< Back

11th October 2019, 21:06

​Gibraltar-based investment bankers on trial in Germany’s biggest ever tax evasion scandal

Two British investment bankers who worked in Gibraltar are standing trial accused of orchestrating transactions that allegedly took almost €450m from the German state illegally.

41-year-old Martin Shields and 38-year-old Nick Diable are standing trial in Germany, charged with “aggravated tax evasion” between 2006 and 2011. They are cooperating with prosecutors.

The trading practice at the heart of the court case is known as ‘cum ex’. Across the financial industry, it is believed to have resulted in up to 55 billion Euros in lost revenue for taxpayers because of a loophole that allowed tax refunds to be claimed twice.

The German media have called it “the biggest financial fraud trial” in the country’s postwar history.

Martin Shields and Nick Diable are on trial in Bonn, Germany - they’re accused of 33 instances of serious tax evasion. GBC understands about six of them relate to work done in Gibraltar. They deny any wrongdoing.

According to the international news agency Reuters, the 635-page German charge sheet spans a period of time in which both men worked in London first as stock traders for Germany’s fourth largest bank, HypoVereinsbank (HVB), and then for Ballance Capital, an investment fund with offices in London, the Cayman Islands, the British Virgin Islands and Gibraltar.

The two defendants lived, worked & played in Gibraltar

In 2008 Mr Shields came to live on the Rock and Mr Diable followed in 2009. They settled down here, bought property, played tennis at Sandpits, football and hockey at the Victoria Stadium. Working from an office above the casino at Leisure Island in Ocean Village, their trading brought impressive financial rewards. According to the Guardian, Mr Shields personally pocketed €12m in just five years as a result of trades through the Gibraltar-based company Ballance Capital.

German state prosecutor Anne Brorhilker said the two men had started the scheme when working at German bank HVB, before moving to the small investment firm based on the Rock, tapping a wide network of contacts to arrange the trades, sometimes splitting the profit made with banks.

How the alleged fraud worked & the full extent of the losses

Cum-ex schemes involved trading vast amounts of shares around a syndicate of banks, investors and hedge funds to give the impression of two or more owners, each entitled to a tax rebate - even though the tax had only been paid once. Among the companies targeted by the investment bankers were carmaker BMW and airline Lufthansa.

The trial of the two Gibraltar-based investment bankers forms part of a wider investigation aimed at recovering billions from banks which prosecutors believe profited from the trades in 11 European countries. Estimated losses include an estimated €31.8 billion in Germany, at least €17bn for France, €4.5bn in Italy, €1.7bn in Denmark and €201m for Belgium.

Diable’s evidence: no reason to believe cum-ex illegal

Both men have already given evidence in court. The London newspaper The Economist says Mr Shields masterminded the cum-ex deals, while Mr Diable played a supporting role.

Mr Diable said he wasn’t aware of some details of the cum-ex deals until he traveled to Cologne last year to talk to prosecutors. The 38-year-old has not denied he was involved in the trading, but - even though he had been under investigation for seven years - he says he had no reason to believe it was illegal.

He said his work had involved entertaining customers in “bars and restaurants” in London, at Germany’s Oktoberfest beer festival, as well as in Gibraltar.

Reuters says Mr Diable played down his role during the court hearing in Bonn, describing his work as that of a salaried technician with a focus on getting trades done rather than a mastermind. He reportedly told the three German judges overseeing his case that every trade had full internal approval and therefore for him “it was only a question of whether the trade was possible or not”.

Shield’s evidence: cum-ex was not clandestine approach of a few, most banks expected it

When giving evidence, Mr Shields - an engineering graduate from Oxford University - did not respond directly to the criminal charges. But - according to the Guardian - he did say in hindsight he had started to feel regret about devising the schemes, which hoovered up money that could have otherwise been spent on building roads, hospitals or nurseries.

Mr Shields told the court “the number of trades going through the market was astronomical” and that he had no reason to believe at the time that cum-ex was legally questionable. Reuters reports that he told the court “this was not the clandestine approach of a few,” describing it as the “clear and openly communicated expectation of most banks and their customers”.

His testimony included a detailed powerpoint presentation showing the way cum-ex deals were structured and the names of the banks and financial institutions involved. It is considered a critical building block in pursuing others who were potentially involved and potentially recovering the vast amount of money lost.

International spotlight as scope of investigation could broaden

Media conglomerate Bloomberg says there’s no formal deal that grants the defendants leniency, but they will be hoping to avoid a lengthy prison term by cooperating and helping to uncover crucial elements of the transactions, as well as people and financial-industry players that were involved. The court will have to determine whether the practice was legal and whether people participating can be convicted of crimes. Bloomberg says the German government was aware at the time that double refunds could occur and stepped in only at a very late stage - 2012 - to abolish the practice.

So far, the Cum-Ex scandal has caught up lenders including Deutsche Bank, Bank of New York Mellon Corp. and Societe-Generale. The Economist says representatives of MM Warburg, Warburg Invest, Hansainvest Hanseatische, BNY Mellon and Societe-Generale have all been in the courtroom for the trial of Mr Shields and Mr Diable.

France’s Le Monde has described it as the “robbery of the century”. The Dutch media has dubbed it “organized crime in pinstripe suits”.

The trial in Germany is expected to last till February. The Economist says it could be the first of many. It is being closely followed in London and Frankfurt, the cities where much of the cum-ex trading was reportedly organized.

Given the Gibraltar links detailed here, it will now be closely followed here too.