
Where in the World Is Denmark’s $2B? - bdr
https://www.nytimes.com/2018/10/05/business/denmark-skat-tax-scandal.html
======
raviolo
Here’s how divident arb / cum-ex works. Say dividend is $10. You (or one of
your accounts) buys the stock pre-dividend. You are then paid $10. However,
the stock ex-dividend immediately falls. The trick is, it does not fall by $10
- it falls by tax-adjusted, market-agreed-upon amount. Say, everyone pays 30%
tax - then the stock falls by $7. After that, you sell the stock.

Your pnl is simply this: you lost $7 on the stock but received $10 dividend.
If you, like everyone else in that market, pay 30% tax on dividend - you are
exactly breakeaven like everyone else. No arbitrage. Here for simplicity we
assume you can’t tax-deduct loss on your stock position (that does not change
anything).

However: if you somehow do not have to pay tax on dividend, or pay it at a
reduced rate, you feel happy.

This could get tremendously complicated with cross-boarder transactions and
international tax law. But nevertheless may be entirely legal, although
understandably frowned upon. It could also be totally fraudulent depending on
the setup. No idea what this guy was doing but the fact that he has not been
criminally charged may be a hint that they actually cannot charge him with
anything.

~~~
MrTonyD
When I worked at a Fortune 50 I was in a group reassigning revenues to
offshore entities. It was just a matter of assigning a team to an offshore
manager (well, any one of the big 3 accounting firms then took our work and
did whatever paperwork might have been required from there. All the major
accounting firms were making millions from us so they were glad to help.) An
executive explained to me that all the senior executives got a variety of
classes of stock in offshore companies, which were essentially worthless on
paper. Then offshore monies could be transferred to increase the value of any
of the many classes of stock which were issued - allowing them to transfer any
amount to any executive. And as long as the public stockholders were making
profit, nobody complained, and money could be freely hidden and transferred
offshore using a wide variety of techniques. At the time, this was considered
standard practice by all the major accounting firms and all the C-suites at
major software companies. We live in a society which is corrupt beyond the
understanding of most people. I personally saw billions transferred offshore
and hidden - think about that when Bill Gates says that he is giving it all
away.

~~~
MaysonL
Reminds me of a consulting company I did some work for a few decades ago.
Reportedly, they had many engineers filling out two 40hr/wk timecards: one for
defense contracts, the other for non-government corporate clients.

~~~
samfriedman
FYI for anyone else in the US who reads this and is/has been in a similar
situation: the DOD hotline for reporting fraud & abuse of contracts is
+1-800-424-9098.

[http://dodig.mil/hotline](http://dodig.mil/hotline)

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lordnacho
An interesting thing that a lot of people will find unacceptable is that a lot
of banks have desks that exist explicitly to exploit this type of loophole.
It's very lucrative. It's also pretty technical, you need to know a lot about
the laws that apply to each country along with all the mechanisms for getting
money from the authorities. Not something your average trader knows. I
certainly did not until I made friends with some of these guys.

As for this claim that the guy makes, that he's just exploited a loophole,
none of the guys I know in this niche believe that. There are also plenty of
rumours surrounding his character, in the sense of "is he an honest guy",
along with stories about how he might be lacking in the scruples department.
None of which is hard evidence, of course.

~~~
dmos62
On that note, I know a person working in an anti-money laundering office in a
major bank. It's like a private detective force. Their system throws a bunch
of automatically flagged accounts, they go through each one, looking for signs
of not paying taxes, money laundering, crime, etc. They not only look at what
you do in their bank but also they'll look at your social media profiles or
anything else they can get their hands on. A lot of anecdotes of people
receiving lots of small payments and when you look at their Facebook profile
you see their selfies with guns and drugs. They would then compile a dossier
and pass that on to the real cops.

Apparently, 9/11 is relevant here, because the bank through which it was
financed just stopped paying the fine a few years ago. It was a pretty big
sum. The bank was guilty of not policing its clients well enough.

