Political liability

After BlackRock raid, Merz is on the defensive

blackrock friedrich merz
Dark pool. Source: imago

German prosecutors took aim at Friedrich Merz’s Achilles heel on Tuesday, raiding the head office of BlackRock Germany in Munich in search for evidence of tax evasion. Merz, who is running to succeed Angela Merkel as leader of the Christian Democrats, is non-executive chairman of the asset manager’s German operations.

The raid is one of dozens of investigations into Germany’s largest tax evasion scandal ever, in which companies dodged an estimated €12 billion in taxes. Across Europe, the damages are estimated at more than €55 billion. Prosecutors in Cologne said Merz was not a suspect in the investigation. Handelsblatt has learned that neither BlackRock nor its managers are the focus of the probe. Rather, prosecutors are trying to gather evidence about clients who borrowed shares from the asset manager to evade tax payments.

The investigation focuses on possible tax evasion from 2007 to 2011, five years before Merz became chairman of BlackRock Germany, but it still poses a risk to his aspirations, which include the chancellery.

BlackRock, the world’s largest asset manager with holdings of $6.3 trillion, is seen by some as the archetype of a greedy form of capitalism. Ever since Social Democratic leader Franz Müntefering in 2005 compared some investors to “locusts” that feed on companies at the costs of employees, hedge funds and private equity firms have had a dubious reputation in Germany.

Return of the locusts?

Merz, a lawyer and former judge, is fully aware of the liability of his jobs, which also include a supervisory board position at HSBC Trinkaus & Burkhardt, the German subsidiary of the British bank. At a press conference last week, when he announced his candidacy, he stressed that he was chairman of BlackRock’s supervisory board, not an executive.

“I am grateful that most people have pointed out that this is not a locust, it is not private equity,” Merz said. “It is an asset manager. Yes, the biggest in the world, but asset managers are trustees of their clients’ assets.”

For left-leaning politicians, these kinds of distinctions matter little. They used the BlackRock raid to attack Merz’s candidacy to become leader of the center-right CDU.

“It would be an irony of history if the CDU chose someone as its leader, and possibly the next chancellor, who led a company that participated in a criminal tax heist,” Dietmar Bartsch, co-floor leader of the opposition party The Left, wrote on Twitter.

Sitzung des CDU-Landesvorstands in NRW
Bad day. Source: DPA

Karl Lauterbach, a leading Social Democrat in the Bundestag, said Merz may have had nothing to do with BlackRock’s possible tax evasion. “Nevertheless, someone who has served big business and earned millions should not represent a mainstream party at a time of large social inequality,” he said on Twitter.

Gerhard Schick, the finance expert of the Green Party, questioned whether Merz has done enough to have the matter investigated internally. “When one discovers such transactions in-house, one should clear things up and cooperate with authorities. We haven’t heard anything like that so far,” Schick told media group RND.

Immoral practices

After the raid, Merz said he had ordered BlackRock Germany’s executive board to cooperate with authorities and provide all necessary documents. The investigation focuses on the trading of shares around the time of dividend payments, which allowed investors to claim exemptions on capital gains taxes. Often, investors claimed the exemption twice or more on the same batch of stocks.

The German government considers the scheme, known as dividend stripping or “cum-ex trading,” a form of tax avoidance and outlawed the practice in 2012, although regulators signaled its unlawfulness as early as 2010. Australian asset manager Macquarie, MM Warburg and private bank J. Safra Sarasin are also subject to investigations, while others, such as regional bank HSH Nordbank, Hypovereinsbank and cooperative DZ Bank settled disputes with the government and repaid hundreds of millions of euros.

Merz condemned the schemes last week in an interview with Süddeutsche Zeitung, calling them immoral, irrespective of their legality.

Within the CDU, they realize the BlackRock investigation damages Merz’s reputation. It will not jeopardize his candidacy, but the probe may create a mood that could weigh on support for Merz, party insiders told media group RND.

If the mood really turns against him, his BlackRock involvement may lead to Merz’s downfall even before he has reached the top.

Gilbert Kreijger is an editor with Handelsblatt Global. Volker Votsmeier and Robert Landgraf of Handelsblatt contributed to this article. To contact the author: kreijger@handelsblatt.com

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