At several points in the career of 43-year-old Martin Shields, the Newry-born man felt undervalued and underpaid by the financial and banking sector.
As a result, a series of decisions led Shields to become the brains behind one company in a network involved in a massive financial trading scheme, dubbed cum-ex, which siphoned billions from tax authorities across Europe.
Shields, who until recently owned a large home on Dublin’s exclusive Shrewsbury Road, went from one of the key players in the scheme to German prosecutors’ star witness.
In 30 interviews over the course of nearly 12-months in 2018, Shields painted a detailed picture for those investigating the scheme, taking them step-by-step through how it worked and who was involved.
Nightclubs must be fully ticketed from next week, newly issued guidelines state
Only 12 hospital beds left for children and no intensive care beds free, warns HSE
Woman seriously injured after being hit in face by firework in Galway
Vigilance needed as venues reopen amid reports of drink spiking – charity
While Shields is one of the first high-profile figures involved in the cum-ex scheme to be convicted, authorities across several European countries are investigating hundreds of further individuals and financial entities
Through a complex series of co-ordinated financial transactions, a network of traders, hedge funds, asset managers and banks were able to claim multiple refunds of dividend withholding tax that was paid only once, or in some cases not at all.
The scheme, which has now been deemed illegal by a German federal court, worked by buying and selling huge volumes of shares at key times around the date companies paid out dividends. The trades were structured to create confusion as to who was owed a tax refund, allowing it to be claimed multiple times from tax authorities.
Estimates from academics of how much was lost by European tax authorities due to cum-ex trades over the past 20 years, and similar schemes called cum-cum, range from €55 billion-€140 billion.
Ireland’s role
An investigation by The Irish Times, in partnership with German newsroom Correctiv and 15 other media organisations, reveals Ireland played a key role in facilitating the scheme.
Several of the figures involved set up funds in Ireland as vehicles to trade and claim tax refunds from larger EU countries, with Germany one of the main targets.
The collaboration of 30 journalists examined a huge leak of documents, called the Cum-ex Files, compiled from several authorities' investigations into the scheme. Other media outlets involved included the BBC, Le Monde, America's NBC, and ABC in Australia.
The leak included transcripts of hundreds of pages of Shields’ interrogation by prosecutors, as well as diagrams, written statements, internal emails and contracts he provided, allowing authorities to pick apart how the cum-ex scheme worked.
Shields received a suspended prison sentence in March 2020 for tax evasion, and was ordered to repay €14 million, following a trial in Bonn, Germany. The lenient sentence allowing the former banker to avoid jail time was a result of his extensive co-operation with prosecutors.
While he is one of the first high-profile figures involved in the cum-ex scheme to be convicted, authorities across several European countries are investigating hundreds of further individuals and financial entities. It is understood information provided by Shields has been crucial in building cases against several others in the cum-ex network.
Born in Northern Ireland, Shields studied in Oxford and began work as an engineer, before swapping to banking as he said he could earn twice as much there. "At that time, that was more than my parents ever earned," he told prosecutors.
In the early 2000s he worked in investment bank Merrill Lynch's London office, where he would meet Paul Mora, who would later become his main partner in the cum-ex game.
When Mora left Merrill for the London office of German bank HypoVereinsbank (HVB), he convinced Shields to join him at the start of 2004.
Shields told prosecutors at the time he had toyed with the idea of leaving Merrill, as his salary had not progressed. He was particularly irked the bank had recently hired a graduate who worked under him, but was earning more than he did.
It was at HVB in the mid-2000s that he first came across cum-ex, given his role was to find profitable trading strategies for the bank.
The glue
Cum-ex trades required detailed spreadsheets and planning to co-ordinate the actions of several actors for the scheme to work, these included short sellers, prime brokers, investment managers, and custodian banks. It involved a spur of activity and transactions within this network in the days around the dates companies paid out dividends to shareholders.
Brokers were “the glue” in the flow of the trades between the parties, the structure of which the investment advisors and banks had teed up beforehand, Shields explained. Often the funding for the trades was drawn from pension funds seeking investment returns. In many cum-ex trades investors were promised returns of 10 per cent, with low risk.
Shields said the process was “extremely complex” to organise, likening it to juggling. However, over time it became relatively repetitive, with “essentially the same protagonists” active in the market.
“From time to time there were new protagonists or others jumped off. But in essence, the processes were repeated,” he said.
Some of the banks he named as being involved in the cum-ex market were Merrill Lynch, Santander, Deutsche Bank and Barclays.
A number of banks in Ireland were used by those involved in the scheme, to carry out the trades.
The Dublin offices of two large international banks, Investec and BNP Paribas, were used by those perpetrating the scheme in cum-ex trades under investigation, internal emails and prosecutors' case files show.
For several years while the profits from cum-ex were flowing in, Shields and his wife bought a number of properties in exclusive areas of Dublin and London
Bank of Ireland Securities Services (BOISS), a fund administration unit in the Irish bank, was used by one of the main investment funds involved in the trades. BOISS was the custodian bank of EQI Irish Funds in 2011, meaning it was responsible for housing the fund's assets and processing its transactions, a key role in cum-ex trades.
