Investec announced financial provisions to cover potential ‘outflows’, including penalties arising from its involvement in allegedly fraudulent ‘cum-ex’ transactions, but the bank is using an ‘extremely rare’ accounting rule to hide the potential scale of the damage.
After conducting my own research into this matter based on the article on Daily Maverick: “Investec defends secret financial provisions in German tax fraud probe”, and AmaBhungane.
I have broken down the events for clarity and welcome your comments.
Events in brief:
- Investec was deeply involved in the cum-ex trading market using German investment funds and senior Investec managers almost certainly approved this. Investec was also an actor in the widespread use of US pension funds or the same cum-ex scams.
- Cum-ex involves several parties colluding to trade shares in a company right before and after dividends are declared. The reason: to generate two claims for a refund of dividend withholding tax that had only been paid once. Cum-ex scams only work in countries that impose dividend withholding tax on shareholders in companies such as Germany and South Africa but only if they have loopholes such as a) a share sale takes two or more days to take effect and b) tax certificates that allow you to reclaim your tax are not issued by the company paying the dividend but by your custodian bank. The trading “strategy” involves fooling a country’s tax authority into issuing duplicate refunds for dividend withholding tax that was paid only once.
- amaBhungane (Centre for Investigative Journalism) explains that between 2012 and 2015 Investec backed controversial Dutch stock trader Frank Vogel with up to some EUR 12.7-billion (about R183-billion) to facilitate his business, which was allegedly based almost entirely on tax arbitrage schemes. This amounted to almost all the funding Vogel’s company MF Finance enjoyed in the period – during which he or his companies faced multiple investigations from tax authorities in Italy, Germany, Switzerland and Austria. At the time he was also embroiled in a legal battle with Dutch authorities about an allegedly bogus “pension fund” he created to claim enormous tax refunds in that country as well as Belgium.
- Funding for this single controversial client seemingly amounted to nearly half of the UK-based Investec Bank plc’s “prime brokerage” business at the time.
- Vogel, who also owns a game lodge in Limpopo, is reportedly considered the “spiritual father” of the tax scheme known as cum-ex which he pioneered while employed at the Belgian bank Fortis in the early 2000s.
- amaBhungane has now acquired financial statements for Vogel’s holding company MF Finance that reveal the full extent of the partnership between Vogel and Investec and how Investec doubled down in its multi-billion Euro support of Vogel after 2012, the year in which changes in German law were supposed to have quashed cum-ex trading.
- It was then that operators like Vogel pivoted towards other strategies that still relied on so-called “dividend arbitrage” to score tax refunds from governments.
Still a long way to go and in Investec who are the perpetrators? Is flesh and blood immune?