After fruitlessly trying to speak to ESMA about the various questions we have received on the cum ex scandal, the ESMA Head of Communications asked if I was working for Sven Giegold. “No” I replied whilst thinking, “we must get in touch with Sven, perhaps he will be more helpful in providing answers.” Indeed, he was very responsive and kindly agreed to give us an interview. So thank you to ESMA for the tip-off and thank you to Sven for a very enlightening conversation, the contents of which you can find here:
Flora: Are CUM EX share deals still happening, and why is/was it not illegal?
Sven: Well, we have to assume that they are. If you listen to the interview* with that undercover journalist talking in London to the guy with the offer – he was very open that this is still happening. It is not necessarily Cum-Ex but Cum-Cum and other forms dividend arbitrage deals. After the German market assumed at least 11 billion (more likely 30 billion) euros of damage, after it became less attractive, the criminals moved elsewhere. Therefore we have to assume it’s still going on.
It’s definitely not a German problem but a European one – other countries are thought to be problematic, it is not only Germany and Denmark, it is also France and at least eight other EU countries.
One has to distinguish between legality and tax enforceability. Under German law it is quite clear that CUM EX has no effect from a taxation point of view when it’s discovered, because you cannot demonstrate that these trades have any other objective than to optimize tax – and such operations are non tax enforceable. That means that when they are discovered, the German authorities say ” You can’t claim these tax rebates”.
On the other hand the question is, is it illegal? We have no final court decisions yet, but we assume that it is illegal. It basically means that you enable tax fraud systematically .
For the German CUM EX, if your objective is to receive a tax rebate twice for a deal that only happened once, this looks very much not like a loophole but more like fraud. You have to be an immoral banker to believe that this is moral.
The worst part of the whole CUM EX crisis is that it demonstrates that hundreds of people in exactly these international banks which contributed to the financial crisis (and who all said that they understood what they did wrong and that they want to build a more moral and ethical based banking system) are now, again, in the same mindset and obviously none of them called the police. So only one person of the hundreds who were involved called the police and that is what is so breathtaking about it. That people who were collectively contributing to the public discussion and saying “we understand, we went too far, we have to bring ethics into our business etc”, hundreds knew and none reported it.
Still, we have this parallel society, in which there is another moral sentiment than in other large sections of the population. This is why this scandal is so shocking.
* this is how the whole cumex scandal was discovered, see https://cumex-files.com/en
Flora: How did CUMEX deal go unnoticed for such a long time? What went wrong with the regulatory system that allowed this to go on?
Sven: There are two damages that we need to discuss.
One is about tax avoidance – well, more fraud than avoidance. That’s where the question: “why was this not discovered?” is really relevant.
The other dimension is, these trades around dividends, they’re easy to spot in the figures and nevertheless, neither the supervisory systems nor the ones who work in the field of trading and the stock exchanges blew in massive numbers the whistle. That is truly disturbing. This must be a part of the European investigation which is now set to come.
I have to say, I’m quite shocked with the lack of reaction from finance ministers and of the European Commission. When the consortium of European journalists, coordinated by the German non-profit investigative journalism centre Correctiv, published, there were very few statements. There is silence and I have to say that I’m very surprised that after such damage, there is not a clear agenda for action by the finance ministers belonging to the christian democrats, liberals and socialists.
Also the European commission hasn’t taken any action. I wrote immediately to the financial supervisors, ESMA and EBA, and received a very disappointing answer by ESMA and another one by EBA. I myself was the founding rapporteur of ESMA for the parliament and still they did not respond with “yes we will investigate” but they said “well it’s a tax matter, it’s not a financial service matter”, which I disagree profoundly with because their mandate is not about only prudence but it’s also about integrity – there is a clear reference in their mandate to integrity. And, clearly, if there’s a lot of trading happening in European stock markets around dividend day which is tax driven, that it is an integrity issue for the markets and not only a question for tax inspectors. This is something they have not accepted yet and I’m in robust discussion with them about it – I had a meeting Tuesday last week with ESMA chair Maijoor and he needs the help of the Parliament in the talks on ESMA’s legislative reform, but at the same time they refuse to take action on CUM EX. This shows the depth of the problem. ESMA is so far staying out of the fight against financial crime. It is a non-issue for ESMA, They admitted this in a public hearing before this scandal was published. And I think that it’s quite irresponsible. Now, the European parliament, also on our proposal, has voted through a resolution which demands ESMA and EBA to make a proper investigation. This call has gathered the support of a broad majority in Parliament. Now, the European supervisors have to act. The supervisory boards of the European Supervisory Authorities are run by the national supervisors. A tough investigation will expose their failure. I can only say that I believe there must be a tough reaction by the European institutions in order to regain the citizen’s trust, particularly when it’s about such a large scale crime.
