Survey on cum/cum transactions

On 17 July 2017, the Federal Ministry of Finance published a letter dealing with the tax treatment of "cum/cum" transactions (see info box "Federal Ministry of Finance on the tax treatment of cum/cum transactions").¹

The responsible tax authorities may order institutions involved in cum/cum transactions to make additional payments of tax on the basis of the Federal Ministry of Finance's letter. In order to determine the potential effects on German credit institutions and securities trading banks, BaFin and the Deutsche Bundesbank launched a survey on 18 July 2017 on the possible impact of cum/cum transactions on those undertakings. The survey also covered significant institutions subject to supervision by the ECB.

BaFin was concerned in particular to obtain an understanding of the consequences that would arise for the banks' solvency and whether bank supervisory measures could become necessary. BaFin and the Deutsche Bundesbank did not carry out any investigations into questions of tax law; such investigations do not fall within their remit. The questionnaires designed for the survey were sent out to more than 1,600 institutions and groups of institutions via the Deutsche Bundesbank's regional offices. The final date for submitting the replies was 20 October 2017.

The survey showed that some of the credit institutions surveyed were involved in cum/cum transactions. According to the information provided by the banks, the financial costs resulting from these transactions have not led in any severe solvency risks which could endanger their existence. At the date of the survey, some of the institutions had already recognised the necessary provisions or had made additional payments of tax. Moreover, the majority of the institutions involved indicated that they intend to use future income to make up for any costs. The replies from the asset management companies which were also asked about possible tax repayment claims in the light of corresponding hedging and securities lending transactions also proved negative for the most part. Only in a few cases are more detailed enquiries necessary. In addition, the investigations by the responsible tax authorities should be borne in mind as they may also result in new findings.

Cum/ex

On 21 June 2017, the 4th parliamentary committee of inquiry of the 18th Bundestag submitted its closing report on the group of issues relating to cum/ex transactions.² The committee reached the conclusion that BaFin had acted responsibly within its area of competence and had not failed to take action in any reprehensible way. It also made it clear that monitoring compliance with the provisions of supervisory law was a core responsibility of banking supervision, but not compliance with other areas of law such as employment, social security or tax law. On this point, the closing report was worded as follows: "The Committee stresses that the Banking Act did not provide a legal basis for BaFin to examine individual cases concerned with tax law".

The committee of inquiry also addressed the question of whether BaFin had correctly handled information on breaches of tax law it had become aware of in the course of its audit activities. On this point as well, the committee was not able to identify any breaches of the obligations on BaFin's part and stated: "The conclusion from the evidence gathered is that BaFin acted fully in accordance with the applicable laws".

An amendment to section 9 (5) of the Banking Act, details of which have already appeared in BaFin's 2016 Annual Report, has applied to BaFin's obligations to provide information to other authorities since 6 November 2015.³ The effect of this amendment is to rescind, to the extent permitted by European Union law, a special provision which had restricted BaFin's obligations to provide information to the tax authorities.

In the course of its duties in 2017, BaFin again assessed the findings from tax-related criminal proceedings and the possible impact of payments of additional tax or tax penalties on the solvency and liquidity position of the banks. Since the amendment to section 9 (5) of the Banking Act, BaFin has also exchanged information with the tax and law enforcement authorities for the purposes of assisting them in their work.

Panama Papers

In 2016, BaFin required 15 institutions to provide information about business in Panama. 11 of the institutions questioned were unable to exclude the possibility that they had business relationships there, with the result that BaFin investigated these institutions more closely. BaFin asked European authorities for information on these institutions by submitting requests for administrative assistance.

As a result, BaFin received an extensive quantity of data by April 2017. An external firm of auditors examined the data from April to August 2017 for violations of anti-money laundering legislation. 991 cases were audited on a sample basis out of a total of 4,942 cases after adjusting, among other things, for multiple references.

No material violations detected

BaFin evaluated the results of the investigation. However, it was unable to identify any material violations of anti-money laundering provisions by the institutions; the institutions have largely complied with the applicable anti-money laundering requirements. The models and structures discovered in the course of the investigation are permitted globally in accordance with the German legal position. This also applies to transactions with shell companies which a number of institutions continue to conduct.

Footnotes: