In November 2011, the Dutch state-owned bank ABN Amro had to answer sensitive questions from the tax authority of the German state of Hesse. A series of securities transactions through which the bank had made tens of millions in previous years had caught the authority’s attention. The transactions had been set up in Amsterdam, starting in the late nineties. ‘Dividend arbitrage’ is the fancy name for the type of transactions carried out by bankers.

The term’ dividend stripping’ better describes what it was all about: wrongly reclaiming dividend tax from tax authorities through complex constructions. There are basically two variants: CumEx and CumCum. With the former, the dividend tax is reclaimed twice, even though it had been paid only once. Traders also call it ‘double dipping’. And this variant was the one often set up in Amsterdam, in close cooperation with the Frankfurt branch. Governments have been trying to put an end to this trading practice for years now.

ABN Amro divested its dividend-stripping division, Global Securities Lending & Arbitrage (GSLA), through a management buyout in 2010. Henceforth, Mainhattan Finance & Trading would focus on dividend stripping from its base in Frankfurt, where it continued doing plenty of business with ABN Amro.

Krug is on the Cologne prosecutor’s list of suspects and is still the top executive of the ABN Amro Frankfurt office

The tax authority in Frankfurt wanted to check securities transactions carried out in the financial years 2007 to 2009 to see whether ABN Amro was entitled to reclaim dividend tax. According to confidential documents that Follow the Money managed to obtain, the amount  involved was 97.8 million euros, almost 15 per cent of the total profit the Dutch state-owned bank expected to make for 2011.

In February 2012, the bank and two representatives of the tax authorities, including the tax inspector, held a meeting. Among those present was Martin Krug, the German Managing Director of ABN Amro Frankfurt. Krug is on the Cologne prosecutor’s list of suspects – Follow the Money has possessed a copy of the list since 2021 – and is still the top executive of the ABN Amro Frankfurt office. Also present: one of the owners of Mainhattan and two gentlemen from the KPMG accounting and consulting firm.

At the time, KPMG was the state-owned bank’s auditor. The auditor checks ABN Amro’s figures and – if they are in order – issues a statement of approval. KPMG did the same at Mainhattan’s parent company, the Kirchberg Group. However, the two KPMG representatives who joined the meeting with the German tax authorities weren’t accountants, but tax consultants.

Fighting the taxman

The only topic of the meeting was the tax treatment of the securities transactions in question. The tax inspector had a reassuring announcement for the bankers, informing them ‘that he saw no reason not to accept the withholding tax credits’. He believed he could conclude the tax audit without any adjustments. That meant ABN Amro did not have to repay the 97.8 million euros to the German tax authorities. There was only one caveat: he had yet to get the approval of Frankfurt’s regional tax authority.

ABN Amro wanted to challenge the decision. And KPMG assisted the bank in the process

After that, nothing happened for seven months. On 26 October 2012, the inspector announced his verdict on the dividend tax previously collected by the bankers through CumEx and CumCum transactions: he had concluded that Fortis Holding was not entitled to those refunds.

On 30 October 2012, the inspector came to explain the standpoint. A refund is only possible if the owner of the shares has paid the dividend tax. But with CumEx transactions, dividend tax that was never actually paid is being reclaimed.

German tax authorities had established that the bank did not own the shares, which resulted in a costly consequence: ABN Amro had to repay the German tax authorities 97.8 million euros. But the bank was unwilling to accept that: together with Mainhattan, it wanted to challenge the decision. And KPMG assisted the bank in the process.

In 2012, it had already been known for years that the German tax office was being defrauded through CumEx transactions, but it was only then that the immensity of the wrongdoings became clear: the damage amounted to billions, and the German finance ministry sprang into action. In 2012, a change in the law plugged the biggest loophole in the system, making CumEx virtually impossible. A year later, a large-scale criminal investigation into CumEx fraud was launched in Germany.

Authorities now suspect more than 1,700 bankers, traders, lawyers and tax consultants of being involved in CumEx fraud. Last year, the former Minister of Justice of the state of North Rhine-Westphalia described CumEx as ‘industrially exploited white-collar crime’.

The fight with the German tax authorities dragged on for years, and ended in 2017 with ABN Amro paying back the money

On 1 November 2012, the two KPMG tax consultants advised Martin Krug, Managing Director of ABN Amro Frankfurt, to nevertheless take steps to retain the tens of millions of euros the bank had managed to collect through dividend stripping for the state-owned bank. Among other things, they informed Krug that ‘the tax recovery notices should be analysed in detail to ascertain whether the tax authorities were entitled to impose such tax bills’.

