation to these tax practices. Authorities have subpoenaed more than 420 companies and people, freezing hundreds of millions of euros of assets around the globe.
With files from Reuters