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ANALYSIS-100 banks, 1,000 suspects: German fraud investigation puts Scholz in the hot seat


By Marta Orosz and Tom Sims

FRANKFURT, August 17 (Reuters)German Chancellor Olaf Scholz faces questions from lawmakers this week over his role in tackling multibillion-euro tax evasion as a sprawling investigation into the scheme threatens to undermine him as he grapples with an energy crisis and the fallout from war.

Under the scheme, known as “cum-ex” or dividend stripping, banks and investors would quickly trade shares of companies around their dividend payment day, blurring shareholding and allowing multiple parties from wrongfully claiming dividend tax refunds.

The now closed loophole has snowballed into a political scandal, reignited by recent headlines that prosecutors investigating the scheme in Hamburg, where Scholz was previously mayor, discovered 200,000 euros in cash in the safe -fort of a local politician.

The probe has long taken on vast dimensions. Government officials say it is about 100 banks on four continents and at least 1,000 suspects. It’s been dragging on for Scholz at a time when his restless governing coalition grapples with growing public discontent over soaring energy costs following Russia’s invasion of Ukraine.

On Friday, Scholz faces local lawmakers in Hamburg who are investigating why when Scholz was mayor it took an intervention from the Ministry of Finance for local authorities to move and demand repayment of the millions of euros earned under the program by Warburg, a major local bank.

Scholz rejected suggestions for political intervention on behalf of the bank, but local lawmakers say the issue has yet to be resolved.

“The suspicion of political influence must be dispelled,” said Goetz Wiese, a Christian Democrat politician who will interview Scholz. “Scholz must put all the facts on the table.”.

During the 2021 election campaign, Scholz came under pressure over fraud at Wirecard, which has since collapsed. It didn’t derail his bid to become chancellor, but Fabio De Masi, a former German member of parliament who investigated the case and the Wirecard scandal, said this time it might be different.

“This case has a lot of potential to put Scholz at risk,” De Masi said.

“The political environment is different now with rising gas prices.”

Some 48% of respondents in a survey by German broadcaster Welt TV said the ex-cum scandal would “permanently damage” Scholz.

The chancellor previously clashed with lawmakers in Hamburg last year and admitted to having had a series of meetings with the then president of Warburg and although he said he could not remember the details, he did denied using his influence as mayor to delay repayment of funds.

“It’s been a problem for two and a half years now,” Scholz told reporters recently. “Countless cases have been studied, countless people have been heard. The result is always: there was no political influence.

MONEY BOX

But the case has again hit the headlines in recent weeks.

State investigators investigating the tax scam found more than 200,000 euros in cash in a safe belonging to a former Hamburg politician from Scholz’s Social Democratic Party, a person with direct knowledge of the incident said. investigation.

Scholz denied any knowledge of the money or where it came from and said he no longer has contact with the lawmaker involved. The lawmaker did not respond to a request for comment.

But the discovery, which was widely reported in German media, has reignited interest in the case and will heighten scrutiny from Scholz when he speaks on Friday.

Authorities seeking to hold individuals and institutions accountable for one of Germany’s biggest post-war frauds and recover money for government coffers have raided the local offices of banks such as Morgan Stanley, Bank of America and Barclays. The mastermind behind the complex tax scheme has been extradited from Switzerland to stand trial in Germany.

Warburg said it refunded the required taxes. Morgan Stanley and Barclays declined to comment. Bank of America said it was cooperating with authorities.

Lawmakers and officials say the effort is far from over.

“It will take many more years for Germany to overcome this huge tax evasion,” said Milan Pein, a member of a Hamburg parliamentary committee who will question Scholz.

Germany’s finance ministry told Reuters last week that the country’s 16 states had identified 3.9 billion euros in damages to taxpayers and that 1.8 billion euros had been or were in the process of being be recovered.

But this government tally is almost two years old and experts say the actual damage could be far greater.

Christoph Spengel, a professor of international taxation at the University of Mannheim and a member of the finance ministry’s advisory board, estimated the total damage at 10 billion euros and said the practice of dividend stripping could still continue.

The Ministry of Finance in Hesse, home to the country’s financial capital, Frankfurt, says 30 banks owe 527 million euros and have so far repaid 285 million euros.

Bavaria’s finance ministry told Reuters it had assessed damage of 746 million euros caused by seven banks. Lenders have so far repaid 347 million euros.

Germany’s state-owned banks were also participating in the dividend stripping program by pocketing tax cuts.

LBBW, the largest state-owned bank headquartered in Stuttgart, said it had refunded 166 million euros in taxes it wrongly claimed and received in 2007 and 2008.

In general, banks acted either as creditors for investors, brokering transactions and collecting fees, or claiming back taxes to which they were not entitled.

Cologne prosecutors have been particularly aggressive in pursuing the case. A representative said he was currently investigating 50 international and domestic financial institutions and brokers.

In 2020, two British bankers were sentenced to suspended prison sentences and one to 14 million euros in fines in the first criminal conviction in this case.

Earlier this year, another banker, a former employee of the MM Warburg group, was sentenced to prison. The judge said that as chief executive of a Warburg investment firm, he helped set up two funds to profit from the deals.

(Additional reporting by Sarah Marsh and Andreas Rinke in Berlin; Editing by John O’Donnell and Tomasz Janowski)

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