The fight with the German tax authorities dragged on for years. The prospectus drawn up for ABN Amro’s IPO in November of 2015 mentioned the skirmishes with the German tax authorities and those in Switzerland, where the bank was similarly engaged in dividend stripping. That prospectus shows that ABN Amro included a 150 million euro provision to cover future claims. It wasn’t until 2017 that the proceedings with the German tax authorities ended, and ABN Amro paid back the millions it had collected through, among other things, fraudulent CumEx transactions.

The Bundestag enquiry committee

It became clear last December that, as ABN Amro’s auditor, KPMG had no objections to the fraudulent dividend stripping. At the time, Follow the Money revealed, based on an internal bank document, that the accountants had, among other things, reviewed the operations of the department in question within the bank in 2008, ‘which resulted in several requirements for (procedural/organisational) improvements’.

Fortis Bank Netherlands – and later ABN Amro – were certainly not the only KPMG clients conducting CumEx transactions, according to a report by the German Bundestag’s CumEx enquiry committee. That report was published in the summer of 2017; KPMG is mentioned 34 times. ‘Without the commercial provision of tax returns, especially by big commercial law firms such as Freshfields or accounting firms like KPMG, these deals would not have been possible,’ the German Bundestag’s CumEx enquiry committee wrote.

The report also talks about KPMG’s questionable role as an investigator of dividend-stripping abuses

In 2007 and 2008, KPMG advised clients such as the Landesbank Baden-Württemberg (LBBW) on CumEx. Reports by KPMG allegedly provided the legal justification for the bank’s directors to continue this trading.

The report also talks about KPMG’s questionable role as an investigator of dividend-stripping abuses. It seems this occurred when Germany’s largest Landesbank – WestLB – was discredited in 2007 for large speculative transactions.

The BaFin ordered an investigation at WestLB in April 2007. It was carried out by KPMG, according to a former Minister of Finance of the state of North Rhine-Westphalia. The investigation supposedly concluded that no CumEx transactions had been carried out at WestLB.

KPMG firmly denied that it had investigated CumEx at WestLB and also said it had ’at no time’ provided advice ‘on designing illegal circumvention models’. The enquiry committee’s report nevertheless pointed to the ‘problematic double role’ of an accounting firm that both investigates possible wrongdoing with CumEx transactions and, at the same time, legitimises these transactions for clients through reports and advice: ‘Playing both sides of the coin always gets you into trouble.’

Raid at KPMG in Frankfurt

For a long time, the press barely covered the role of auditors in the large-scale CumEx fraud. In September last year, that changed. A big raid at KPMG by German investigating authorities alerted not only thousands of KPMG employees but also financial journalists.

The raid was ordered by the Cologne prosecutor’s office and involved Germany’s largest office building: The Squaire near Frankfurt airport. KPMG is one of the main tenants of this 660-metre-long building, and tax consultants who assisted ABN Amro and Mainhattan also worked there. In addition, raids were conducted at the homes of (former) KPMG employees.

Several banks whose financial statements KPMG audited have been in disrepute for years because of their role in the German CumEx scandal

‘Experts report that KPMG catered to dozens of CumEx clients. The firm allegedly wrote favourable reports and provided clients with advice on CumEx,’ German business newspaper Handelsblatt wrote. What is certain is that several banks, whose financial statements KPMG audited, have been in disrepute for years because of their role in the German CumEx scandal that cost the German treasury an estimated 12 billion euros. Some high-profile names include HypoVereinsbank (HVB) and Deutsche Bank.

Although other accounting firms were also involved in CumEx, Handelsblatt says there are ‘indications’ that KPMG consultants may have been very closely involved in CumEx deals for a long time. The same appears to have happened at Fortis and later at its legal successor ABN Amro.

It also begs the question of how independent KPMG was in its tax advice to ABN Amro. Banks are Public Interest Entities (PIEs) subject to the Audit Firms Supervision Act (Dutch: Wta). Auditor independence is guaranteed under Article 24b: ‘An accounting firm that performs statutory audits of a public interest entity shall not, in addition to audit services, perform any other work for that entity and entities affiliated with that entity.’

However, the article in question only came into force on 1 January 2013 and had a two-year transition period, so KPMG presumably cannot be formally faulted on this point.

Follow the Money forwarded findings and questions to KPMG. The spokesperson’s response was concise: ‘Due to its duty of confidentiality, KPMG Netherlands is not at liberty to comment on individual client cases.’

Translation: Delia Burggraaf