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CumEx tax scam: Opening a Pandora’s box of financial corruption

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Sasha Planting is a seasoned financial journalist and Associate Business Editor at Daily Maverick Business.

Tax havens and their army of lawyers and corporate arrangers allow the rich to buy secrecy and circumvent the rules at best and, at worst, the secretive companies that they enable support a world of crime, corruption and wrongdoing.

First, in 2013, we had the Offshore Leaks, a cache of 2.5 million records that provided details on the secret assets of people from 170 countries and territories, including the daughter of Philippine president Ferdinand Marcos and various Ukrainian and Russian oligarchs.

Then, in 2016, came the explosive Panama Papers, with 11.5 million secret records based on a leak of files from Panamanian law firm Mossack Fonseca. This revealed the offshore holdings of current and former world leaders and more than 100 other politicians and public officials across the globe. This leak and the investigations and revelations that flowed from it became a touchstone for the debate around corruption, financial crime and inequality. Five years later its impact is still being felt, with investigations into money laundering and profiteering taking place around the world, and importantly, prosecutions following.

In 2017 came the Paradise Papers, with 13.4 million secret records that again revealed the extent to which companies and individuals would go to hide their wealth. Incredibly, it hasn’t stopped there. The latest – and largest – in this series of leaks is the so-called Pandora Papers, details about which were first published in early October by the International Consortium of Investigative Journalists (ICIJ). The papers reveal hidden wealth, tax avoidance and money laundering by some of the world’s richest and most powerful people. “There’s never been anything on this scale,” Fergus Shiel, managing editor of ICIJ, told Salon.com. Delivered to the ICIJ by an unnamed source, the files come from 14 companies involved in offshore finance and cover nearly 50 years of transactions, in some cases. Together with more than 600 media partners around the world – including SA’s AmaBhungane – the ICIJ has analysed text documents, spreadsheets, emails, and images. These include certificates of incorporation, lists of shareholders, invoices, passports and travel records.

Once again, the revelations shine a spotlight on the hidden side of international finance, exposing the secrets of tax havens and the professionals who act as a bridge to reach these jurisdictions.

Last week, in a separate investigation, amaBhungane revealed how the Irish branch of the former Investec plc, subsidiary of SA’s very upright and proper Investec, was allegedly involved in deals worth hundreds of millions of euros that resulted in European governments being defrauded through the infamous “CumEx” withholding tax scam. In so doing, notes journalist Dewald van Rensburg, the elite bank joins the ranks of lawyers, bankers and financial services outfits from across the world implicated in what is widely reported to be the largest fraud in history, allegedly costing European revenue services more than €55-billion, mostly between 2007 and 2012.

The scam saw wealthy punters buying and selling shares in a listed company immediately before and after the declaration of dividends, with the intention of claiming back a withholding tax on the dividend that got paid out – not once but twice. The traders exploited a legal loophole, apparently making it “legitimate”. But it doesn’t take a rocket scientist to recognise that something can stink to high heaven even when it’s technically legal. The bank told Van Rensburg that no current or former employees, nor the bank itself, had been criminally charged, indicted or subpoenaed, and said it was cooperating with German authorities in their investigation.

That’s the thing. Tax havens and their army of lawyers and corporate arrangers allow the rich to buy secrecy and circumvent the rules at best and, at worst, the secretive companies that they enable support a world of crime, corruption and wrongdoing.

According to the International Monetary Fund, tax havens like Bermuda, the Cayman Islands, Switzerland, Hong Kong … the list goes on … cost governments between $400-billion and $800-billion every year in lost tax revenues from corporations and individuals. These types of numbers are trotted out so often that is easy to dissociate from them. But this is real money. It is money that is not being spent on schools, roads, hospitals or the transition to a low-carbon economy.

But change is coming and these leaks go further than inciting citizens to throw bananas and yogurt in Iceland and rocks in Pakistan, as the Panama Papers did. They are having an impact. The ICIJ reports that world leaders in Latin America, the Czech Republic, Ecuador and more are already facing official scrutiny over financial activity revealed by the Pandora investigation.

This latest leak, and the sheer scale of it, comes at a challenging time. The global impact of Covid-19 has made the world a very different place, exacerbating differences between rich and poor and developed and less developed countries. The pandemic has led to record levels of government borrowing, for which ordinary taxpayers will have to foot the bill, probably for decades to come.

Thus, shedding light on the financial affairs of the elite, including 35 current and former heads of state and more than 300 public officials, is the right and proper thing to do. Politicians and their backers need to be held to account for their promises and need to be asked if their own financial affairs present a conflict of interest.

And the role played by the bureaucrats who prefer to remain in the shadows – the offshore providers, accountants and lawyers who assume a moral high ground but help set up and service these offshore structures – must be exposed.

It may be time to lawyer up if you believe your name could surface one day.

I salute the work of the ICIJ and our own amaBhungane in this regard. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.

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