One way in which a lot of terrorism is financed relatively safely is simply by
switching banks, because banks don't have an adequate data-exchange mechanism.
So for example, you fool one bank that the money being sent from Saudi Arabia
to UK is an uncle sending money to a niece studying abroad. That looks normal.
But then that money is sent from the niece to some third person, which might
be suspicious. But if that third person uses a different bank than the niece,
then this third person's bank will actually have no idea that one bounce ago
the money was in Saudi Arabia. If the bank where the money first landed in UK
didn't react, the money was moved successfully. I.e. the chances of it being
traced back to Saudi Arabia are slim. Add a few more hops through different
banks and tracing theses transactions becomes a nightmare.

This mess has two reasons, as far as I can tell. One is that there isn't a
good way for banks to exchange data. They pretty much have to call the other
bank and ask. The other reason is that they're policing themselves. Why do we
have a decentralised money police?

That last question sort of leads me to my last point. This person I know
confided that the distressing part of the job is that often you're helping put
people in jail for dabbling in small crime (think selling some weed), but
you're instructed to not pursue the big clients. In my friend's words, that's
because the bank makes money off of the big clients, but the small ones are
numerous, therefore expendable. They have to be able to demonstrate that they
are thwarting money laundering and terrorism financing, meanwhile the big
money crimes slip by unnoticed. So for the bank it's advantageous to do the
policing themselves, because then they can discriminate.

~~~
ellius
If you're interested in the question you posed ("why do we have a
decentralized money police?"), in part it is the consequence of a series of
historical accidents, but you can get a pretty good answer from the book
"Treasury's War."

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thaumasiotes
> he learned about cum-ex trades. The term is Latin for “with-without” and
> refers to the status of shares before and after a dividend is issued

Where did this idea come from? _cum_ is Latin for "with". _ex_ is Latin for
"out of" or "from" (as in "exit"). _sine_ is Latin for "without".

Compare the Spanish for "with" and "without", _con_ and _sin_.

...and somehow, this article talks constantly about cum-ex trades without ever
bothering to explain what they are.
[https://en.wikipedia.org/wiki/Dividend_stripping](https://en.wikipedia.org/wiki/Dividend_stripping)

------
bdr
This is an incredible story. In short: Denmark automatically withholds taxes
on dividends. If you’re a foreign shareholder, you can apply for a refund on
the withholdings. But they weren’t actually checking whether you owned the
shares.

~~~
_nalply
No, they were checking buy orders but these were canceled after refunds. The
fraudsters had a scheme with several American pension plans which where bogus
trading with each other. It's a fraud.

~~~
thaumasiotes
The article, which appears to be trying its hardest not to describe what
happened, specifies the following:

1\. There was a pool of retirement accounts that traded with each other.

2\. In an example of the scam, one of these accounts would place an order to
sell Danish stocks short, presumably cum-dividend.

3\. Another account would respond by placing an order to buy the same stocks.
This order never went through, presumably because it was placed at a lower
price point.

4\. The "buy" account would get its dividend taxes spuriously refunded and
then cancel the buy order. The "sell" account would cancel its sell order.

I don't see what the role of the "sell" account is. It looks to me like you
could do exactly the same thing with just the "buy" account.

~~~
dgacmu
I can't figure it out either from the details provided in the NYT article, but
there's a more clear article about the related case in Germany:

[https://www.reuters.com/article/germany-
dividends/dividend-t...](https://www.reuters.com/article/germany-
dividends/dividend-tax-scandal-how-banks-short-changed-germany-idUSL8N1991BN)

In this case, though, it involved a bank that owned the shares: The bank would
loan the shares to a shorter, the shorter would sell them to a buyer, and both
the bank and the buyer would collect the dividend refund.

I wonder if there's some detail the NYT author missed in terms of double
ownership that would make the short sale make more sense.

~~~
toast0
A short sale that's unwound after the dividend makes a lot more sense. Both
the buyer and the lender of the shares are owed a dividend, and depending on
how the records reflect that, I could see both being able to claim the refund.

Under US law, a dividend paid to you by a borrower is taxable as ordinary
income, not as a qualified dividend -- usually the borrower (short seller)
will pay a premium on the interest to reflect the difference in effective tax
rates.

I don't know the rules for Denmark, but it seems that having a withholding
requirement on the dividend payer ads to complexity, because it requires a
refund process. It might be better to have simply required reporting of the
income, and maybe required withholding by brokerages.

