© Kim van Dam / ANP
Fortis Bank Netherlands engaged in fraudulent CumEx deals after its nationalisation
Shortly after the nationalisation of Fortis and ABN Amro, the brand-new state-owned bank engaged heavily in fraudulent CumEx deals to plunder the German treasury. This happened with the full knowledge of the auditing firm KPMG and the regulator, De Nederlandsche Bank. This is apparent from a confidential document that Follow the Money managed to acquire.
A few months after Dutch taxpayers bailed out Fortis Bank Nederland and ABN Amro in late 2008, Fortis began plotting fraudulent transactions at the cost of the German treasury. On 27 January 2009, an employee of the bank sent several proposals to the risk committee of the Merchant Bank division. These were related to the Global Securities Financing Group (GSFG) division, part of Fortis Merchant Bank.
A confidential document obtained by Follow the Money reveals that one of the proposals suggested carrying out CumEx trading in Germany. It involved potentially tens of millions that Fortis would illegally reclaim from the German Tax Authority. ‘Those transactions were approved,’ a former GSFG employee told Follow the Money. ‘CumEx was a good fit in the Merchant Bank Risk Committee’s risk appetite at the time. There was money to be made!’
The document also discussed risks related to auditors and regulators. The bank had had its CumEx division GSFG audited by KPMG in 2008, but that did not lead to the cessation of CumEx trading.
DNB was ‘rather negative’ about CumEx transactions, but Fortis was nevertheless able to reach agreements with the regulator about continuing them
The CumEx transactions at GSFG were discussed with the regulator as well: De Nederlandsche Bank (DNB). DNB’s opinion was ‘rather negative’, but Fortis was nevertheless able to reach agreements with the regulator about continuing the transactions. The bank agreed with the DNB that the size would cover ‘a maximum of 75 per cent of the 2006 market volume’. However, both DNB and KPMG deemed that, regarding CumEx, ‘procedural’ and ‘organisational’ improvements needed to be made within GSFG.
The document also mentions a visit by the Tax Authority. ‘In 2007, the Tax Authority investigated GSFG activities. No enquiries were received about the C-E activities.’ ‘C-E activities’ refers to CumEx.
‘It’s strange that the Tax Authority did not raise the alarm about CumEx. Perhaps they saw it as a German problem,’ says Dutch tax law professor Jan van de Streek. ‘In any case, this internal Fortis document from 2009 shows that the Tax Authority had good reason to actively seek cooperation with DNB and the AFM in the same period to get banks to stop dividend stripping. But I fear that there was no stopping this bank’s opportunism’.
CumEx transactions are incredibly complex and aim to recover dividend tax that was never paid. Both the share owner and the party that has artificially acquired a dividend certificate through a scheme claim back the dividend tax. The trick is also known as double dipping.
CumEx has been banned in Germany since 2012, and since 2013, the Public Prosecutor’s offices of several federal states have been conducting criminal investigations into the practice. Two years ago, the first CumEx traders were criminally convicted. Since then, several former bankers have been sentenced to prison and ordered to pay hefty damage claims in various German courts. The length of prison sentences varies between 1.5 and 5.5 years. Earlier this month, on 13 December, a new record was set: the well-known German tax expert Hanno Berger was told by a judge in Bonn that he will be spending 8 years behind bars.
Uproar within Fortis becomes public
That CumEx transactions were being carried out within Fortis Bank Nederland was already public knowledge in 2009. In February 2005, a whistleblower came forward internally to expose the unethical nature of CumEx trading. His name: Stefan Stanciu. He was a derivatives trader in the Global Securities Lending & Arbitrage (GSLA) department, where CumEx trades had been set up successfully for years.
In his report, Stanciu stated that some department employees used to call business associates with mobile phones to harness transactions. Calling with mobile phones is considered a mortal sin within banks; employees should use landlines, which automatically record all calls. Details of Stanciu’s report were shared with several members of the bank’s board, including Jan van Rutte, the CEO of Fortis Bank Nederland in 2009.
