Red lights here and there
When asked by the chief judge to explain the workings of the trades, one of the two accused equity traders on trial began his remarks by announcing that ‘this will be pretty technical’. And indeed, a few moments later, some highly complex charts were screened to large areas of two of the courtroom’s walls. The terminological technicalities of global finance – ‘trading level’, ‘all-in level’, ‘swaps’, ‘dividend arbitrage’, ‘double dib’, ‘gut spreads’, etc. – turned out to be challenging. In the financial market, these terms are codes for certain transactions, which imply complex forms of cooperation among a multiplicity of actors such as traders, brokers, investors, banks, or public and private regulatory agencies. Some of the corresponding interactions operate in the dark, e.g., to keep out competitors in the market or because they would be prohibited by law or some other form of regulation. In order to legally assess the corresponding flows of finance, the court’s challenging task has been to shed some light into this darkness.
What has been at stake at the Landgericht Bonn, a German regional court with jurisdiction on tax offenses, is an extreme form of tax evasion or, to be precise, the operation of financial trading structures to the end of generating multiple tax returns – with the appeal that the corresponding tax had only been paid once. While attempting to delve into the mechanics of the trades, the judge asked whether nobody had wondered about the (il)legality of all this, as well as about the awareness of possible sanctions in the market. What could have happened, answered one of the accused traders, is that a red light appeared, and the trade could not happen. Throughout the trial, the ‘red light’ was mentioned here and there. The traders working in the back and front offices mentioned it, but also a witness who, while working as a lawyer, had arguably orchestrated the practice but not directly operated at the trading desk. It seemed that the ‘red light’ was, at the same time, a real experience and a metaphor. However, the shared aim among the participants in the industry had been to turn it off. While the operative strategy in the back offices has arguably been to circumvent regulatory obstacles, the orchestrators in the front offices tried to adapt to a changing normative infrastructure – i.e., the state trying to prevent the practice – by introducing new trading structures. More often than not, this meant the inclusion of more actors such as funds, brokers, accountants, etc., necessitating cooperation, part of which had to be hidden from the regulators, i.e., dark cooperation.
Dividend arbitrage (or dividend stripping) is a financial market practice of temporally trading shares around the ex-dividend date (the date of dividend distribution to shareholders). The major aim of these financial transactions is not to generate profit through dividends or speculation on price developments of shares but to benefit from regulatory deviations. It is often used as a strategy of tax avoidance and, at times, tax evasion. One very aggressive type of this practice has become known as cum-ex (Liste 2022). The term relates to the sequenced circulation of shares with (cum) and without (ex) dividend right. By way of a cum-ex trading structure, it becomes possible to generate double (or even multiple) tax returns, even though the corresponding tax had only been paid once – a ‘robbery of state treasuries,’ as it has been called by investigative journalists (Schröm 2021). And indeed, the damage has been fatal. In Germany alone, the practice caused an estimated damage of at least 10 billion Euros in only a few years (between 2001–2011). In this regard, dividend arbitrage could well be understood as a case of extractive finance that Saskia Sassen has addressed as part of a ‘predatory formation’ and a ‘new face in a certain type of global capitalism’ (Sassen 2014: 11, 14).
Cum-ex trading schemes are extractive in that they extract value from the nation-state’s public purse. While it is common to address such harmful practice as a use of legal loopholes, I argue that this view is misleading. In fact, extractive finance becomes possible not because of a lack of law or regulatory gaps but, quite to the contrary, through law (Pistor 2019). The regulatory landscapes that enable extractive finance, I call legal infrastructure. As Gillian Hadfield puts it, our legal infrastructure is ‘the almost invisible platform of rules and practices on which we build everything else in our economy’ (Hadfield 2017: 3). Yet, in this paper, I will not address legal infrastructure as something we should aim for or what we should optimize but as an analytical concept to study the role of legal practice in pockets of the global financial market. What can be seen in a niche like cum-ex is in fact an expression of a much broader current in global political economy. While extraction in its original sense of resource mining necessitates a material infrastructure, extractive finance builds upon a normative infrastructure through which certain financial transactions make sense and lead to the results intended by the involved beneficiaries.
Thus, when cum-ex came to court, this has by far not been the first time that extractive finance encountered the law. Long before German courts finally determined that cum-ex has been illegal and an extreme type of tax evasion, there has been the aforementioned red light. In fact, the red light appeared when a trade contravened a regulation. Yet, the practice of turning it off consisted in taking a detour, perhaps by using a different (legal) infrastructure, including a different financial vehicle subject to a different regulatory regime. For example, while an investment fund in Germany may be subject to a regulation that prevents extraction, setting up a fund in a different legal form (e.g., as a so-called ‘special fund’) may solve the issue. However, the new legal structure may invite further problems, which, in turn, could be solved by way of adding another vehicle, perhaps another fund, now in another jurisdiction, say, in Malta. It is in this sense that the production and ongoing reproduction of operative trading structures has a significant transnational component.
