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CAPinside2 MIN READING TIME2018-11-08

Blackrock raid in Munich

At the request of the Cologne public prosecutor's office, the premises of the asset manager Blackrock at Lenbachplatz in Munich were searched on the morning of 6 November, in connection with the suspicion of unauthorized "cum-ex" transactions.

Blackrock is the largest fund company in the world and manages a total of about $ 6.4 trillion. In Germany, Blackrock holds interests in all DAX companies and is the largest single shareholder in the Deutsche Börse. The company, which was founded in New York in 1988, is internationally dominant in trading ETFs (exchange-traded funds).

Due to the great influence of Blackrock in private companies and central banks, the company has repeatedly come under fire.


Suspicion: cum-ex-business

The public prosecutor's office Cologne has the suspicion that Blackrock operated at least in the period from 2007 to 2011 so-called Cum Ex business, which evaluates the public prosecutor as a form of tax evasion.


Cum Ex Trades: Double credits

Such a business is also referred to as dividend stripping and requires three market participants. It works like this:

Step 1: Market participant 1 owns shares of an AG traded on a German stock exchange.
Step 2: Market participant 2 buys shares with a dividend entitlement (cum dividend) of the AG for the same amount owned by 1, of short sellers 3
Step 3: Market participant 1 receives a dividend less capital gains tax and a tax certificate that allows him to recover the tax.
Step 4: 1 sells his shares to 3, ex dividend
Step 5: Investor 3 delivers the shares plus the net dividend to 2
Step 6: 2 gets a tax certificate on the amount of capital gains tax from the foreign custodian bank, which does not know whether taxes have already been deducted from the dividend.

There is no distinction between a compensation payment and a dividend.
Step 7: 2 sells the shares to investor 1


1 and 2 have each received a tax certificate which allows them to recover double the amount of capital gains tax. Foreign banks are not required to withhold capital gains tax and so the state can not recover its loss.

The profits are shared by the three participants. Since only funds and banks are reimbursed for the taxes paid, all those involved are such institutions.
So far, banks were mainly targeted by the state authorities, so there is now apparently a suspicion against Blackrock against a fund.


effects

The news has so far caused no significant uncertainty among the shareholders, the price of the Blackrock share shows up on Tuesday without signs of a gloomier mood.
The investigation could have far more short-term effects on German politics.

With the announced withdrawal from the party leadership of the CDU Angela Merkel has triggered a competition for the post. One of the most promising candidates for this seemed to be the popular in conservative and pro-business groups Friedrich Merz, who had retired for years largely from politics to exercise various board positions.

Merz has been chairman of the supervisory board of Blackrock Deutschland since 2016 and will have to comment on the investigations. Since Merz was not employed by Blackrock at the time in question, he can at most be alleged to have remained silent despite better knowledge of the group's past mistakes. In a potentially close race for the CDU chairmanship, even difficult to make allegations could change the outcome. Merz had just distanced himself from cum-ex-shops just last week and it will be enough if that proves to be enough.