BOISS was later bought by US-based financial services company Northern Trust, which continued the arrangement.
Shields provided prosecutors with information he had on the Irish pillar bank’s links to those carrying out the trades. BoI staff were allegedly working “until late into the night” settling transactions from EQI’s trades, as part of an “aggressive” form of the scheme, he told investigators.
A spokesman for BoI said it adhered “to the legislative and regulatory requirements in all countries in which it operates”.
“We have not been notified that BOISS is subject to an investigation. Where contacted by relevant authorities we will always endeavour to provide assistance to any criminal investigation,” he said.
After 2007 the cum-ex market began to heat up, with more banks becoming familiar with the scheme and others increasing the volume of their trades, and their profits, Shields said.
But, not for the first time in his career, he began to feel under-appreciated at HVB. The previous year he “achieved a significant increase in profits,” but had the impression that was “not sufficiently recognised by the management”.
At the start of 2008, Shields and Mora decided to leave the German bank and set up their own company, Ballance. Based in Gibraltar, it would specialise in cum-ex.
Others interviewed by prosecutors described Shields as an “excellent mathematician” and the “numbers person” behind the set-up of cum-ex trades at Ballance.
Ballance Group made millions of euros in profits over roughly three years, with the highest profits in 2009 and 2010, Shields said.
The company was in competition with a number of similar firms seeking to structure cum-ex trades, such as Solo Capital, EQI, and Duet.
Duet, and EQI founder Salim Mohamed did not respond to requests for comment, while Sanjay Shah, who set up Solo Capital, maintains he took advantage of legal tax loopholes.
Jockeying
Despite the global economic crash, the cum-ex market continued to boom after 2010, with several of these hedge funds “jockeying for finance” to carry out trades, Shields said.
Following a split at Ballance, Shields and Mora took part of the company and renamed it Arunvill Capital, which was involved in cum-ex trades for a number of further years.
For several years while the profits from cum-ex were flowing in, Shields and his wife bought a number of properties in exclusive areas of Dublin and London.
The couple bought Lissadell, 9 Shrewsbury Road, Dublin 4 for €6 million in 2012, before substantially expanding the property. Shields sold the large Edwardian home earlier this May for more than €13 million, to property developer Pat Crean.
The family also bought a mansion on Egerton Crescent, Chelsea, and a property on Mespil Road, Ballsbridge. In more recent years Shields said he had worked in the Dublin property sector.
Shields described how as a young trader he entered 'a bubble and remained in a bubble,' where things were taken for granted, and not questioned sufficiently
As tax authorities in different States, such as Germany, began to close off loopholes allowing cum-ex from 2011 onwards, those trading in the field devised new means of enacting the scheme, each of which Shields explained to prosecutors.
Irish tax authorities were not targeted by cum-ex, although investment funds registered in Ireland were used in trades targeting other European countries.
One by one countries became closed off to the scheme, including France, Spain, the Netherlands, Italy, Austria, Belgium, and later Denmark, Shields said.
Investigators examining German cum-ex trades “started to make connections to other markets.” As a result other tax authorities “started to close down their own cum-ex tax loopholes and generally tightened up the availability of tax reclaims,” he said.
Shields said he had become aware of the first investigation into cum-ex, launched in Frankfurt in 2011, by around 2012 or 2013.
The former banker said the development led him to decide Arunvill’s UK-registered entity “would probably have no business future due to the reputational damage”.
However, he said at that stage the arm of Arunvill registered in Gibraltar still existed. Mora is currently living in New Zealand, and has maintained he did not believe cum-ex trades were illegal at the time. One source close to the former banker said Mora "has no confidence that he would now get a fair trial in Germany".
Loophole expectation
Speaking about why he decided to co-operate, Shields told prosecutors he wanted to “clarify the facts in a neutral way”.
Shields said he had previously believed the “worst case” scenario was that authorities would wise up, and cum-ex tax refund claims would be rejected. This would leave those involved facing huge losses.
He said he came from an investment banking environment where tax loopholes “could and should be exploited”, and that was the expectation of the banks and their customers.
Shields told investigators he had believed it was legal to exploit cum-ex tax loopholes at the time, and “at no point did I intend to commit tax evasion”.
In a statement to the court following his conviction last year, Shields said he regretted his role in the scheme, and had since “tried to do the right thing” in cooperating. “I clearly see that I have made mistakes, I regret these deeply,” he said.
Shields described how as a young trader he entered “a bubble and remained in a bubble,” where things were taken for granted, and not questioned sufficiently. “Whatever was taken for granted back then, I now see turned out to have been the wrong path,” he said.
A lawyer for Shields told The Irish Times he was unable to comment, as he was continuing to co-operate with ongoing investigations into cum-ex.
More than 700 suspects are under investigation by German prosecutors in Cologne alone, including a number of Irish residents. One source indicated the fallout from the cum-ex scandal would continue to work its way through the courts for at least the next five to 10 years.
