What is cum-ex trading and what is Ireland’s role in it?

At around 1pm on a Tuesday in early February 2010, two men working for a hedge fund sat down for a meeting in an upmarket office building on Harcourt Street in Dublin's city centre.

The pair had flown to Ireland that afternoon to meet with staff in the Dublin office of Investec, a South African bank specialising in asset and wealth management.

Investec, previous sponsor of Monaghan GAA, has operated in Ireland since 2000, with Dublin now its European headquarters.

The meeting took place at Investec's offices in the Harcourt Building. In attendance were Aneil Anand and Oliver Wulff, from the London hedge fund Duet. They were joined by Loman Gallagher (52), Investec's head of equity finance, and another colleague.

Majority see problem with understanding of sexual consent

---

Man (80s) dies in three-vehicle crash on M9

---

Coronavirus: 2,148 more cases reported as Nphet gives first briefing since August

---

Booster vaccines for over-60s can be given five months after last dose

---

The four talked business over lunch. Duet felt there was money to be made trading German stocks, if Investec was able to provide it with leverage, ie funding to carry out trades.

In an email the next day, Gallagher described a “very positive meeting” with “more than enough meeting of minds” to work together.

However, Duet had a different trading strategy to the standard playbook of most hedge funds.

It was part of a loose network of hedge funds, asset managers, banks and lawyers who had been making huge sums through a complex trading scheme, known as cum-ex.

Through a series of co-ordinated financial transactions, to buy and sell huge volumes of shares at key times around the date companies paid out dividends, the scheme allowed those involved to claim multiple refunds on dividend withholding tax that was only paid once, or in some cases not at all. The spur of trades effectively created confusion as to who was owed a refund on dividend withholding tax, allowing it to be claimed twice or more.

Cum-ex trades, which cost European tax authorities hundreds of millions of euros a year, have since been labelled as fraud by Germany's Federal Court of Justice.

An investigation by The Irish Times, in partnership with German newsroom Correctiv and 15 other media organisations, examined a huge leak of documents, dubbed the Cum-Ex Files, compiled by authorities in several European countries investigating the scheme.

The documents reveal the central role investment funds set up in Ireland played in the scheme, and how Irish financial institutions were used by those carrying out the trades.

Prof Christoph Spengel, a University of Mannheim expert on cum-ex trades, said while Irish tax authorities were not targeted by the scheme, Ireland "facilitated cum-ex transactions in other European countries," through funds set up in the country.

During the introductory meeting with Duet in February 2010, it became “apparent” that Investec was “very familiar” with cum-ex trades, Anand later told German prosecutors.

Investec would act as the prime broker for an investment fund called Caerus, named after the ancient Greek god of opportunity. Duet would manage the fund, which had been established by Varengold, a German bank involved in cum-ex trades.

By late February, Gallagher said Investec could commit “a soft limit” of €250 million leverage per share in funding, emails show.

Anand told prosecutors Investec knew the proposed trade “was a cum-ex trade” and required approval from the bank’s Dublin, London, and South African offices.

Investec Ireland's longtime chief executive, Michael Cullen, was involved in discussions with Varengold Bank at this time.

Internal emails show Cullen arranged to fly to Germany for a March 26th, 2010 meeting with Varengold executives, with the bank booking him a room at the Empire Riverside Hotel near its Hamburg offices.

Three days later Dewey & LeBoeuf, a now-collapsed law firm who wrote legal opinions underpinning many cum-ex trades, wrote an opinion on a draft agreement between Investec and Varengold, on behalf of the Caerus Fund.

The trades went ahead, resulting in profits of €92 million from tax reclaims now under investigation by German prosecutors, according to case files seen by The Irish Times.

In response to questions sent to Investec and Gallagher, Cullen said it was the bank’s policy “never to comment in relation to its transactions with existing or former clients”.

“I can confirm that these matters have been raised and discussed with all relevant regulatory authorities, and Investec continues to co-operate and assist the authorities with any queries they have in relation to the issues raised,” he said.

“All appropriate disclosures in relation to the matters under discussion have been made in Investec’s financial statements,” Cullen said.

Origins of cum-ex trading

It’s unclear how or where the idea for cum-ex trades originated, but they began around 2001.

Initially those involved targeted German tax authorities, but as word of the lucrative trades spread, tax authorities in Italy, Denmark, France, Belgium, and other European countries were targeted between 2002 and 2015.

Estimates from academics of how much was lost from European tax authorities through cum-ex trades, and similar schemes called cum-cum, over the last two decades range from €55 billion to as much as €140 billion.

Sanjay Shah (51), a hedge fund manager involved in cum-ex through his company Solo Capital, described knowledge of the scheme as "the recipe for Coca-Cola".

While the “secret” was closely guarded from the wider financial world, within an “inner circle” it was talked about openly, Shah told German outlet ARD Panorama.

A number of large banks were involved in the trades, according to leaked documents, including Merrill Lynch, Santander, Deutsche Bank and Barclays.

The cum-ex market began to heat up from 2007 onwards, as more banks and traders became familiar with the scheme.

As unemployment queues stretched amid the global financial crash, many in the cum-ex game continued to make millions –at the expense of countries’ increasingly under-pressure tax coffers.

Much of the cum-ex trades now the focus of prosecutors flowed through a small number of hedge fund and asset management companies: Duet, EQI, Solo Capital and Ballance.

Several of these had registered funds in Ireland to carry out trades, such as Solo Capital's Broadgate Ireland Funds, set up in early 2010.

Salim Mohamed, a 54-year-old hedge fund manager in the UK, was another prominent cum-ex figure, who set up EQI Irish Funds in late 2009.

