PrefBlog

Three cheers for well thought out financial controls!

Prosecutors in Copenhagen say it was an elaborate ruse, one that ultimately cost taxpayers more than $2 billion — a spectacular sum for Denmark, the equivalent of a $110 billion loss in the far larger American economy.

The country had fallen victim to a dubious financial maneuver at the intersection of the tax system and capital markets, a dizzyingly complex transaction known as a “cum-ex” trade.
…
The trade is focused on one of the dullest, most overlooked acts in any financial system — the request for refunds on taxes withheld on dividends. Under Danish law, the government automatically collects taxes on dividends paid out by companies to their shareholders. If the shareholders live in the United States, they are eligible for a refund on some or all of those taxes.

A tiny department in SKAT, run by one man, approved thousands of applications for refunds.
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After the financial meltdown, dozens of German banks desperate for a new source of profits eagerly facilitated cum-ex trades, fueled by capital from all over the world.

Traders made off with more than $11 billion, according to officials there. Cum-ex would reap fortunes from the governments in Austria, Belgium and Switzerland, too.
…
In 2013, all that stood between Solo Capital and Denmark’s treasury was the bespectacled, gray-haired veteran of SKAT, Sven Nielsen. After two colleagues retired, he was the last person in the Dividend Department. Complicating matters, he lacked the tools to perform the most basic due diligence when reviewing refund applications.

The agency was in the midst of a yearslong and often disastrous overhaul, meant to digitize the system and reduce head count. The priority was helping Danish taxpayers, not foreign shareholders. Mr. Nielsen didn’t even have a database to check whether an individual pension plan actually owned the shares it claimed, said Lisbeth Romer, who was Mr. Nielsen’s boss until she retired in 2013.

“Sven’s job was reduced to bookkeeping, essentially, checking if a form was filled out properly,” she said. “A monkey could do it.”

I don’t get it, I really don’t. If the fraud is for a few million, OK. It happens. Figure out how it happened, plug the hole and try to catch the perpetuators. But $2-billion in a small economy? Didn’t anybody notice there was a tiny little discrepancy between the amount of dividend taxes withheld and the amount of the total claims on that money?

It reminds me of the Barings Bank fiasco, in which every single senior manager and executive solemnly swore that yes, they knew Nick Leeson, one single guy on a sleepy arbitrage desk, was making roughly 25% of the bank’s reported profit. No, they had no idea of how he was doing it. Clowns. They should be grateful I’ve considered them grossly incompetent, because they wouldn’t like the other choice so much.

This entry was posted on Tuesday, October 9th, 2018 at 5:58 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.