Soon afterwards, the GSLA department was to be renamed Global Securities Financing Group (GSFG). Despite assurances from senior management that Stanciu would be treated – and protected – as a whistleblower, he was fired by his boss Frank Vogel shortly after his report. It wasn’t long before Vogel and his right-hand man Olaf Ephraim, who were in charge of setting up the CumEx transactions, had to pack their own bags. The bank’s predominantly Belgian top brass had had enough of the wayward duo, who, with their millions in bonuses, earned more than they did and who were unwilling to make concessions to the concern’s top brass.
The issue concerning the dismissal of Vogel and Ephraim (who is now MP for the Van Haga Group) spiralled into an uproar that was scooped up by journalists. Het Financieele Dagblad and De Telegraaf published on the issue and described the CumEx trade that the GSLA department had set up. Fortis managing director Frans Demmenie, Vogel and Ephraim’s boss, engineered the duo’s departure from the bank.
He masked the stink about the whistleblower’s dismissal with a lie in Het Financieele Dagblad: Demmenie told the financial newspaper that Stanciu had made his report only after he had been fired. A year later, business magazine Quote published an in-depth article on the settlement with whistleblower Stanciu, Fortis’ CumEx trading and the power struggle at the GSLA department.
In 2006, the Dutch Fiscal Information and Investigation Service held a presentation regarding the nature and extent of the CumEx trade. They estimated the damage to the coffers of various governments to be “several billion euros”
Vogel and Ephraim challenged their dismissal by Fortis. They also sued whistleblower Stanciu and claimed 10 million euros in damages in court for loss of reputation. In that lawsuit, the pair claimed to be the ‘founding fathers’ of CumEx trading within Fortis. According to Vogel and Ephraim, CumEx was a legitimate trade. They substantiated this with, among other things, a so-called legal opinion from law firm Allen & Overy, which stated that CumEx was a legal trading form. Law firm Freshfields, which also issued its legal views on CumEx at Fortis, is now facing criminal charges in Germany for its involvement in CumEx trading.
The bank’s top brass was also well abreast, Vogel and Ephraim argued at the time. ‘The head of Merchant Bank and member of the Fortis Executive Committee knew about the nature of the transactions and that they were being carried out by GSLA,’ as stated in the factual report of the Amsterdam court ruling. And: ‘GSLA always requested permission from Fortis’ highest risk committee in accordance with the procedures.’
The Ministry of Finance, at the highest level, was also aware of Fortis’ CumEx trading. In 2006, the Dutch Fiscal Information and Investigation Service (FIOD) held a presentation regarding the nature and extent of the CumEx trade. They estimated the damage to the coffers of various governments to be ‘several billion euros’. The FIOD called for a ‘full-scale criminal investigation’, as Follow the Money revealed in 2019, but that never materialised. A year later, even the Tax Authority – of which the FIOD is a part – appeared to not have many issues with CumEx transactions within GSFG, at least not according to the document.
‘Largest expected revenue’
Previous investigations by Follow the Money revealed in late 2018 that dividend stripping and facilitation continued at Fortis – and later at ABN Amro – until 2016. The confidential document, dated January 2009, addressed to the Merchant Bank Risk Committee (MBRC) that Follow the Money recently obtained reveals for the first time how CumEx transactions were being reported within the bank, and that they were still being set up and approved even after the bank’s nationalisation.
The Complex Transaction Committee was the entity within Fortis that made recommendations to the MBRC. The Risk, Legal, Tax and Compliance departments were represented in this committee. When the committee convened on 15 January 2009, the meeting was chaired by Frank Vogel’s former boss Frans Demmenie. He was one of the few people aware of GSFG’s track record and the CumEx trading. When Follow the Money asked him about the matter, he stated that he ‘has no recollection’ of the document in question, nor of the existence of said Complex Transaction Committee. ‘Doesn’t ring a bell at all, but that could be because of my age; I’m 71 now.’
About CumEx: ‘That such trading was possible was largely due to the governments and regulators themselves. They could have plugged the hole by making a few adjustments to the system, but I never heard anybody about that.’
The Tax Department had announced before the meeting that it saw no point in ‘continuing’ certain types of transactions in 2009. CumEx deals in Switzerland were among them. The document states: ‘The tax advice is based on tax law developments in the countries concerned, but also on aspects such as sustainability and reputation, taking into account the new identity of FBN [Fortis Bank Nederland, eds.].’ That ‘new identity’ included the upcoming merger of Fortis Bank Nederland and ABN Amro. The new owner of both banks was part of that ‘new identity’: the Dutch government.
The Complex Transaction Committee had listed all possible deals with a tax component in an overview called the ‘Boardtable’ – including the recommendation ‘Approve the Boardtable.’
The Boardtable also lists ‘German CumEx’. CumEx is among the transactions with the ‘largest expected revenue’, according to the explanation in the Boardtable. For MBRC members who do not understand what that trade precisely entails, the document includes the following explanation:
‘Possibilities arise that dividend withholding tax (WHT) could be reclaimed by more than one party: the so-called “double-dip”’ – Fortis Boardtable, January 2009
‘Cum-Ex is a situation in which transactions are done over the ex-dividend date of a share. Due to the settlement system (in several countries), possibilities arise that dividend withholding tax (WHT) could be reclaimed by more than one party: the so-called ”double-dip”.’ This was followed by half an A4-sized annexure explaining the technicalities of this trading form.
In addition, Fortis in Germany was doing another form of dividend stripping through GSFG’s Frankfurt branch: CumCum. This trading form was also subsumed under the heading of ‘largest expected revenue’. Unlike CumEx, this type of transaction does not involve double dipping, but recovers dividend tax to which the share owner himself is not entitled, via a constructed temporary new ownership. This technique is explained in the document as well. Fortis also engaged in dividend stripping in other countries: Switzerland, France, Spain, Portugal and the Netherlands.
In August 2021,when publishing its quarterly figures, ABN Amro announced that the Dutch Public Prosecutor’s office was investigating the bank’s use of this form of dividend stripping (CumCum). The Public Prosecutor’s office suspects that US merchant bank Morgan Stanley may also be guilty of committing such offences. This involved stripping dividends from shares listed on the Amsterdam stock exchange, at the cost of the Dutch treasury. Last year, the Public Prosecutor’s office confirmed to Follow the Money that the two cases were connected.
Earnings and risks
For 2008, the bank still had 86 million euros outstanding in tax refunds that it expected to receive. In 2009, the GSFG department expected to earn 65 million with the intended trades, about half of the department’s annual turnover.
‘Can we afford renewed publications about this subject?’
Obviously, this trading form is not without risks; these are described in the document. Reputational damage is addressed first. ‘In recent years there were several articles in the Dutch papers where a possible involvement of FBN in Cum-Ex was described,’ the first sentence reads. Then the essential question is raised: ‘Now that ABN-FBN will become one of the 3 “big sisters” in The Netherlands, and in view of all the developments [at] Fortis-FBN, the Dutch media watch FBN closely. Can we afford renewed publications about this subject?’
The opening of the answer that the Merchant Bank Risk Committee would eventually give followed immediately after: ‘On the other hand: The GSFG business will be a relatively much smaller part of the total bank activities after the integration [of ] ABN-FBN. We should not overestimate the risk. And GSFG is an important market player in Securities Financing business throughout the year. Would market participants accept that we stop doing business around Cum-Ex dates?’
‘The collusion lies within this sentence,’ a former GSFG employee says to Follow the Money. ‘There were agreements which they had better not break. Fortis was part of it, and they wanted to continue with it because the bank could make a lot of money from it.’
Under tax risks, the document mentions that several European tax authorities have taken measures ‘which made Cum-Ex transactions (partly) unattractive. This is the case in Switzerland’. Changes to the German tax law in 2007 are also discussed. The purpose of that amendment was ‘to stop the possibility of a double WHT [withholding tax, eds.] reclaim. The situation for non-German residents was and is however still unchanged [..].’