Bank of Ireland’s fund administration unit had acted as custodian bank of EQI, according to an agreement seen by The Irish Times signed in December 2010. A custodian bank was a crucial cog in a cum-ex trade, responsible for holding the fund’s assets and processing the large number of transactions.

The unit, Bank of Ireland Securities Services (BOISS) was EQI's custodian bank until the middle of 2011, when the subsidiary was bought by US-based financial group Northern Trust, which continued the arrangement. EQI used a credit line from BOISS to borrow capital to carry out its trades, according to documents drawn up by German prosecutors.

German prosecutors are pursuing EQI over attempts to claim €119 million in dividend withholding tax refunds in 2011. The applications were submitted to Bonn’s tax office, “although they knew that the conditions for a tax refund were not met”, prosecutors claim.

A spokesman for BOI said it adhered “to the legislative and regulatory requirements in all countries in which it operates”. BOISS was a subsidiary which was sold in 2011, he said.

“We have not been notified that BOISS is subject to an investigation. Where contacted by relevant authorities we will always endeavour to provide assistance to any criminal investigation,” he said.

Ireland’s involvement

The number of funds set up in Ireland for cum-ex trades increased from 2011, after Germany sought to close off a loophole allowing the scheme.

In December 2010, the German Federal Ministry of Finance announced changes to how dividend reclaims would work, in an attempt to put an end to cum-ex.

The change sent a ripple of concern across the network of traders and hedge fund managers. One key cum-ex legal adviser put it bluntly in an email to colleagues: “Big problem, game over.”

Overnight those involved in the trades began looking for ways to continue the scheme. Two options that emerged were to use an investment fund registered outside of Germany, with Ireland a popular destination, or to use US pension funds as the investment vehicle.

Duet was one which set up an Irish structure in early 2011, Beech Fund. The hedge fund had a meeting with staff from the Dublin office of French bank BNP Paribas, on a rainy late January day in 2011.

During the meeting it was “completely clear” the plan being discussed was a cum-ex strategy, one attendee later told prosecutors. BNP Paribas agreed to become the custodian bank of Duet’s Beech Fund.

A spokeswoman for BNP Paribas confirmed German authorities investigating cum-ex had approached the bank “as well as all other banks operating in the German financial markets, in order to gather information relative to old operations undertaken by certain clients”.

“At the time, BNP Paribas submitted the entirety of the information requested. We continue to fully co-operate with the German authorities. We have not identified involvement by BNP Paribas in any such operations,” she said.

Shortly before the start of the 2011 dividend season, Duet decided not to proceed using the Irish structure, due to “increased risk” and “for reasons of profitability”.

One concern was that 10 per cent of withholding tax was not refundable, under Ireland’s double taxation agreement with Germany. This meant slightly less profit from the refund claims, compared to using US pension funds.

So Duet redirected investors' money into a structure set up by a rival, Ballance Group, which used eight US pension funds to carry out the cum-ex trades.

Some €123 million in dividend refund claims were submitted in 2011; however, only a small fraction was paid out by tax authorities, and amid scrutiny the outstanding claims were withdrawn.

German prosecutors are pursuing several senior Duet executives over alleged attempted tax evasion in connection with the trades, according to an arrest warrant seen by The Irish Times.

Other countries began to follow Germany’s lead to tighten tax systems to stop the scheme. While avenues to keep the money rolling in were being shut off, a string of investigations were being opened.

The investigations

On September 23rd, 2014, German authorities met with European colleagues at Eurojust, the EU’s criminal justice agency in The Hague.

The first inquiry into cum-ex was opened in Frankfurt in 2011, but by 2014 prosecutors in several German cities had mounted major investigations.

The meeting at Eurojust offices was to plan a co-ordinated day of police searches across several countries, including Ireland.

The searches were to take place simultaneously on October 14th, 2014, according to a request for assistance sent to the Garda, seen by The Irish Times.

The request asked gardaí to obtain search warrants seeking records from Bank of Ireland, the Dublin office of BNP Paribas, EQI Irish Funds and Northern Trust Securities Services (Ireland), formerly BOISS.

Following the searches gardaí sent six boxes worth of documents to German counterparts, emails show.

Investec has also been notified by prosecutors in Cologne that the bank, as well as some current and former staff, “may be involved in possible charges” over cum-ex trades, according to a 2019 report it published listing risks for its investors.

The bank noted “no formal proceedings have yet been issued”, but there were “factual issues to be resolved which may have legal consequences including financial penalties”.

Two non-executive former Irish directors of EQI were interviewed by detectives from the Garda National Economic Crime Bureau in November 2014.

Michael Boyce (67), from Cabinteely, south Dublin, a previous managing director of Ulster Bank Investment Services, told gardaí the day-to-day decisions were made by EQI executives in the UK. He said he had "no knowledge" of the details of cum-ex trades, according to a transcript of the interview.

Similarly, Thomas Murray (65), from Malahide, north Dublin, told gardaí that decisions were made in London. He said he had "no involvement in the investment decision-making process" and had "no knowledge" trades were based around claiming multiple dividend tax refunds.

In March 2020, German prosecutors secured a conviction for tax evasion in one of the first court cases. In that case, Martin Shields, one figure in the cum-ex network who previously lived on Shrewsbury Road, Dublin 4, was ordered to repay €14 million, but avoided prison time as a result of extensive co-operation with prosecutors.

More than 700 suspects remain under investigation by prosecutors in Cologne alone, with criminal inquiries spanning across a host of banks, funds and other entities.