The Macquarie Group Ltd (ASX: MQG) share price finished the day in the red on Friday.
At the closing bell, shares in one of Australia’s largest financial institutions were down 3.22% to $195.28. The weakness follows reports shared by ABC News that Macquarie has found itself at the heart of an investigation into an $80 billion scandal.
However, Macquarie is not alone in the hot water, being one of 100 banks and financial institutions under the microscope. The scandal stems from a German tax loophole believed to have been exploited between 2001 and 2012.
What is the German tax scandal?
On Friday, the Macquarie share price fell as the tax scandal deepened. The scheme that has been dubbed the “biggest bank scandal in history” essentially involved the double-dipping of a tax refund. To do this, financial institutions engaged in rapid trading of shares in the European Union.
In short, to tax authorities, it appeared as though there were two simultaneous owners of the shares with and without dividend rights. Even foreign investors were able to claim tax reimbursements on shares that weren’t actually owned by them.
Macquarie’s involvement involves the lending of money to carry out an increased volume of such trades. In October 2010, the board of Macquarie convened to discuss a proposal to provide hundreds of millions to overseas funds. In return, the investment bank would receive up to $30 million for each lending agreement.
Despite the company’s legal team giving it the go-ahead, there was a sense of haziness around the legalities of the trades. For instance, a memo to the board for deliberation read:
The risk of reputational damage remains should the German authorities take action against the funds. lt is difficult to quantify the reputational risk associated with this transaction and we suggest [the Executive Committee] weigh this against the anticipated returns.
A blow to the Macquarie share price
Today’s revelation involves new documents found through a joint investigation between the ABC and German news outlet, Correctiv.
These documents indicate that Macquarie engaged in the German tax scheme, overlooking the risks it was presented with of reputational damage and legal issues.
For example, an email detailing the risk of transactions being classed as tax fraud was received by current CEO Shamara Wikramanayake. After forwarding to colleagues, the concerns were dismissed. Soon after the board approved the proposal to fund such trades.
It is believed Macquarie has since paid back roughly $150 million. The loophole was removed by the German government in 2012.
A Macquarie spokeswoman issued a statement to the ABC saying the bank continued to “cooperate constructively with German authorities”. However, it was “unable to comment further”.
For shareholders, the concern may lay in what the total costs could amount to with the investigation ongoing. Ironically, earlier this week the Macquarie share price had pipped another ASX bank to become one of the big four.