~~~
_nalply
Perhaps they should have been able to detect a mis-use of this scale because
the refunds exceed the deductions by a wide margin. Or perhaps a lot of people
never request a refund so they were used to keep billions of dollars in
dividend taxes so this went under their radar?...

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mrweasel
That's just one issue facing the Danish tax authorities. The last 10 to 15
years have seen the politicians implementing numerous saving plan for SKAT.
Among other things implementing new software and firing the people it would be
replacing, before the software was even written. The software alone costed 260
million USD, and the project still failed. As an added bonus SKAT had to give
up on collecting 300 million USD in old debt.

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MarkMc
There should be a "bug bounty" program for taxes. If you identify a loophole
or scam which was costing the government $100 million you get $1 million.

~~~
asah
Exists for the US:
[https://www.google.com/search?q=irs+whistleblower+reward](https://www.google.com/search?q=irs+whistleblower+reward)

~~~
jedberg
That's for reporting someone who is actually exploiting the loophole. I think
OP is proposing a bounty for finding and reporting loopholes before anyone
takes advantage of them.

In other words, make it more profitable to tell the government what to look
for instead of taking advantage of it yourself.

~~~
MarkMc
Yes exactly. It would be like Facebook only paying a bug bounty if you can
identify the hacker who breached their security.

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eksemplar
This article is one of the weirdest I've ever read as a dane. We have a vat
refund system, that paid out 120 billion danish kroner to companies that
weren't meant to have those 120 billion danish kroner.

It was made possible because the audit of every vat refund was just one guy,
and that was ridiculous, but those 120 billion still exited our treasury.

It's kind of easy to prove wrong doing on vat, if your company hasn't
registered a single transaction, then your company simply isn't owed any vat.
Yet the article seems to want to make this complicated...

Why is that?

~~~
jsnell
Are you talking about some totally different case than the article? The scheme
described in the article has nothing to do with VAT.

~~~
eksemplar
I’m probably using the wrong English word, it’s called moms and I don’t know
what that’s called in English.

It’s the tax you pay when you trade any product.

~~~
jsnell
Yes, that's a VAT. But this case is described as being about dividends, which
are not goods or services being traded. I've never heard of a tax code where
dividends were subject to VAT. Typically they're treated as either a capital
gains tax or an income tax.

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jjjjjjjjjjjjjjj
SKAT... When paying my taxes in Denmark using a foreign bank I have to
manually "enter my CPR number and describe what the payment is for" in the
message field.

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jokoon
Reading that article makes me deeply cynical about capitalism in general. I
don't dislike capitalism, but this news is really gold for people who want to
advocate against capitalism. It's scary.

I might not be very smart, I'm having a hard time understanding how this
scheme was accomplished. What worries me is how invisible this is, and how
much harm it does. I really wonder how much fraud of this scale is not being
caught, because most people don't really understand what is being done, on top
of it happening in ways which are hard to grasp.

It really reminds me how big multinationals have committed tax avoidance for
decades, but the voters cannot see it, don't understand how it hurts them, and
are never really protesting it.

There are laws and a justice system, but to me it's really hilarious that
those people are getting away with this, and how loopholes are tolerated and
not an abuse of the law. I cannot understand how the world can just look away
and not try to fix this. I fear that if this keeps happening, it may be a
source of instability and would really undermine political stability. How
would you make a country work properly is the state budget is shrinking?

~~~
sonnyblarney
"makes me deeply cynical about capitalism in general. I don't dislike
capitalism, but this news is really gold for people who want to advocate
against capitalism."

Funny because the first thing I think of is government incompetence and
stupidity.

A hole in a system a billion dollars wide will always be taken advantage of in
whatever kind of economic system, i.e. this is not 'capitalism' just 'quasi
legal hacking'.

That's a pretty big hole and I wonder how many people will lose their jobs
over it? One? More? Any?

I like fair regulatory systems, especially those easier to watch ... but this
isn't that.

This is enough of an embarrassment that the government should be brought down
over it. That's just an quite amount of money to lose for a small country. $2B
buys a lot of services for a country the size of a city.

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ispiansclsda
Dang: typo. Should be "Where in the World Is Danmark's $2B?"

