Looking for a different story in the business pages of The Guardian, I happened across a headline stating The men who plundered Europe’: bankers on trial for defrauding €447m. That attracted my attention, but the standfirst, in smaller print, was even more startling

Martin Shields and Nick Diable are accused of tax fraud in ‘cum-ex’ scandal worth €60bn that exposes City’s pursuit of profit

For those without a calculator handy, that’s about $A100 billion.

I think of myself as someone who pays attention to the news, but I had missed this entirely. Google reveals essentially no coverage in the main English language media. There’s a short but helpful Wikipedia article and that’s about it. The scandal has been described as the ‘crime of the century’, but it’s just one of many multi-billion dollar heists, with the GFC towering abover them all.

It remains to be seen how the trial will turn out, but it’s already clear that, as usual, the banks have got away with it. The bank most closely involved in the scam, HypoVereinsBank in German has set aside €200 million euros to cover its potential liability. That’s less than 1 per cent of the tax avoided or evaded (the lawyers will be fighting out which, for some time, but the effect on ordinary citizens is the same).

The crucial point here isn’t the failure of the law to punish wrongdoing.

What matters is that crooked deals of this scale suffice for a complete explanation of the growth of the global financial sector since the 1970s. The point of the financial sector is not to allocate capital more efficiently, but to undermine the regulatory and tax systems that are supposed to make the economy work properly. Unsurprisingly the huge financial boom has been accompanied by miserable productivity growth, repeated business collapses and massive growth in inequality.

The only way to fix the problem is to shrink the financial sector to a tiny fraction of its current size, and tightly regulate what remains. The rational route to achieve this would start with the kinds of reforms being proposed by Elizabeth Warren. But we may be stuck with a messier path, in which courts tire of giving slaps on the wrist to recidivist banks and start shutting them down.

For those interested, the name cum/ex (Latin for with/without) refers to shares before and after dividends have been paid. The scam relied on making the same shares appear to be owned by different people, in such a way that each could claim favorable tax treatment.

15 thoughts on “Cum/ex

  1. A significant move would be to develop an almost zero fee national wealth fund that all superannuation contributors could subscribe to.

  2. Plenty of new laws covering protests over logging, fracking, coal mines, etc. but as you note it’s crickets when banks make out like bandits.

  3. Harry, humans don’t like risk with their retirement savings, so the government could have put the funds into shares but provided a fixed real return on super each year. Say 6%. As the historical real return on Australian shares is a little over 8% the surplus that would build up would protect against share price falls.

  4. “Cum/ex” sounds like a specialist category of online porn. The fraud it actually denotes is much less respectable.

  5. The problem with regulation in Australia is the political interference with the regulatory bodies. Apart from appointing the people who run such bodies the federal government sees nothing wrong in sending them ministerial directions. Until our financial regulators are semi-autonomous bodies with a “hands off” clause in their mandate any amount of regulation will be less than optimal.

  6. Ronald, I would prefer that to be (if anything) an option available for superannuation investors. Current fees are unnecessarily high and only feed the leeches.

  7. “What matters is that crooked deals of this scale suffice for a complete explanation of the growth of the global financial sector since the 1970s. “

    This is hyperbole. In the Australian context, the growth of the financial sector was caused by deregulation of the banks, which let them lend virtually as much as they wanted to whoever they wanted and compulsory superannuation, which turbo charged the funds management industry.

    This particular scam looks like a plain vanilla fraud and the fact that it might have been legal is down to the complexity of national tax laws which run to tens of thousands of pages and are understood only by the people who think up these schemes. The situation is made much worse in Europe because they can arbitrage differences in national tax laws.

  8. David Allen +1

    James Wimberley “The fraud it actually denotes is much less respectable”. Chuckle +1

    Gregory J. McKenzie “Until our financial regulators are semi-autonomous bodies with a “hands off” clause in their mandate any amount of regulation will be less than optimal.” Hands off +1

    Smith9 you are correct to call it fraud but saying cum/ex “looks like a plain vanilla fraud ” is disingenuous imo, and also hyperbole.

    Bait & switch by calling cim/ex “plain vanilla” is what I’d expect from Trump or Boris.

    Is Vanilla vs “industrial scale”

    Is Vanilla vs “networks” (financual and legal across borders)

    Is Vanilla vs “the most basic cum-ex deal involves at least 12 transactions.”

    “Shields said cum-ex trades were practised on an “industrial scale” in the first decade of the 21st century, and involved a vast network of banks, companies, brokers, lawyers and financial advisers. Even the most basic cum-ex deal involves at least 12 transactions.”

    And smith9, you contradict your ‘vanilla’ with “The situation is made much worse in Europe because they can arbitrage differences in national tax laws.”

    When I buy vanilla, I can buy extract, pods, powder or icecream. From woolies. To buy your vanilla I need a phalanx of smarties and “Europe” and “differences in national tax laws.”

    Smith9 your vanilla fraud / hyperbole comment looks like the worst “apologist”. JQ’s hyperbole is at least worthy of cum/ex / financialisation, even if a stretch.

    …”…prosecutors are now conducting 56 probes with a total of about 400 suspects related to cum-ex. More than 400 individuals and companies have been sued in connection with the scheme in Denmark.

