The kiosk on the street corner could be anywhere in Germany, except that it sells Moët & Chandon champagne alongside the tabloid newspaper, Bild, and Marlboro cigarettes. Here, in Frankfurt’s upmarket WestEnd neighborhood, is where the German arm of Maple Bank is based.
It’s a long time since there have been any celebrations here. The bank, which has its roots in Canada, became bankrupt after it was forced to set money aside to pay back taxes, a move which would have increased its debt significantly. Those taxes involved millions of euros being demanded by the German treasury due to its use of controversial tax avoidance schemes known as dividend-stripping deals, which are likely to be deemed illegal.
The bank’s insolvency has had more serious financial consequences for creditors than previously feared. A spokesperson for the insolvency court told Handelsblatt that 236 creditors have registered claims totaling €3.3 billion, or $3.68 billion.
This would make the case one of the biggest insolvencies ever in the German banking sector.
Word from insiders suggests that the insolvency proceedings are at a difficult impasse - it is clear that there are unresolved tax issues at Maple Bank.
Maple Bank was closed on February 6, 2016. Since then, insolvency administrator Michael Frege, from the law firm, CMS Hasche Sigle, has been in charge.
Mr. Frege has experience in this area. Thanks to him, creditors of the German subsidiary of U.S. bank Lehman Brothers, which collapsed during the financial crisis, got back almost all the money they were owed.
How much Maple Bank’s creditors will get back remains in the lap of the gods right now. At any rate, Mr. Frege now knows the number of creditors and the total volume of claims.
The deadline for submission of claims expired in mid-April. It’s not up to the administrator to examine the claims received.
Maple Bank’s biggest creditor is the deposit insurance fund of the Association of German Banks, the Bankenverband, or BdB, which represents more than 200 banks in Germany including Deutsche Bank and Commerzbank.
The association had to shell out a total of €2.6 billion by mid-March via two different funds it operates. A deposit insurance fund known as EdB, a subsidiary of the association, is responsible for guaranteeing deposits in German bank accounts up to a maximum of €100,000 per depositor, and has paid out around €8 million. But the BdB has also committed to paying up to €59.8 million per investor in the bank through a separate insurance fund, and been forced make up much of the difference.
The bankruptcy of Maple Bank has sparked a debate among private banks about a reform of the complex deposit insurance system.
Creditors also include public-sector bodies, which ended up being rescued by private banks. The German state of North Rhine-Westphalia had invested around €62.5 million with Maple in fixed-term deposits. As the protection provided by the deposit insurance fund is capped at €59.8 million, North Rhine-Westphalia must accept a provisional loss of €2.7 million.
“The state has registered its claims with the managers of the insolvency,” a spokesperson for the state’s finance minister Norbert Walter-Borjans said. Other states, such as Mecklenburg-Western Pomerania, Rhineland-Palatinate and Lower Saxony, had also invested tens of millions of euros. They can save themselves the stress of dealing with an insolvency administrator though, as their investments were fully protected.
It is currently unclear how much of their money the creditors will get back. This could be due partially to the way Maple Bank did business. Word from insiders suggests that the insolvency proceedings are at a difficult impasse. Mr. Frege himself has refused to comment. But it is clear that there are unresolved tax issues at Maple Bank.
Germany’s financial supervisor, BaFin, closed Maple Bank due to the risk of excessive debt related to the tax investigations and possible additional back payments. Put simply, Maple Bank may need to pay back several hundred million euros in taxes that it is thought to have pocketed illegally.
“In terms of tax law, it hasn’t yet been fully clarified,” said a lawyer who is familiar with the matter. But on the whole it does look like the transactions in question were illegal and that Maple will have to pay.
It is clear that the small bank was heavily involved trading equities around the date that dividends are paid out by companies between 2006 and 2010. Until a loophole in German law was closed in 2012, such dividend stripping deals allowed banks and companies to offset capital gains taxes. Effectively, it meant that capital gains tax that had been paid only once could be claimed back several times.
Maple Bank was caught up in the law change that made dividend stripping against the rules. It involves buying shares – sometimes worth billions of euros – just before a company pays out dividends to shareholders, and then selling them again shortly after. By carrying out these transactions with borrowed money – short-selling – the customers are able to sell the shares at a loss without losing any actual money. The “loss” allows them to claim multiple tax exemptions, ultimately lowering the taxes they have to pay on their overall capital gains revenues.
Once German lawmakers outlawed the practice, tax authorities started looking at whether to claim back taxes from more than 100 banks engulfed in the scandal. Maple Bank was one of many that had to set aside massive provisions. BaFin believed that the risk was too high and closed down the bank owing to “risk of excessive debt.”
In the Maple Bank case, Frankfurt’s attorney general is also investigating 11 former bank managers, including managing directors, supervisory board members and directors. They are suspected of serious tax evasion, with potential losses allegedly totaling €450 million in taxes. Presently investigations are still at an early stage and it is not yet completely clear whether charges will be brought.
The defendants have refused to comment publicly so far, and their defense lawyers will only speak off the record. The key questions are: Did those under investigation claim tax back illegally? And did they withhold information from tax authorities about certain, related deals?
Maple Bank has already become part of banking history in Germany. However it will be years before the investigators’ files can finally be closed.
Michael Brächer is a financial editor in the investment team in Frankfurt. Volker Votsmeier is an editor with Handelsblatt’s investigative reporting team. To contact the authors: firstname.lastname@example.org and email@example.com