German infrastructure tangled in dodgy US tax scheme

What do Berlin trams, German sewers and the stricken US insurer AIG have in common? They are all intertwined in complex financial transactions that could cost many German cities dearly.

German infrastructure tangled in dodgy US tax scheme
Photo: DPA

The tale began with intermediaries such as Deutsche Bank and the financial arm of auto maker Daimler that approached cash-strapped communities, specialist Werner Ruegemer told AFP.

“These ‘arrangers’ told municipal authorities that thanks to a US fiscal loophole, they could obtain cash just by signing a piece of paper,” he explained.

The transactions are known as cross border leasing, or CBL.

Behind the German intermediaries were US banks operating from post boxes in locations such as the state of Delaware, known for its business-friendly tax environment.

In Berlin, indebted city officials agreed in 1997 to rent tram and subway cars to a US trust, and then sublet them back for use in the city’s transit system.

More than 1,000 cars were involved in the scheme, according to press reports.

The US investor that bought or rented German infrastructure got a tax benefit for foreign investments, while the city got money but became a renter, or sub-renter of the assets.

Berlin received €69 million ($90 million dollars) from its deal.

Another key actor in the transaction were banks or insurance companies that agreed to guarantee the value of the assets until the contract expired, between 25 and 99 years later.

Ruegemer said 180 such contracts were signed in Germany for an estimated €80 million.

In 2004 however, a US court uncovered the loophole.

Since then, German municipal authorities have come to realize the full content of the contracts they signed, written with complex technical terms over hundreds of pages and signed in New York during comfortable business trips for which all expenses were paid.

A US financier for example can demand a city continue to maintain subway cars it no longer uses so the investment does not lose its value, or prevent a worksite from proceeding.

And many banks and insurance companies that guaranteed the contracts are now distressed, forcing communities to guarantee the guarantor’s financial health or replace them, according to terms of the deals.

A frequent guarantor was AIG, which is in deep trouble after posting a 2008 loss of almost €100 billion.

US investors have therefore demanded that municipalities find other guarantors for the assets – at present often impossible – or provide their own guarantees.

The city of Bochum, in western Germany, had to buy $125 million in US Treasury bills on credit to insure the value of the sewer it had ceded.

For its tramways and subway cars, Berlin had contracted insurance in 2004 from a consortium that included AIG and the US investment bank Lehman Brothers, which went bankrupt in September 2008.

In a worst case scenario, the German capital could face claims for $200 million on the basis of the CBL contracts. “For now, no one has asked us for a cent,” said Petra Reetz, spokeswoman for the Berlin transit system BVG.

“If someone comes after us, we will not pay, we will take them to court,” she vowed.

For members


EXPLAINED: Berlin’s latest Covid rules

In response to rapidly rising Covid-19 infection rates, the Berlin Senate has introduced stricter rules, which came into force on Saturday, November 27th. Here's what you need to know.

A sign in front of a waxing studio in Berlin indicates the rule of the 2G system
A sign in front of a waxing studio indicates the rule of the 2G system with access only for fully vaccinated people and those who can show proof of recovery from Covid-19 as restrictions tighten in Berlin. STEFANIE LOOS / AFP

The Senate agreed on the tougher restrictions on Tuesday, November 23rd with the goal of reducing contacts and mobility, according to State Secretary of Health Martin Matz (SPD).

He explained after the meeting that these measures should slow the increase in Covid-19 infection rates, which was important as “the situation had, unfortunately, deteriorated over the past weeks”, according to media reports.

READ ALSO: Tougher Covid measures needed to stop 100,000 more deaths, warns top German virologist

Essentially, the new rules exclude from much of public life anyone who cannot show proof of vaccination or recovery from Covid-19. You’ll find more details of how different sectors are affected below.

If you haven’t been vaccinated or recovered (2G – geimpft (vaccinated) or genesen (recovered)) from Covid-19, then you can only go into shops for essential supplies, i.e. food shopping in supermarkets or to drugstores and pharmacies.

Many – but not all – of the rules for shopping are the same as those passed in the neighbouring state of Brandenburg in order to avoid promoting ‘shopping tourism’ with different restrictions in different states.

2G applies here, too, as well as the requirement to wear a mask with most places now no longer accepting a negative test for entry. Only minors are exempt from this requirement.

Sport, culture, clubs
Indoor sports halls will off-limits to anyone who hasn’t  been vaccinated or can’t show proof of recovery from Covid-19. 2G is also in force for cultural events, such as plays and concerts, where there’s also a requirement to wear a mask. 

In places where mask-wearing isn’t possible, such as dance clubs, then a negative test and social distancing are required (capacity is capped at 50 percent of the maximum).

Restaurants, bars, pubs (indoors)
You have to wear a mask in all of these places when you come in, leave or move around. You can only take your mask off while you’re sat down. 2G rules also apply here.

Hotels and other types of accommodation 
Restrictions are tougher here, too, with 2G now in force. This means that unvaccinated people can no longer get a room, even if they have a negative test.

For close-contact services, such as hairdressers and beauticians, it’s up to the service providers themselves to decide whether they require customers to wear masks or a negative test.

Football matches and other large-scale events
Rules have changed here, too. From December 1st, capacity will be limited to 5,000 people plus 50 percent of the total potential stadium or arena capacity. And only those who’ve been vaccinated or have recovered from Covid-19 will be allowed in. Masks are also compulsory.

For the Olympic Stadium, this means capacity will be capped at 42,000 spectators and 16,000 for the Alte Försterei stadium. 

3G rules – ie vaccinated, recovered or a negative test – still apply on the U-Bahn, S-Bahn, trams and buses in Berlin. It was not possible to tighten restrictions, Matz said, as the regulations were issued at national level.

According to the German Act on the Prevention and Control of Infectious Diseases, people have to wear a surgical mask or an FFP2 mask  on public transport.

Christmas markets
The Senate currently has no plans to cancel the capital’s Christmas markets, some of which have been open since Monday. 

According to Matz, 2G rules apply and wearing a mask is compulsory.

Schools and day-care
Pupils will still have to take Covid tests three times a week and, in classes where there are at least two children who test positive in the rapid antigen tests, then tests should be carried out daily for a week.  

Unlike in Brandenburg, there are currently no plans to move away from face-to-face teaching. The child-friendly ‘lollipop’ Covid tests will be made compulsory in day-care centres and parents will be required to confirm that the tests have been carried out. Day-care staff have to document the results.

What about vaccination centres?
Berlin wants to expand these and set up new ones, according to Matz. A new vaccination centre should open in the Ring centre at the end of the week and 50 soldiers from the German army have been helping at the vaccination centre at the Exhibition Centre each day since last week.

The capacity in the new vaccination centre in the Lindencenter in Lichtenberg is expected to be doubled. There are also additional vaccination appointments so that people can get their jabs more quickly. Currently, all appointments are fully booked well into the new year.