Olaf Scholz and the Cum-Ex Scandal
Dr. Achim Doerfer is an attorney in business and tax law and a writer in Germany. He studied law and philosophy at Göttingen and Freiburg universities and completed his doctoral dissertation on the U.S. legal philosopher Lon L. Fuller in 2006. In the 1993 fall semester, he held a position as visiting research scholar at Cornell Law School. He has been active in German politics for three decades with an emphasis on intercultural and interreligious matters and tax justice, where he also did advisory work for a number of members of the European Parliament. He serves as deputy chairman at his local Jewish congregation as well as on the state level (Lower Saxony). He appeared on numerous occasions on national TV and radio and is regularly publishing in national newspapers. He lectured on applied legal philosophy at Hamburg University, Germany. In 2014, he published a book on tax justice (Die Steuervermeider, “The Tax Avoiders”), which the leading German daily business newspaper Handelsblatt denoted as “the standard work on the subject.” His latest book on Jewish resistance and revenge as well as on German remembrance culture (Irgendjemand musste die Täter ja bestrafen, “Someone Had to Punish the Perpetrators”) appeared in 2021.
Why the German chancellor is stuck in a nasty multibillion dollar tax evasion scandal
It can be blurry sometimes, the line between tax evasion—a criminal offense—and tax avoidance—morally questionable or illegitimate strategies to lower the tax burden. Often, it is more self-deception than cool-headed legal analysis that leads to using seemingly legal strategies that, in fact, are just another example of tax evasion.
In the 1990s, German tax attorney Hanno Berger found a loophole in the German tax authorities’ treatment of capital gains from share dividends. (After he was extradited by Switzerland, he is now facing trial before the Bonn, Germany, criminal court.) The scheme worked in principle as follows: If a number of participants sold and bought back shares just before and just after the dividends were due at year’s end, they could structure the deal in a way to later be eligible to reclaim taxes. And, despite the fact that exactly the same shares were sold and bought back, under that scheme they succeeded in reclaiming taxes not once (according to the original legal policy) but twice. The fiscal authorities would pay back not just the money they had received, but once more the same amount, thus putting the tax-paying community eventually in the red. Step one of the share-shifting would be called “cum,” step two “ex.” Hence the “Cum-Ex” strategy.
In the years that followed, banks and other financial institutions thus made billions of euros for their wealthy clients until the practice was outlawed in 2012. The German weekly newspaper Die Zeit estimates the amount of fiscal damage at 55 billion euros (roughly the same amount in U.S. dollars). While this resulted in a tax avoidance frenzy (allegedly), it became more and more apparent that this was not only tax evasion, but that the criminal character of the scheme was apparent from the very beginning. So, the authorities and courts—as always only reacting to actual events, lagging behind a number of years—started to clutch back on the twice-repaid taxes and, starting in September 2019, eventually entered into a number of criminal proceedings. The Bundesgerichtshof, the supreme criminal court, affirmed the first convictions in 2021.
This legal battle’s front came dangerously close to Chancellor Scholz, then mayor of the city-state of Hamburg, when prosecutors and the Federal Ministry of Finance informed the Hamburg authorities in 2016 that the venerable Hamburg bank M.M. Warburg & Co. owed some 47 million euros (the equivalent of about 47 million U.S. dollars) in back taxes for 2009. But surprisingly, since the tax assessment was not enforced despite internal discussions, at year’s end of 2016 the applicable statute of limitations came to M.M. Warburg & Co.’s rescue.
While it is still an open question whether and to what amount this will have an impact on Olaf Scholz’s career, for the time being it certainly leaves a stain on Germany’s image as a country of politicians immune to the lure of Big Money.
In 2017 Olaf Scholz, still mayor of Hamburg, engaged in a number of meetings with Christian Olearius, one of the bank’s owners. At that time, Olearius had already been under criminal investigation by the state attorney’s office—well noted not of Hamburg, but of Cologne—for about two years. Despite that, the Hamburg authorities took no further action, claiming the legal basis of any such undertaking was too shaky—notwithstanding the fact that it was already common knowledge that what had allegedly been legal was in fact a case of aggravated tax evasion. The elephant in the room: What had Olaf Scholz had to do with that mysterious course of events?
Not surprisingly, the press had a number of questions for Scholz, which he answered in no satisfactory manner. He has also been questioned twice by the German Bundestag’s special parliamentary committee on Cum-Ex: in April 2021 and in August 2022. At first, he stated he did not have any concrete recollection regarding any meeting with M.M. Warburg & Co. executives. After being confronted in September 2021 in connection with a meeting of the finance committee of the Bundestag with Olearius’ agenda and diary, proving the existence of the meeting, he claimed to have no recollection of what was talked about during those meetings. Moreover, it became clear from the aforementioned diary that in fact questions of tax and criminal law had been discussed. Scholz’s memory had not recovered when he was again serving as a witness before the special parliamentary committee in August 2022. While he could not remember anything, he was at least certain to not have influenced any decision-making in the case at hand.
It certainly did not prove helpful to Scholz’s strategy of “Just ask, I won’t tell,” when, in August of 2022, law enforcement discovered 214,800 euros (the equivalent of $214,800) and $2,400 in cash in a safe deposit box held by an SPD (Social Democratic Party, Scholz’s party) bigshot close to Scholz. Johannes Kahrs, federal MP, had also met with M.M. Warburg & Co.’s Christian Olearius in December 2017. That very year, the SPD in his constituency had received donations amounting to 38,000 euros (as part of 45,500 euros in total for the Hamburg SPD) by M.M. Warburg & Co.—a considerable sum in the German system. While U.S. politicians entering the realm of politics might be wealthy to start with, this is nearly never the case in Germany. So, it is no trite question where those roughly 217,000 euros came from and why. Plus: Is there any connection between the Warburg scandal and Warburg’s donation of 45,500 euros to the Hamburg SPD?
The attitude of the media—in short—has not changed to this day. It basically remains overly skeptical. Small wonder: If there’s one thing we know politicians remember—since it is the universal currency of a successful career in politics—that would be, “What has he or she done for me or to me, and what have I done for him or her?” So, the Damocles sword above Olaf Scholz’s head won’t go away anytime soon. And while politicians elsewhere have successfully built a strong man’s image on the size of the things they could get away with, neither the German independent media nor the opposition in the Bundestag, still furious in October 2022, are susceptible to this. The same holds for the public: An August 2022 survey shows that only 11 percent of Germans do buy Scholz’s lack of memory and more than 70 percent do not, among them 56 percent of adherents of his own party, the SPD. Some of Germany’s best investigative journalists are still working on the case. And from what I know about them, in part from personal experience, having had the privilege of working with them on matters of tax justice, they won’t back off anytime soon. While it is still an open question whether and to what amount this will have an impact on Olaf Scholz’s career, for the time being it certainly leaves a stain on Germany’s image, owed, in part, to former chancellor Angela Merkel, as a country of politicians immune to the lure of Big Money.