The expertise necessary for creating such structures and for adapting them to sometimes quickly changing legal environments, entails a profound knowledge about transnational legal infrastructure. It includes not only knowledge about domestic tax or investment law but also about the corresponding legal infrastructure abroad, international law, private governance of finance, internal compliance mechanisms of various financial institutions, or a command of the legal knowledge practice of establishing, say, a shell company in one of the many available tax havens. In this sense, facilitating cum-ex has involved a highly complex – and expensive – transnational legal knowledge practice.
Legal knowledge practice and the orchestration of dark cooperation
What becomes obvious already in this brief sketch is that harmful extraction of public value becomes possible through transnational cooperation, and only through transnational cooperation. To make things happen, expert lawyers, often working for big internationally operating law firms, serve as orchestrators. In the cum-ex complex on trial in Bonn, two lawyers left the law firm to establish a new business – specialized in making accessible the extractive scheme for private investors (Schröm 2021). They hedged legal risk by way of providing legal opinions for private or institutional investors or lobbied – and in doing so undermined – the legislative attempts to prevent further tax damages, but the core of their business model has arguably been the production and reproduction of trading structures, which meant to connect actors using legal infrastructure.
While the first protagonists of the German cum-ex complexes have in the meantime been sentenced (some of them to multiple years in prison) and while the cum-ex trading scheme has arguably come to an end through effective banking regulation, a profound knowledge of how to deploy legal infrastructure is and remains a major asset in the encounter of law and finance. Yet, the strategies of how various and likewise (or even more) harmful types of dark cooperation are orchestrated through transnational legal knowledge practice is a research desideratum.
 Accused S. in court (Landgericht Bonn, Germany), 19 September 2019.
 In 2019, I have observed the trial sessions for several weeks. The Bonn trial against two equity traders has been the kick-off in a series of trials in the years to come. For the judgment, see Landgericht Bonn, 62 KLs - 213 Js 41/19 - 1/19.
 Accused S. and D. on 25 September 2019.
 Witness ‘Frey’ in Bonn, 29 October 2019.
 For estimations, see Deutscher Bundestag 2017: 472.
 Landgericht Bonn, see above.
 Relevant legal knowledge may include various fields of domestic law, rules of common law, international treaties on double tax avoidance), international regimes against base erosion and profit shifting (BEPS), private governance of global marketplaces, the private standardization of over-the-counter trading, the internal compliance processes in the involved banks, etc. (see Riles 2011; Dietsch and Rixen 2016; Picciotto 2016).
Deutscher Bundestag (2017). Beschlussempfehlung und Bericht des 4. Untersuchungsausschusses nach Artikel 44 des Grundgesetzes, Drucksache 18/12700, 20 June, available at: dserver.bundestag.de/btd/18/127/1812700.pdf (accessed 12 January 2022).
Dietsch, Peter and Rixen, Thomas (2015). Global Tax Governance: What Is Wrong With It and How to Fix It, Colchester: ECPR Press.
Hadfield, Gillian K. (2017). Rules for a Flat World: Why Humans Invented Law and How to Reinvent It for a Complex Global Economy, Oxford: Oxford University Press.
Liste, Philip (2022). Tax Robbery Incorporated: The Transnational Legal Infra-structures of Tax Arbitrage, Global Cooperation Research Papers, No. 30, Duisburg: Käte Hamburger Kolleg/Centre for Global Cooperation Research (KHK/GCR21).
Picciotto, Sol (2016). ‘The Deconstruction of Offshore’, in Elizabeth Mertz, Stewart Macaulay and Thomas W. Mitchell (eds), The New Legal Realism: Translating Law-and-Society for Today's Legal Practice, Cambridge: Cambridge University Press, 160–79.
Pistor, Katharina (2019). The Code of Capital: How the Law Creates Wealth and Inequality, Princeton, NJ: Princeton University Press.
Riles, Annelise (2011). Collateral Knowledge: Legal Reasoning in the Global Financial Markets, Chicago, IL: University of Chicago Press.
Sassen, Saskia (2014). Expulsions: Brutality and Complexity in the Global Economy, Cambridge, MA: Belknap.
Schröm, Oliver (2021). Die Cum-Ex-Files: Der Raubzug der Banker, Anwälte und Superreichen – und wie ich ihnen auch die Spur kam, Berlin: Ch. Links Verlag.
About the Author
Philip Liste is a Professor of Political Science with a focus on the politics of human rights at the University of Applied Sciences Fulda. He was a research fellow and research group leader at the KHK/GCR21 (2018/2019). His research focuses on human rights critiques, global tax governance, international relations, law and society studies, and transnational legal theory.