€36B tax fraud scandal returns to haunt Germany’s Scholz

BERLIN — German Chancellor Olaf Scholz is set to face questions over his alleged involvement in the country’s biggest tax fraud scandal, which could become another challenge to his credibility during an election campaign in which he’s already struggling.

The center-left leader will face Hamburg’s parliamentary investigation committee for a third time on Friday over his connection to the broader “cum-ex” and “cum-cum” affairs, in which the German state is estimated to have been defrauded by around €36 billion as some banks, companies, or individuals claimed erroneous tax reimbursements from authorities.

“We are continuing our search to find out whether or not there was any form of political influence in the prosecution,” Farid Müller, a member of the investigation committee for the Greens, said. 

Scholz is fighting for political survival after his three-party coalition collapsed last month when he sacked his finance minister, Christian Lindner of the fiscally conservative Free Democratic Party. Scholz’s center-left Social Democratic Party is currently polling in third place in an election to take place in February.

He’s being questioned over his dealings with one of the banks involved in the affair, the former HSH Nordbank, which paid around €126 million to the tax authorities in 2014, after a law firm had scrutinized its cum-ex transactions ― a Latin term given to the practice ― between 2008 and 2011.

In such transactions, investors trick tax authorities by trading around a stock dividend date to receive multiple refunds of capital gains tax that they had not previously paid or only paid once.

While Scholz isn’t accused of carrying out any fraud himself, questions remain whether all relevant transactions at the then state-owned HSH Nordbank were made public. The investigations focus on the extent to which and when Scholz, who then was the mayor of the Hamburg city-state, and so politically in charge, knew about the transactions and whether he did enough to clear up the allegations.

A spokesperson for the German government declined to comment on the allegations.

“Scholz is responsible for the fact that the state has lost millions of taxpayers’ money,” said Julia Klöckner, a senior lawmaker from the center-right Christian Democratic Union. “Of course that will play a role in the election campaign, because it’s about his credibility.”

With less than three months to go until Germany’s February snap election, the chancellor’s opponents are not expected to let the matter go.

“Many state banks were affected by the financial crisis, including HSH Nordbank,” said Fabio De Masi, a European lawmaker for the left-wing Bündnis Sahra Wagenknecht alliance who closely followed the tax evasion scandal. “In my view, the cum-ex transactions were a way of recapitalizing very cheaply behind the public’s back, without bailout packages.”

Exit of lead prosecutor

The scandal hung over Scholz’s victorious campaign to become chancellor in 2021 — when Hamburg’s M.M. Warburg & Co. bank took center stage in the scandal — but had little impact in the end as the chancellor’s possible involvement remained unclear. 

During his time as the mayor of Hamburg, Scholz several times met former head of the Warburg bank, Christian Olearius, who stood trial over tax evasion resulting in losses of €280 million. Critics have questioned whether the chancellor might have intervened in favor of the bank. Scholz, meanwhile, has repeatedly said that he cannot remember the private meetings.

Earlier this year, Olearius’ trial ended without a judgment. The 82-year-old was too ill to stand trial, the court ruled.

The case of Olearius, who was neither found innocent nor guilty but is no longer facing legal consequences, illustrates how difficult it is for German prosecutors to successfully convict alleged perpetrators of major financial crimes.

“White-collar criminals and tax evaders with resources such as expensive law firms are dismissed too quickly from criminal proceedings,” Anne Brorhilker, the former lead prosecutors in Germany’s cum-ex proceedings who stepped back earlier this year, said in an interview. “The financial lobby in Germany is so strong and has so many resources to push through its interests that a counterweight is needed,” she added in view of her career switch to NGO Finanzwende.

Within the cum-ex investigations, charges have been brought against a total of 18 defendants in 11 proceedings while a total of 133 investigations involving around 1,700 defendants are pending, according to the public prosecutor’s office in Cologne, which oversees the investigations. Not a single charge has been brought, however, since the resignation of lead prosecutor Brorhilker in April, according to Handelsblatt.

The sluggish process is, according to Brorhilker — who was involved in the investigations from 2013 — due to the proximity between business and politics on the one hand and structural problems on the other hand, including too few investigators, an outdated IT system, excessive bureaucracy and a lack of cooperation between public authorities.

“It was not possible for me to organize a video conference with all my investigators or to include everyone in one email,” Brorhilker said in view of the data protection laws in different German states. “That’s completely absurd, it’s a basic function that doesn’t work in Germany.”

While other European countries, such as Denmark and France, have showcased much more political will in pursuing the tax fraud scandal, German lawmakers have recently made a breakthrough more unlikely, according to Brorhilker.

The so-called fourth bureaucracy reduction act, which came into force in October, shortens the retention periods for accounting documents and invoices — which could, in criminal proceedings, serve as key evidence — from 10 to eight years, while the statute of limitations remains 15 years.

With regards to the cum-cum investigations in particular “this is bitter” Brorhilker said, adding that German prosecutors, unlike their foreign colleagues, are yet to investigate around 99 percent of the cases which are estimated to have cost the German state nearly €30 billion.

“This law means we will probably never see any of this money again,” she said.