‘For the German Cum-Ex as well as for the other proposed transactions, we received an [sic] positive external and internal tax advice: from a technical tax point of view OK.’ One of the tax experts who looked into this – he was also one of the recipients of the document – was Bas Castelijn, then Global Head of Tax for Merchant, Private and Retail banking.
Castelijn is currently the Lead Tax Partner Financial Services Industry at Deloitte Netherlands. On his behalf, a Deloitte spokesperson informed us that he could not comment on questions relating to the former Fortis bank. Likewise, ABN Amro, DNB, KPMG, the Tax Authority and several people directly responsible, such as former CEO Jan van Rutte and former board member and Chief Risk Officer Jeroen Dijst, did not wish to comment substantively on Follow the Moneys findings and questions.
Tax law professor Jan van de Streek on the matter: ´I think this internal document is rock-solid evidence of non-integrated management. Instead of taking management measures against dividend stripping, the bank is in fact seeking opportunities to participate in these shady transactions.’
Translation: Delia Burggraaf
What is the Minister’s view on findings?
‘The observed findings are in line with what was already common knowledge. Wopke Hoekstra, former Minister of Finance, reported the following to Parliament in 2018. This still applies.
Financial institutions, including banks, should act with integrity. This includes not committing in or contributing to fraud in any way. Tax compliance itself is not subject to supervision by De Nederlandsche Bank (DNB). However, in broad terms, DNB does play a role in monitoring the integrity of banks. Indications of fraud could play a role in assessing a bank’s controlled and ethical business operations and compliance with the open norm of acting in a socially decent manner.
Furthermore, these indications can be taken into account when assessing policymakers and serve as grounds for reassessing a policymaker. Given their social responsibility, banks should not want to conduct transactions aimed at dividend stripping, neither for themselves nor for their clients. The Minister regularly addresses the industry on its social responsibility and will continue to do so.
NLFI manages shareholdings in temporary financial institutions, including ABN AMRO and Volksbank, on behalf of the state. The establishment of NLFI in mid-2011 accommodated the Lower House’s preference for the shareholding in some financial institutions to be conducted in a business-like, non-political manner and for the interests to be separated transparently.
ABN AMRO informed NLFI and the Finance Minister’s predecessor in 2015 that the bank is in close contact with the German authorities and is constructively cooperating with investigations into whether banks were justified in recovering dividend tax in the period up to 2012. Information about these investigations was also included in ABN AMRO’s 2015 prospectus and recent annual reports.In the period before NLFI was set up, in the first years after the acquisition of the Dutch parts of the “old” ABN AMRO and Fortis Bank Nederland, the state was informed by ABN AMRO about investigations by tax authorities into dividend stripping and its settlement. In addition, the new strategic direction of the acquired parts was discussed. The state and ABN AMRO then jointly decided to wind down activities related to dividend stripping.
In 2019, again under the ministerial tenure of Wopke Hoekstra, something was added to this, and that, too, still applies.
ABN AMRO has informed the ministry that, in recent years, the bank has increasingly formulated and tightened its policy, which shows that it does not want to be involved (anymore) in activities such as dividend stripping, even if, in a given situation, that would result in withheld dividend tax normally deductible now no longer being deductible. I agree with this policy of ABN AMRO. Given their social responsibility, banks should not want to conduct transactions aimed at dividend stripping, neither for themselves nor for their clients.’
At that time, did DNB warn the Minister about the risk of these trading activities at this state-owned company? If yes: when and where is this evidenced? If no: why not?
‘That is unknown.’
Did the Minister later point out to NLFi that dividend stripping and/or facilitation thereof was a controversial activity through which the state-owned bank believed it could make money? After the nationalisation, did the Minister urge the top management of Fortis Bank Nederland, and later ABN AMRO, to stop dividend stripping? If yes: when and where is this evidenced? If no: why not?
‘In the first years after the acquisition of the Dutch parts of the ‘old’ ABN AMRO and Fortis Bank Nederland, the state was informed by ABN AMRO about investigations by tax authorities into dividend stripping and its settling. Additionally, the new strategic direction of the acquired parts was discussed. The state and ABN AMRO then jointly decided to wind down activities related to dividend stripping.’