    “Estimated losses include an estimated €31.8 bn Germany, at least €17bn for France, €4.5bn in Italy, €1.7bn in Denmark and €201m for Belgium”.

    400 people and companies in Denmark involved in defrauding approx €51Billion is approx €127.5 Million EACH.
    4,000 participants = €12.7M each
    40,000 €1.27M each
    Australia – vanilla fraud $1,426 each (figures all wonkish – keen to see better – anyone? )

    Smith9 please explain vanilla fraud but don’t use Australia. Your reply will seem vanilla…
    “Assuming these 31 agencies that were unable to specify a loss were representative of all agencies that reported experiencing fraud, the grossed-up total losses for all agencies that reported experiencing fraud would be $142,653,810. ” totalling 91,091 incidents ” x 1.1 so approx 100, 000 incident making..
    $142.6m / 100,000 therefore avg fraud…
    $1,426 Each

    If we include super though?

    Cum/ex is an order of magintude or 2 in quanta and an 3 orders of magnitude by participants from most fraud.

    Vanilla fraud vs cum/ex ‘fraud’ imo is also hyperbole.

  9. What flavour would we call…
    “… the Entire Finance Industry on Trial
    “Germany’s most convoluted tax case … it’s the role of the financial services industry at large that will come under scrutiny.”

    “What Is Plain Vanilla?
    …”It is the opposite of an exotic instrument, which alters the components of a traditional financial instrument, resulting in a more complex security.”

    I cannot think of a flavour to go with cum/ex. Nor cum/cum.

  10. We need to drastically simplify the finance sector. As the Professor has suggested. Clearly a Tobin tax would stop a lot of these running raids on our retirement funds, and force value investing as the norm. Value investing is valid because thats price discovery. Other forms of stock speculation …. Not so much.

    But since the current finance system is so drowning in corrupt thinking and behaviour, it is time to resurrect the idea of social credit. There are not a great many things we ought to be thinking about socialising. But given the performance of the finance sector since the end of Bretton Woods, definitely finance needs to be in our cross-hairs.

  11. “OK it is not as big as the $100b swindle that John focuses on but $32b in fees or 1.23% of superannuation balances is a lot.”

    Yeah you bet. I’m amazed at how many ideas that Paul Keating had at the time, have turned out not so good. I mean they were all made with impeccable logic, they seemed to be the right thing at the time. I agreed with almost every change he made. But they keep on turning pear-shaped. I think its to do with the gradual but sustained corruption of the finance sector. The information era only made it easier for these people to steal off us. Sometimes at the speed of light with their automatic algorithm based trading. Sorry for being mean to you back in the early 2000’s Harry. Its all very embarrassing to me now that I have a better picture of the crowd I was batting for.

  12. “The only way to fix the problem is to shrink the financial sector to a tiny fraction of its current size, and tightly regulate what remains.”

    Anyone who disagrees with this? We need to talk. The finance sector needs to be only the oil that greases the wheels of commerce. Nothing more. We are drowning in this black sludge. Even at the best of times, interest and fees are dead value and overhead. And thats quite besides the point that a little bit of this usury might be vital. Such an admission ought to be neither here nor there.

    The quoted statement should be bipartisan, if we are all loyal Australians. We’ve seen the damage, the bailouts, the nightly central bank subsidies, the cartelisation, the four bludgers policy, the central bankers, of what is supposed to be a sovereign nation, falling on their knees in Switzerland at the foot of proven failures ………… the lawbreaking, the legalised scamming, and the diversion of loanable funds from wealth creation to land inflation, and all sorts of other wealth destroying distractions.

    Its not funny anymore. And its not good enough for Australians.

  13. There’s a chain of social logic here that pushes inexorably in this direction unless balanced by other forces:

    1. Money as transferable debt facilitates wider and higher social hierarchies;
    2. Money is socially internalised as a major standard of value
    3. Money-wealth and status become closely linked
    4. More and more life becomes monetised as people seek status

    Last stage – money as status claim becomes decoupled from actual production of value. Some event reveals the decoupling, there is an almighty bunfight over whose claims should be honoured. Other values come to the fore for a time….

    Emmanuel Saez notes that the bottom 50% of the US population have not had a raise in 40 years. Given that consumption of actual goods and services by the very rich is well below what they notionally earn, much of the “wealth” accumulated in that time is simply zeroes in a computer. It is, however, a claim to status and to a share of collective income. The environment is forcing a revaluation of those claims and that status. Bunfight in progress……

  14. German version too…


    by Julian Klinkhammer and Markus Pohlmann

    “Cum-cum and cum-ex transactions (Cum/Ex) enabled “the biggest tax theft in the history of Europe”, concluded Dr. Christoph Spengel, Professor of Business Taxation at the University of Mannheim, who had prepared a report for the 4th Enquiry Committee of the German Bundestag on Cum/Ex. A German insider, who worked as a lawyer for a long time on specialized Cum/Ex transactions, spilled the beans in front of the running camera. He reports exclusively from the “engine room” of this “devil’s machine,” as he calls it. After 14 months of interrogation by the Cologne public prosecutor, he was able to convince himself that he was part of a system of “organized crime in pinstripes” between 2006 and 2011. What has actually happened and what is behind the scandal?”

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