By Bastian Finkel & Dr Franz Konig


Published 16 March 2020


Some years ago, the so-called “Cum-Ex” trading scandal at first sight appeared to be one among many other scandals in Germany involving banks and financial institutions in the wake of the global financial crisis.

This first impression was completely wrong.

The “Cum-Ex” trading scandal has emerged to be by far the biggest tax fraud in history not only in Germany, but also in many other European countries. These deals involve illicit tax refunds which may have cost the German state billions of euros. Estimations reach from €12 billion up to €30 billion.

German authorities are investigating allegedly tax-driven share transactions that took place around the dividend record date, which were allegedly executed by banks between 2001 and 2011 trading on their own account or on behalf of third parties. “Cum-Ex” trades involved the acquisition of shares with (cum) dividends due on or just before the dividend record date and delivery of these shares after the dividend record date without (ex) dividends, which made it possible to obtain multiple returns of capital gains tax that had only been paid to the German tax authorities once. The authorities are also investigating so called “Cum-Cum” deals, which involved the short-term transfer / loan of shares owned by a foreign company or investors to a domestic German bank, which subsequently applied for a tax refund on the dividend that would not have been available to the foreign company / investor.

A seemingly never-ending list of banks containing nearly every major international investment bank, almost any German bank and many well known legal consultants, law firms and accounting firms involved in this tax fraud show that this matter is far from at an end – not to forget hundreds of accused persons are also under investigation by German authorities.

The news causing perhaps the greatest stir at the end of 2019 was the arrest of Ulf Johannemann by German prosecutors. Johannemann was a partner and head of tax at a global law firm, that he had left only days before. A short time before, the law firm had paid €50 million to the insolvency administrator of Canadian Maple bank – due to Cum-Ex advice given to the bank. Maple-Bank was forced to file for bankruptcy as a consequence of the scandal.

Whilst criminal proceedings in this regard have not yet started, the public prosecutor’s office of Cologne charged former traders with carrying out Cum-Ex deals. Not only the traders are being charged in these proceedings, but five banks are involved as well, among them a German private bank and some international players. In recent weeks the court gave a first indication; it is likely the banks involved will have to repay approximately €400million of tax refunds to fiscal authorities.

This shows why Cum-Ex is still of interest for D&O-insurers as well: On the basis that fiscal authorities are treating the “Cum-Ex” trades as tax evasion, this potentially allows them to go back 10 years and seek financial recourse in respect of profits previously deemed secure and closed. Additionally, wealthy investors raised claims against (mostly) private banks for failed investments in funds based on Cum-Ex models. Recourse claims of banks against their own management can also be brought within a 10 year duration; this long period of limitation shows the extraordinary D&O risk for financial institutions in Germany.

Even though “Cum-Ex” trading was formally banned in Germany in 2012, German authorities are investigating new schemes, e.g. deals using “American Depository Receipts” (ADR). The suspicion is that banks and investors found new ways to gain tax refunds where capital gains tax was never paid. But the investigations in this respect have just begun. At the same time this development shows it is likely the “Cum-Ex” trading scandal will be in the focus of attention for banks, fiscal authorities, public prosecutors and D&O-insurers for further years.