Freshfields under financial and reputational fire in Germany as cum-ex tax scandal rolls on

Marco Cillario and Nathalie Tidman report on Freshfields’ role in the tax scandal rocking Germany

It is not often that a law firm makes headlines outside the legal media, yet the name Freshfields Bruckhaus Deringer is rapidly becoming a regular feature of German newspapers. That is bad news for the City giant. How bad, many are currently trying to assess.

The firm’s unwelcome prominence is thanks to what has been widely dubbed the biggest tax fraud in German history: the cum-ex saga. Having simmered for months, the story is moving quickly now. In late November 2019, it emerged that Freshfields’ global head of tax, Frankfurt-based Ulf Johannemann, had resigned from the firm. A few days later, he was jailed as a flight risk. Released in December on a €4m bail, he is facing charges of fraud in connection with his advice to the defunct German arm of Maple Bank over the legality of a scheme to reclaim more than €380m in tax that was never paid. Freshfields itself could face a fine of €15m if Johannemann is convicted.

His arrest and the trial in Frankfurt is only the latest chapter in a story that has developed for almost two decades (see below). Cum-ex transactions allegedly used a loophole in German law to allow investors to claim back dividend tax that was never paid. The practice is claimed to have started in the early 2000s and carried on for several years, costing European taxpayers up to €55bn, according to European Parliament estimates. Legal advisers are accused of having played a central role in exploiting the loophole.

Johannemann joined Freshfields in 2000 and made partner in 2007. ‘He was always a super-confident guy,’ says a former German colleague. ‘The year after he became partner he was already shaking up things in the office.’

‘Ulf Johannemann was super-confident. The year after he became partner he was already shaking up things.’

By the year he was appointed global head of tax, 2016, the issue was about to become charged. Maple Bank shut in Germany after being overwhelmed by the request to pay back the illegitimately-claimed tax refunds. Over the following three years, the police carried out a series of raids at Freshfields’ Frankfurt office and two partners were put under criminal investigation.

At the end of August 2019, Freshfields agreed to pay a settlement of €50m after being sued by the liquidator of Maple Bank for €95m. The firm declared in a statement that it was ‘convinced that our advice always complied with applicable law’.

And all this could be just the beginning. While Johannemann faces trial in Frankfurt alongside six former Maple bankers, the identity of the other Freshfields partner investigated has not been confirmed.

As other cases emerge in Germany and other EU countries look into the role of their own banks in similar transactions, the question in German lawyers’ minds is: how many might involve Freshfields?

Indeed, the financial damage for the firm could be considerable. There have been claims that the settlement with Maple Bank and other sums the firm has to pay in relation to cum-ex criminal proceedings might not be covered by insurance – though insiders contest this.

The reputational harm is potentially even more serious. The firm’s name now appears in most reports around the tax scandal, including in The New York Times and in popular German news magazine Der Spiegel.

The irony is that cum-ex advice was only a drop in the ocean of Freshfields’ global revenue. The tax practice accounts for roughly 8% of the around €440m the firm generates in Germany – and cum-ex transactions were only a small part of the practice.

Still, it will be complicated for Freshfields to dismiss the matter as the responsibility of Johannemann alone. The firm’s role in cum-ex transactions had been known for years internally and Johannemann remained tax chief until shortly before his arrest. In the words of a former partner, the tax practice is ‘one of the crowning jewels of the firm’. Freshfields’ managing partner Stephan Eilers himself led the practice between 2000 and 2005, and then from 2008 to 2010.

Reflects one former Freshfields City partner: ‘To the extent people knew the ins and outs of it, they would have had to form a view that this was aggressive tax planning but it was OK. To the extent Freshfields says, “We didn’t know what was going on,” it shows that they don’t have oversight of someone in a key management role. You don’t win either way.’

Unsurprisingly, the firm is declining to comment, but there is no doubt that the saga has already taken a toll on its reputation in Germany, one of its key markets and its largest single practice outside the UK. With no other peers as yet emerging to have been involved in cum-ex transactions and prosecutors circling, Freshfields is now in an exercise of high-stakes damage limitation.

marco.cillario@legalease.co.uk

nathalie.tidman@legalease.co.uk

The cum-ex saga