Are people who take advantage of legal loopholes criminals or just brilliant people who don’t care about societal responsibility? This is one of the primary questions that investigators are grappling with in what has been dubbed Europe’s largest tax heist. Dividend stripping is a short-term trading strategy that can help you save money on taxes.
The investor purchases a stock shortly before a dividend is declared, intending to sell it as soon as the payout is paid. Private players, banks, accounting firms, financial houses, and law companies from all over the European Union and the United States were part in the tax rebates system. The scheme’s goal was to deceive governments into believing that a stock had numerous owners on dividend payday, each of whom was promised a dividend and a tax credit.
Multiple people were able to claim ownership of the same shares and hence the right to a tax rebate by using an interpretation of the tax laws. The use of cross-border tax loopholes and deficiencies in the current systems of information exchange and cooperation between EU Member State authorities in the sectors of taxation and financial crime was a crucial aspect in the fraudulent trade activities. While the German government had purportedly known about the dividend arbitrage trading schemes for years, other Member States were only alerted in 2015. Similarly, despite multiple indications that the tax refund methods were being abused, the Danish tax authorities did nothing.
The fact that tax laws have become extremely complicated is a major issue. Correctiv, a German non-profit investigative journalism organization, began gathering evidence and piecing together the jigsaw of cross-border tax evasion in 2016. Since then, governments have begun investigations into the illegal tax refund methods and have filed criminal charges against the perpetrators.
The difficulty is that many of them are sheltering in non-EU third nations. Meanwhile, a new method of tax avoidance known as dividend stripping (cum-cum) evolved, robbing governments of even more money. According to experts, such as Jacques de Larosière, Chairman of the EU’s High-Level Group on Financial Supervision, EU Member States must obviously step up their fight against illicit financial activities by forming a united front that allows for cross-border information exchange and prosecution. While the actors involved, particularly the banks, have suffered reputational harm, politicians have escaped blame.
The Cum-Ex scheme alone is thought to have defrauded Europe’s taxpayers of €55 billion. Dieselgate is the second case. The US Environmental Protection Agency (EPA) discovered in September 2015 that Volkswagen (VW), a German automaker, had rigged diesel emissions testing in nearly eleven million cars worldwide, including 500 000 in the United States.
VW had been inserting unlawful software in its car models for years in order to make them perform better under test settings than they did on the road. Without the ‘defeat device,’ the engines released nitrogen oxide pollution that were up to 40 times higher than the permitted limit in the United States.
VW systematically overstated financial gains at the expense of the environment and public health as a result of this practice. The European Commission’s Joint Research Centre (JRC) warned in 2011 of major disparities between vehicle NOx emissions under test settings and those seen on the road, as emphasized in the ECA’s briefing document The EU’s Response to the “Dieselgate” Scandal (February, 2019). Despite the fact that the Commission initiated inquiries into possible solutions, the problem remained unaddressed, as automotive testing continued to contain defects and loopholes. In terms of compensation, the EU’s fragmented regulatory environment makes it doubtful that EU consumers will be able to obtain compensation packages similar to those secured for VW’s American customers.
Fortunately, the European Parliament is currently considering new laws to allow consumers to band together to seek compensation for illegal business activities, after other car manufacturers were discovered to have installed dubious software to adjust to testing conditions. VW agreed to pay fines totaling more than €1 billion in Germany and the Netherlands in 2018 for getting unfair economic advantages.
The scandal harmed VW’s reputation among consumers and investors, and the scandal had huge political and economic ramifications for Germany’s hallmark manufacturing industry. Looking Forward Fraud is still a concern in the private sector, as the cases above demonstrate. The chosen cases are also intriguing since they suggest that the banking and finance industries would be the hardest hit. After all, fraud is a classic example of a so-called “white collar” crime. Finally, globalisation plays a role, with deregulation in banking and finance providing fraudsters with a plethora of new opportunities.
While crime does not stop at borders, control, auditing, and prosecution are constrained by borders, as well as by national policies, laws, and administrative procedures. As a result, adherence to social, economic, and environmental rules and norms remains a changing objective for all social players. Even though the systems in place to detect and prevent financial crimes are insufficient, the cases that have appeared suggest that they are at least somewhat effective. To improve the battle against fraud and corruption, more international collaboration is required.