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the cum-ex trading scandal and why it matters

  • Written by Alex Simpson, Senior Lecturer in Criminology, Macquarie University

It has been called “the robbery of the century[1]”. Martin Shields and Nicholas Diable, two British investment bankers, are on trial in Germany for helping structure a massive tax evasion scheme, known as cum-ex trading, that has siphoned up to €55 billion[2] (about US$60 billion or A$90 billion) from European public funds.

Let’s put that in perspective.

The world’s most successful diamond thieves, the “Pink Panther” group, are suspected of heisting jewels worth €334 million[3] (about A$544 million). The largest bank job in history, a “cash withdrawal” from the Central Bank of Iraq by Saddam Hussein, is estimated to have been worth US$1 billion[4] (about A$1.45 billion). The biggest ponzi scheme in history, by Bernie Madoff, defrauded investors of about US$20 billion[5].

So a €55 billion fraud is a very big deal.

Yet there’s a good chance you haven’t heard much about it. One reason is that, unlike video footage of someone ram-raiding a liquor store, financial fraud doesn’t make good television.

This specific alleged crime involves “cum-ex fraud”. If you have no idea what this is, you are not alone. It involves bafflingly complex transactions and jargon. Even the most basic cum-ex deal involves at least 12 transactions.

It’s one of those ironies that complexity not only helped hide this alleged crime in the first place, but also helps keep it out of the public eye now.

Let’s try to remedy this by getting to grips with what cum-ex trading is all about.

What is cum-ex trading?

The term cum-ex comes from the Latin – cum meaning “with” and ex meaning “without”. In this case, “with” and “without” refers to stocks with and without dividends.

The cum-ex trading in question took advantage of a loophole in German tax law and involved rapidly exchanging stock “with” and then “without” dividends between three parties. At least two of these parties then claimed tax rebates on taxes only paid once.

There are three key things at play here.

First is when companies pay dividends to shareholders. This usually happens quarterly when companies audit exactly who owns their stock, known as the Record Date[6].

Second, dividends are taxed differently for individuals and corporations (such as investment companies). In Germany, individuals pay 25% capital gains tax on all dividends. For corporations, however, their dividend income is combined with all other income. Then, once a year, they pay 15% corporation tax on their profit.

Third, capital gains tax is automatically deducted from all dividend payments. Institutional investors can therefore legitimately reclaim the capital gains tax that has already been deducted.

How cum-ex trading works

Shields and Diable were allegedly just part of a sprawling web of bankers, brokers, investors, asset managers, lawyers and consultants who, together, rapidly transferred company shares either side of the dividend Record Date. This made it almost impossible for Germany’s tax office to know exactly who did (or didn’t) own company shares at what time.

Simplified, cum-ex trading works something like this:

Party One, typically an asset manager who owns valuable company shares, “lends[7]” its stock to Party Two, a bank. Under the agreement, the title and ownership of the stock is temporarily transferred to the borrower in return for a fee. Such practices are not only legal but a common part of “short selling[8]”, the practice featured in the 2015 film The Big Short[9]. Essentially, it is where an investor borrows a stock (for a fee), sells it, then buys it back later at a lower price to return it to the original – on the expectation the stock’s value will fall and a profit made.

Read more: Explainer: what is short selling?[10]

image Christian Bale, left, as hedge fund manager Michael Burry in the 2015 film The Big Short. Paramount Pictures/IMDB[11]

Party Two then sells the shares with-dividend to Party Three fractionally before the Record Date. However, the shares are delivered without-dividend just after.

Timing, speed and complexity are key. Like a magic trick, the shares “disappear” fractionally before the Record Date and “reappear” with a new owner just after. The aim is to obscure exactly who – Party One, Two or Three – owns the stock on the Record Date. As a result, two parties can simultaneously claim ownership of the one stock.

Up until 2011, a loophole in the German tax code allowed both Party One (the owner of the original stock who had received the dividend and paid tax on it) and Party Three (the holder of the stock just after the Record Date) to claim a tax reimbursement. All colluding parties would then split the gains.

What of the trial?

Shields and Diable stand accused of 34 instances of “aggravated tax evasion” that cost German taxpayers up to €450 million (A$730 million) between 2006 and 2011. Indicating the complexity of the case, the charge sheet runs to 651 pages[12].

Shields, who is cooperating with prosecutors, has said in court that cum-ex trades took place on an “industrial scale[13]” and involved a vast network of banks, companies, brokers, lawyers and financial advisers. Now a judge has to decide whether these cum-ex trades merely exploited a loophole or violated the law at the time.

In a sign of how twitchy high-profile banks are getting, the courtroom’s gallery has been packed with their legal representatives[14]. They have good reason to be. The Cum-ex Files[15] investigation by European media groups has evidence the practice continued in Germany until 2016, and also occurred in Switzerland, Austria, Finland, Spain, and France. It may even have spread as far as Australia[16].

Read more: Australia's tax office can use global data leaks to pursue multinationals, High Court rules[17]

Cum-ex deals illustrate perfectly how easily complexity is used as a tool in finance to misdirect, obfuscate and perplex. The complexity also plays a key role in clouding public understanding of these alleged crimes. It’s easier for the media to focus public attention on simpler crimes with clearly identifiable victims.

All this is why Shields and Diable, despite the staggering sums of money involved, face maximum prison sentences of 10 years, while “blue-collar” robberies often incur far heavier sentences and attract much more sensational media attention.


  1. ^ the robbery of the century (
  2. ^ €55 billion (
  3. ^ worth €334 million (
  4. ^ worth US$1 billion (
  5. ^ defrauded investors of about US$20 billion (
  6. ^ Record Date (
  7. ^ lends (
  8. ^ short selling (
  9. ^ The Big Short (
  10. ^ Explainer: what is short selling? (
  11. ^ Paramount Pictures/IMDB (
  12. ^ charge sheet runs to 651 pages (
  13. ^ industrial scale (
  14. ^ has been packed with their legal representatives (
  15. ^ Cum-ex Files (
  16. ^ Australia (
  17. ^ Australia's tax office can use global data leaks to pursue multinationals, High Court rules (

Authors: Alex Simpson, Senior Lecturer in Criminology, Macquarie University

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