Two British investment bankers have gone on trial in Bonn in what German media have called “the biggest financial fraud trial” in the country’s postwar history.
The two British citizens, Martin Shields, 41, and Nicholas Diable, 38, are accused of having defrauded the German state of €447.5m (£405m) from London’s banking district with so-called cum-ex trading schemes, a complex shell game of share transactions.
Cum-ex transactions work by trading shares at high speed on or just before the dividend record date – the day the company checks its records to identify shareholders – and then claiming two or more refunds for capital gains tax which had in fact only been paid to the state once.
Some financial experts have likened the practice to the banking equivalent of parents claiming child benefit for multiple children when they only have one.
The trial, which is scheduled to last until January next year, is being followed with interest across Europe because many more investment bankers, working for clients including Deutsche Bank, Barclays and Sweden’s SEB, are suspected to have practised cum-ex deals between 2001 and 2012, when legislators closed the loopholes that made the practice possible.
The trial in Bonn could for the first time rule that the practice was already illegal in the years after the turn of the century.
Estimates of the cum-ex scandal’s total financial damage to the German state range from €5bn to €55bn.
The 635-page charge sheet in the trial relates specifically to 34 instances of serious tax fraud between 2006 and 2011, when Shields and Diable worked in London first as stock traders for Germany’s fourth largest bank, HypoVereinsbank (HVB), and then for Ballance Capital, an investment fund with offices in London, the Cayman Islands, Gibraltar and the British Virgin Islands.
Shields, who was born in County Down in Northern Ireland and studied engineering at Oxford University, and Diable face potential prison sentences of 10 years but can hope for a more lenient judgment after indicating their willingness to help Germany’s state prosecutor with investigations.
Speaking to the press after their first day in court on Wednesday, Shields’ defence lawyer, Hellen Schilling, said her client would “testify comprehensively” regarding the facts of the case. “He will thus make a further decisive contribution to clarifying the facts which form the basis of the legal assessment. In doing so, he consistently continues the path he has already taken in numerous interrogations with the public prosecutor’s office [in] Cologne.”
The state prosecutor, Anne Brorhilker, said Shields’ testimony had already helped speed up the trial in Bonn and other investigations.
Reading out charges against Shields and Diable, Brorhilker also named another former HVB trader, the New Zealand citizen Paul Mora, whom media reports in Germany have identified as the central architect of the cum-ex business.
Mora, a trained lawyer who is believed to reside in New Zealand, is being investigated by state prosecutors in Germany and several other European countries for carrying out cum-ex deals on behalf of Hamburg’s Warburg Bank, with which he entered an investment partnership in 2008.
According to investigations by the German TV programme Panorama and the Die Zeit newspaper, Mora founded Ballance Capital in 2008 to specialise in cum-ex operations after becoming frustrated with the size of his bonus package at HVB, said to have been up to €890,000.
Until 2015, Mora was registered as one of the directors of the Cinnamon Club, an opulent library turned Indian restaurant popular with London’s political and business elite, located in a grade II-listed Victorian building next to the Department for Education and across the road from Westminster Abbey.
According to Die Zeit, the Cinnamon Club was the central venue where cum-ex deals were contrived and later celebrated, with one insider quoted as calling it the “cum-ex lounge”.
Mora has been registered with the City regulator as fit and proper to work in the finance business on several occasions for some of the biggest names in international banking, including Merrill Lynch, Credit Suisse and UniCredit.
Mora has denied any wrongdoing. “I understand that certain transactions with which I was involved while at HVB are being reviewed by the German authorities as part of a wide-ranging investigation into mainstream transactions in the mid-2000s, the time I was working for HVB,” he said in a statement quoted in the New Zealand media. “The trades with which I had any involvement were approved by legal experts and undertaken in accordance with advice.”
