On 28 March 2023, the French Financial Prosecutor's Office ( PNF ) and the German Welle, raided 5 major banks in Paris as part of a very extensive fraud investigation. These include Societe Generale, BNP Paribas, HSBC, Natixis and BNP's Exane, which are suspected of serious tax fraud and money laundering that would have cost France and Germany, $108 billion or €100 billion in tax revenue. The criminal investigation was already opened in December 2021. The raid has been prepared for months.
The searches were carried out by 16 investigating judges and more than 150 investigating agents. Six Cologne prosecutors were already involved in carrying out the raids in connection with the tax evasion practices uncovered following the 2018 'CumEx files' investigation by Correctiv, a German investigative journal.
Furthermore, the investigations are related to the "cum/cum" practice, a controversial technique used by some banks whereby wealthy customers can avoid paying tax on their dividends.
In the application of this technique, shareholders transfer their shares to investors abroad for a short period to avoid dividend tax. The investors then hold the shares during the period in which the dividends are paid and are either not taxed or receive a tax refund. They then sell the securities back to the original owner and the amount saved is divided between the parties.
This is a very sophisticated form of tax avoidance that is punishable just like tax evasion.
The term 'CumEx' is derived from Latin words meaning 'with' and 'without', referring to the disappearing dividends associated with such practices.
Similar investigations are ongoing in other European countries, including Germany, where in December 2022 the court sentenced tax lawyer Hanno Berger to eight years in prison for orchestrating one of the country's biggest post-war frauds through a scheme cum/cum dividend arbitrage. It is the heaviest sentence so far in a series of trials in which British bankers have also been convicted.
Reports of the searches have made financial markets nervous. Share prices of BNP Paribas and Société Générale started to float volatile, closing 0.34% and 1.07% lower, respectively. Since the failure of Silicon Valley Bank and Signature Bank in the USA, the collapse of Sillicon Valley Bank in the UK that was acquired last minute by HSBC for a symbolic pound and the emergency rescue of Credit Suisse by UBS, there has been great nervousness in the banking sector.
The global banking sector is still reeling after the rapid collapse of several major banks and near-bankruptcies that were only saved by emergency mergers.
On Wednesday 15 March 2023, French banks BNP Paribas and Société Générale cracked on the stock market. While the former fell 10.92%, the latter plunged 12.97%. Other European banks also suffered. This was the case for Banco Sabadell (11.19%), ING (9.50%), Commerzbank (9.90%), Deutsche Bank (8.65%) and Unicredit (7.14%).
The current searches at BNP Parisbas and Société Générale could well put the noose around the necks of both banks.
José Manuel Campa, chairman of the European Banking Authority (EBA), has warned that the sector remains highly vulnerable to further disruption. Peter Schiff, CEO of Euro Pacific Asset Management, compares the contagion to the 2008 financial crisis and expects it to be worse than the Great Recession. In response, investors started investing in Bitcoin (BTC) en masse, increasing the market capitalisation beyond giants such as Visa (NYSE:V) and JPMorgan Chase.
Large-scale fraud by major banks is not new but a historical evil that has, however, remained under the radar for a very long time. It seemed like banks were inviolable and allowed to do anything. It looks as if a clean-up is finally ongoing. Three months ago, Denmark's largest bank, Danske bank, paid a €2 billion fine after pleading guilty on fraud charges.
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