€1bn property fraud scandal heaps further pressure on German watchdog

Germany is bracing itself for possibly the biggest real estate fraud of the last decade, with investors worldwide likely to lose their entire investments. The case of German Property Group (GPG), based in Langenhagen near Hanover, is likely to expose criminal activity on behalf of the owner of the group and close associates. And it represents another case that is likely to make Germany’s financial watchdog BaFin look incompetent, following the Wirecard debacle.

German Property Group, also known by its previous names, Dolphin Trust and Dolphin Capital, is being investigated by authorities in Germany and the U.K. for suspected corporate crimes, including embezzlement and delay in filing for insolvency, and has collapsed, filing for bankruptcy in late-July. Investigators in London have asked for assistance in the case from prosecutors in Hanover.

In Germany the case has been hindered by bureaucratic delays relating to where the insolvency proceedings should take place. Meanwhile, the court-appointed liquidator is scrambling to identify the investors in Ireland, the UK, and Asia – mainly South Korea, Hong Kong, Singapore and Malaysia – who invested more than €1bn into the business. 

GPG promised investors double-digit returns from the redevelopment of historic German buildings, known as Denkmalgeschützte Gebäude, often buying them in partnership with local authorities. It now appears that most of the money has disappeared.

GPG claimed the German apartments that were to be redeveloped with investors' funds would be highly attractive for buyers because they would be able to claim back a large part of the construction costs for tax purposes under the German Income Tax Act. Characteristic of a classic pyramid scheme, GPG seems to have initially made interest payments to investors, helping to lure further investments in, but from 2018 onwards payments became irregular and finally stopped altogether. With lawsuits piling up, and its debt burden over €500m, GPG filed for bankruptcy in Bremen.

The original liquidator Gerrit Hoelzle (he has since been replaced), a lawyer with the Görg law firm in Bremen, has identified a web of 200 companies affiliated with GPG, and less than €200,000 in liquid assets, along with about 50 properties across Germany purporting to be the heritage buildings - but which are actually run-down properties that were never developed by the company as promised to investors. The consulting group EY has since been drafted in to build up a picture of the complicated web of subsidiaries and to follow the money trail.

The mastermind behind GPG is a German-British businessman named Charles Smethurst. Media reports in Germany say the insolvency administrator has solid evidence that Smethurst  - after building up Dolphin Trust over a period of a decade - had been helping himself to investors’ funds and injecting millions into businesses owned by his wife, a moderator and dress designer, and other business associates. Smethurst and two other associates are now the object of the Hanover district attorney’s lawsuit.

Last year researchers at German radio stations Bayerischer Rundfunk and Hessischer Rundfunk and the BBC all produced programmes highlighting what was already beginning to look like a major scam. Although the company hadn’t published accounts since 2016, it was still able to grant a private loan to CEO Smethurst of €3m the previous year. 

While BaFin was made aware of the investigations into dubious practices at the firm, it appears that it failed to take any action on the grounds that certain loan documents would have been well within the competence of professional investors to assess – although it was clearly a structure targeted at private individuals, including pensioners. In the opinion of several observers, BaFin did not get too involved as GPG seems to have raised its money exclusively from foreign investors.

Germany’s last major property scandal involved the company S&K, whose two owners were arrested on criminal charges in 2013 and sentenced to eight and a half years in prison. The damage done to investors in that case was €240m – a quarter of the amount involved in the German Property Group case.