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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, October 9, 2018

NY Times: Where In The World Is Denmark’s $2 Billion?

New York Times, Where in the World Is Denmark’s $2 Billion?:

As large as it is, the building would be easy to miss. Plain, gray and near a McDonald’s, it’s part of a generic office complex surrounded by a vast parking lot in a suburb of Copenhagen. “Danish Tax Agency” is stenciled in both English and Danish on a glass front door.

This outpost of SKAT, as the I.R.S. in Denmark is known, seems an improbable setting for what the authorities call one of the great financial crimes in the country’s history. For three years, starting in 2012, so much money gushed from an office here that it was as though the state had sprung a gigantic leak.

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. Most of the applications were filed by self-directed pension plans in the United States, a type of retirement account for individuals.

But experts and lawyers familiar with the scheme say those people were fronts for cum-ex trades. Deploying a kind of financial sleight of hand, the trades made it appear as if the pension plans had purchased shares of Danish companies and paid taxes on the dividends. Neither was true.

To the Danes, it was a fraud, one executed and conceived by Sanjay Shah, a 48-year-old, London-born financier. With an assist from employees, he found the Americans, helped facilitate the applications and ended up with much of the money.

Mr. Shah denies any wrongdoing and through a publicist says he merely took advantage of a loophole. He now lives in Dubai, where he owns a $1.3 million yacht and a 10,000-square-foot villa with access to the beach. He has become Denmark’s national villain.

“You have this guy, living off fraud, it’s infuriating,” said Joachim B. Olsen, a member of the Danish Parliament and chairman of its Finance Committee. “The expectation of the Danish people is that we will go after him, no matter the cost.”

Since May, the cost has included hiring an American law firm to sue 277 of the self-directed pension plans and their owners who applied for all those tax refunds. But the true toll of this scandal can’t be measured in kroner. It has undermined trust in Danish politics and it has severely dented the country’s self-image as a bastion of honest, efficient government. An unfolding $230 billion money-laundering fiasco at Danske Bank, the country’s largest lender, has only deepened the gloom.

What has made the dividend debacle even more painful is that many here believe it was an inside job. The lone employee approving those tax refunds was a lifelong civil servant named Sven Nielsen. After a lengthy investigation, the police learned that Mr. Nielsen had spent a few boozy and convivial evenings with an employee of Mr. Shah’s, although they found no evidence that he had colluded or profited in any way.

Instead, they discovered evidence that years ago, Mr. Nielsen had helped an old friend bilk SKAT in a relatively small scam. Through his lawyer, Mr. Nielsen declined to comment — from prison, where he is now serving a six-year sentence for criminal fraud in that case.

So, Danes are left with a mystery that belongs in a Nordic noir, one with elements of farce and filled with enraging twists. Is Mr. Nielsen a co-conspirator, or a dupe? Is he a criminal or a man so flattered by attention that his critical faculties abandoned him?

The other mystery concerns Mr. Shah, who is now rebranding himself as a philanthropist, raising money for autism research by promoting concerts with performers like Flo Rida and Lenny Kravitz. He has been formally termed a suspect by Danish authorities, but to the collective amazement of the Danes no criminal charges have been filed against him.

A spokesman for the State Prosecutor for Serious Economic and International Crime would not say why. Instead, with impeccable Scandinavian restraint he said only that the case involves people “who seem to have used a very crafty setup.”

https://taxprof.typepad.com/taxprof_blog/2018/10/ny-times-where-in-the-world-is-denmarks-2-billion.html

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Comments

Yeah, the U.S. should really emulate the tax policies of Scandinavian countries...

Posted by: MM | Oct 9, 2018 7:28:27 PM

As perhaps the only TaxProf reader to have visited the Danish IRS, I have to say that this surprises me.

Posted by: Mike Livingston | Oct 10, 2018 4:38:51 AM

So where was the oversight and internal auditing that should have found this problem a few hundered million kroner sooner?

Posted by: Fred | Oct 10, 2018 9:11:14 AM

This is a very good example of revenuefocused Resource allocation going wrong. Handing back Money to taxpayers was regarded as a low value Activity and auditing as a high value activity. They limited resources spent on "low value" handing back money to close to zero so they could allocate all the resources on "high value" auditing giving extra Revenue. They paid back allegedly paid WHT on dividends from Companies which had not paid dividends for years. No resources wasted on checking the substance of the claim.

Posted by: GSo | Oct 12, 2018 1:09:31 AM