Flora: Does the responsibility for the state of the financial sector and the crisis lie with the executives or the politicians?
Sven: If you have a badly built suburb, which makes it easy to commit crime, those who commit crime are responsible for their crimes, while those who constructed the suburb or have sent too few police also have responsibility. So, the first responsibility lies with those who commit unethical trades – if you commit a crime, you’re responsible, if you do things which are clearly unethical (to say the least), you’re also responsible.
Secondly, of course, it is the responsibility of those who in charge of supervising financial institutions, of enforcing the rules. If these institutions do not respond properly, and do not investigate properly, they are not doing their job properly.
And, ultimately, there’s the responsibility of the politicians who did not give the right resources and powers to these institutions and allowed loopholes and bad incentives in the law.
I would say that, perhaps the largest responsibility of the political sector, is that we have public institutions which have too limited resources, where their staff don’t get paid anywhere near what they would make working for the private sector – this is why the best people are often lost from the public service. That is perhaps one of the most important reasons for the limited efficiency.
And then, of course, we have a lot of powerful interest groups influencing the decision making and a lack of interest groups for the common good that are equally knowledgeable. Both sides exist but the resources are extremely unevenly distributed. So we have very few, poorly funded, public interest groups. We need more people who are highly skilled and qualified working in the public sector and in public interest to re-balance the power distribution. And we need to limit by law what big money can do in politics.
Flora: What about the lack of change in moral sentiment in the finance industry. What do you think could change the moral sentiment, if it’s possible?
Sven: Well, I think that ethics and sanctions in this field have to become normal. These professional associations – if you’re a lawyer, if you’re an accountant, if you are part of the management community – they have to anchor and sanction serious ethical standards, that is very important.
Secondly, I think it’s very important that the rule of law is made much more strict towards those in positions of responsibility – in particular, we need higher fines and also a serious possibility of going to jail. And the most important punishment is that the names of those responsible for committing certain acts have to be made public for a long time – that is very important, because my experience is that what people in power like the least is when their name is exposed, this is what hurts. So, at the moment, it’s rather unusual in many European countries that people who have committed financial crimes are ever named, neither the business nor the individual.
This is probably the biggest deterrent – it’s about money, it’s about jail and it’s about reputation. This contributes of course to ethics.
And the last thing, I think Ethics [classes] must become compulsory in all business, law and accountant educational programs.
In the end, it’s very difficult to force people to be ethical; you can contribute to it, but cynicism, a political cynicism, ethical cynicism, is becoming normalized – the finance world can’t stay uninfluenced by that change.
Flora: Do you think there’s enough motivation in the political world to legislate serious ethical reform, to stop unethical trade deals and punish people who commit them?
Sven: No, of course not. We need publication of fines, sufficient jail time – it must become easier to send people to jail. What’s more, in Germany, fines normally only go to individuals, not to the companies, because there is no criminal law for companies, criminals can only be individuals; that’s a big problem that has to be tackled, we only have administrative fines for businesses.
Flora: Is finance hiding behind a wall of jargon?
Sven: Well, any professional group has its jargon – a collective of artists, they look differently, they speak differently, they behave differently – finance has its own code, of course, but that’s not the problem. The point is to have enough people who understand that code and are working for the common good.
Beyond that, though, generalising is not the right thing to do, there’s a lot of honest people around the financial sector – perhaps not in these parts, that were committing these trades [cumex trades) but they exist. We need those people, those knowledgeable, highly educated people, on our side.
Flora: How about Green Banking? Can/ should supervisory authorities use Window Guidance and moral suasion?
Sven: Obviously, we need an enabling framework to discourage fossil fuels and the other ‘dirty’ investments and we have started working towards that – the EU is just developing the legal framework for green finance but, and this is a big but, this does not replace the discussion about ethics that we need to have. Green finance is about where do you invest, not whether you cheat taxes, financial laws or not.
Flora: What has been changed in the financial regulatory system to ensure that another crash will not happen?
Sven: I believe a lot has changed. I disagree profoundly with the statement that essentially nothing has changed, it’s much too simplistic. Is it sufficient? No.
Have the moral sentiments in higher classes of trading and financial management changed? No.
But is there now more capital in the system? Yes.
Is there more transparency in derivatives? Yes.
Is there more common supervision in Europe? Yes.
The whole debate became so messy because neither the thesis that everything is now good and a new crisis is unlikely is true, nor the thesis that nothing has changed. One needs to examine complex regulatory issues piece by piece.
The second important point to make is, not morally but politically, that once again the supervisory authorities have failed to discover a scandal [the CumEx scandal]. Again, a whistle-blower revealed this, not the supervisory authorities. The fact that hundreds of people, lots of major banks and other financial firms were involved, and many more must have known, yet an insider had to blow the whistle, is shocking.
Here is a link to Sven’s website if you would like to know more about what he is working on: