Danish prosecutors have formally charged the suspected organisers of a billion-dollar tax fraud scheme, four weeks after the Cayman Islands Grand Court allowed local corporate service providers to offer foreign judicial assistance by disclosing documents of certain Cayman entities in a related US civil lawsuit brought by Denmark’s tax authority.
The two alleged British organisers of one of the largest fraud cases in Denmark’s history are suspected of having defrauded the Danish state of more than 9 billion knone (CI$1.5 billion).
It is alleged that the two men – on behalf of a number of investors and companies – used a fraud scheme to submit more than 3,000 applications to unlawfully receive dividend tax refunds from the Danish Treasury.
While prosecutors did not name the individuals, the Financial Times reported one of the men is Sanjay Shah, a British national who is resident in Dubai. Shah is also named as the alleged central organiser of the fraudulent scheme in civil cases in the UK and the US. He denies the charges.
Danish state prosecutors believe that the dividend reclaim case involves 24 Malaysian companies, 224 US pension plans and more than 70 companies incorporated in the British Virgin Islands, Cayman Islands, the United Arab Emirates and the United Kingdom.
In April, Denmark’s national tax authority Skatteforvaltningen, or SKAT, sought discovery from 21 corporate service providers in Cayman and the British Virgin Islands, whose clients are suspected of being involved in the scheme.
SKAT applied to a federal court in the Southern District of New York, where it is suing dozens of US pension plans and associates, to request judicial assistance from the Cayman Islands.
The suit aims to recover more than US$2 billion in dividend withholding-tax refunds claimed for shares the defendants said they owned in Danish stock market-listed companies.
The Danish tax authority alleges that the refund applications were fraudulent because the plans did not actually own the Danish securities they claimed to own, nor did they earn the dividends they claimed to have earned, and as a result they were not entitled to the tax refunds they received.
US District Court Judge Lewis Kaplan subsequently issued letters of request to the Cayman Islands Grand Court, which sought the production of documents from corporate service providers in Cayman.
SKAT alleges the US defendants used certain third parties in Cayman to advance the fraud and conceal their involvement in the scheme. The Danish tax office asserted that it has already obtained evidence which connects several Cayman entities to Shah, as the principal organiser of the fraudulent scheme for a vast majority of the defendants.
In a judgment delivered on 11 Dec. 2020, Cayman Islands Grand Court Justice Margaret Ramsay-Hale granted the application stating that, as Judge Kaplan wrote in his request for judicial assistance, the “documents sought are likely to demonstrate that the US defendants either owned, controlled or were benefitted by the Cayman Third Parties and will reveal the relationships between Cayman Third Parties and the defendants in the common fraudulent scheme”. Ramsay-Hale added that the matters “bear directly on SKAT’s case against the defendants and are necessary for the purposes of justice”.
She noted that the documents sought are all required to be obtained and maintained by corporate services providers in Cayman under the Companies Law and other legislation.
In granting permission to SKAT to use the documents in the foreign civil proceedings, she concluded, “I am therefore satisfied that the documents requested exist or have existed and that SKAT is not engaged in a ‘fishing expedition’,” which is not permitted under Cayman law.
SKAT wants to use the information to establish that the Cayman entities were controlled by or affiliated with the US defendants and Shah, and to demonstrate that the pension plans were not actual holders of the Danish securities.
The discovery seeks, among other things, books of accounts, customer due-diligence records, service agreements, invoices, payments receipts, bank details and correspondence between the service providers and their clients.
With regard to entities that are registered companies, the Danish tax office requested access to the certificate of incorporation, and articles and memorandum of association, as well as the registers of shareholders, directors and beneficial owners.
SKAT believes the scheme involved entities in the Cayman Islands and elsewhere to create false, fictitious book entry transactions and records that supported the purported purchase, transfer or ownership of Danish securities. According to Denmark’s tax office, the defendants allegedly purchased fictitious shares from themselves in a circular transaction using intermediaries.
SKAT alleges these transactions were all settled by custodians controlled by Shah.
The Cayman service providers asked to produce documents are Bell Rock Corporate Services, Campbells Corporate Services Limited, CO Services Cayman Limited, DMS Corporate Services, Forbes Hare Trust Company Limited, Genesis Trust Corporate Services Ltd., Harneys Services (Cayman) Ltd., Intertrust Corporate Services (C.I.) Limited; Ocorian (Cayman) Limited, Sterling Trust (Cayman) Limited, Trident Trust Company (Cayman) Limited, Vistra (Cayman) Limited and Walkers Corporate Limited.
The corporate service providers are not parties to the lawsuit.
With regard to the now filed criminal charges, Danish state prosecutor Per Fiig said in a statement, “This is a case of extremely serious and extraordinarily extensive crime committed against the Danish state, and we believe that the two defendants committed cynical and meticulously planned fraud in a scheme where they defrauded the Danish state of DKK 9 billion.
“On the basis of extensive and complex investigations, we have therefore today raised formal charges for fraud of an aggravated nature and attempted fraud worth a total of DKK 9.6 billion against the two British nationals in one of the main tracks of the dividend reclaim case.”
The maximum penalty for the alleged fraud is imprisonment for eight years, but the state prosecutor said, due to the severity of crimes committed, he would seek to apply a special section of the Criminal Code under which the maximum penalty may be increased to 12 years.
The entire dividend reclaim case involves fraud worth a total of DKK12.7 billion (US$2 billion) and the investigation against other suspects continues.
“We still need to complete a few interviews and investigative measures, and we expect to decide whether we will be raising formal charges against the other persons within a few months,” Fiig said.
“In addition, we have several other tracks in which we are investigating a number of different networks of people for the remaining part of the fraud totalling more than DKK12 billion. It will take a while longer before our investigations show whether there are grounds for raising formal charges.”
Based on its investigation in the case, which involved several European countries, as well as Europol and Eurojust, the State Prosecutor’s Office has so far seized assets worth around DKK 3 billion (US$493,000).
Although it is difficult to seize assets in major international fraud cases, Fiig said, “We are obviously still working to get our hands on all assets we can get to so that we can return as much of this money as at all possible to the Treasury where it belongs.
“And we will continue the hunt even though we have now raised formal charges in one of the main tracks of the case.”
Dividend tax refund fraud, also known as ‘cum-ex’ fraud derived from the terminology for shares traded with (‘cum’) and without (‘ex’) dividend rights, has been rife in Europe.
In March of last year, two British bankers were convicted of tax evasion in the first cum-ex trial in Germany. Banks and law firms involved in these transactions argued they legally exploited tax loopholes.