It was a proving to be a golden goose, and no one at Hypo-Vereinsbank wanted to stop it from laying eggs.
Numerous warnings came and went without change – the management board simply took too great a pleasure in the fact that its dealers in London and asset managers in Munich were delivering high profits year after year.
It’s the story of the 2008 financial crisis – bankers bending rules and cutting corners in the hopes of making quick money for clients and for the banks themselves.
But with investigators around the world cracking down on shady practices since 2008, Munich-based Hypo-Vereinsbank, or HVB, is now being forced to settle its old scores.
HVB’s own recipe for success before 2008 came from dubious tax practices. In total, HVB is now expected to pay a fine of around €20 million, or $21.9 million, to put the past behind it. One case to be settled involves aiding and abetting tax evasion in Luxembourg. Another involves a controversial tax dodging practice known as dividend stripping.
The principle of the latter: By rapidly trading stocks before and after dividends are paid out by companies, the bank was able to be reimbursed repeatedly for capital gains taxes leveled on its trading profits. The idea is to buy a company’s shares with borrowed money just before a dividend is paid out, and then sell the shares at a loss once the dividend payout is made. The bank and its clients lose no money in the process – but the alleged “loss” on the sale qualifies them for multiple tax exemptions.
Both tax evasion and dividend stripping have implicated a number of banks in Germany, and have become the target of a series of investigations by prosecutors and states. In June, Deutsche Bank’s offices were raided in connection with the latter, while Commerzbank’s Luxembourg subsidiary has been under investigation for the former.
One of the main accusations against the banks is that they provided clients with offshore letterbox companies that made it possible to conceal money from tax authorities.
For HVB, dividend stripping proved very profitable. An investigation commissioned by the bank’s non-executive supervisory board revealed just how much capital gains tax HVB was able to offset through dividend stripping: In 2005 it was €29 million, one year later €54 million, in 2007 already €70 million, and finally in 2008 €144 million.
But soon the game was up. The bank and its customers have had to pay back a large part of the money to the government, and now the bank has to atone further for its profit-making machine of earlier years.
Now the bank is expected to settle with the Cologne Public Prosecutor’s Office. People close to HVB and familiar with the affair have confirmed that the public prosecutor’s office will impose a penalty of around €10 million.
Neither the bank nor the prosecutors’ office was willing to comment. The newspaper Süddeutsche Zeitung had first reported about the situation.
HVB also expected to settle a separate tax scandal involving allegations of aiding and abetting tax evasion in Luxembourg. People familiar with the case confirmed media reports that a fine of around €10 million will be imposed here, too.
The Cologne Public Prosecutor’s Office has been involved in this case, too, along with the tax-fraud investigative unit of North Rhine-Westphalia. Both have been in charge of scrutinizing the Luxembourg business of German banks.
One of the main accusations against the banks is that for years they provided their clients with access to offshore letterbox companies that made it possible to conceal money from the tax authorities. Above all, Panama played an important role here.
The investigators already have an eye on Cisal, the Luxembourg subsidiary of Commerzbank.
HVB apparently took that as an inducement to clear up its own situation internally — even though it already sold its Luxembourg business to a another German bank, DZ Bank, in 2010.
With the settlements, HVB hopes to finally put the tax scandal behind it for good. But while the fines mean that HVB itself will be out of the crosshairs, the same cannot be said for individuals connected with the case.
The fact is that, even if HVB agrees to a settlement, three public prosecutors offices are still looking into other aspects of the dividend stripping transactions.
An investigative report commissioned by the bank’s non-executive supervisory board revealed last year that three former members of the management board – Rolf Friedhofen of the retail division, Andreas Wölfer of asset management and Ronald Seilheimer of investment banking – may share responsibility for the dividend-stripping transactions.
According to Handelsblatt information, the ex-managers should have responded to the report by the end of 2014, but the process is moving ahead slowly. The former directors demanded access to further documents. The word is that the problem will not be resolved before the end of the year. Part of the question is whether liability insurance taken out by the former managers could pay for some of HVB’s fine.
It is not known whether current HVB managers are among the accused in the investigations, which have been going on for years.
All that can be learned from the supervisory board’s report is that the bank’s current chief executive officer, Theodor Weimer, and his one-time chief financial officer, Peter Hofbauer, co-signed dubious declarations concerning corporate income tax in 2010.
Despite the signatures, it is possible that they did not end up in the sights of the investigators. This would be in contrast however to Jürgen Fitschen, the co-CEO from Deutsche Bank, who has found himself in the crosshairs of a similar investigation because of his own signature on a tax document.
Meanwhile, Frankfurt prosecutors have spent the past three years looking at the high-volume stock transactions of Rafael Roth, an investor connected with the bank who has since passed away. There was a spectacular raid of HVB’s offices at the end of 2012 in connection with the case. Along with several former bank employees, Mr. Roth’s tax lawyer Hanno Berger is among the accused.
Prosecutors in Munich and Cologne are also still investigating aspects of the case. All this means that, even if HVB agrees to settle, it will struggle to put the sordid affair behind it for a while yet.
Volker Votsmeier is part of Handelsblatt’s investigative team, particular of financial firms. Kerstin Leitel covers banks and the insurance industry for Handelsblatt in Munich. Christopher Cermak of the Handelsblatt Global Edition also contributed to this story. To contact the authors: firstname.lastname@example.org and email@example.com