FCA hits ED&F Man Capital with £17.2m fine for its role in facilitating cum-ex trades
06 June 2023 UK
Image: mehaniq41/adobe.stock.com
The UK Financial Conduct Authority (FCA) has imposed a £17.2 million fine on ED&F Man Capital Markets (MCM) for its role in facilitating cum-ex trades.
This is the fourth prosecution applied by the UK financial regulator and the largest fine that it has applied to date. This includes just over £5 million in income forfeited by MCM as a result of their breaches relating to cum-ex transactions.
MCM qualified for a 30 per cent reduction in the penalty under the FCA Settlement Discount Scheme since it did not dispute the FCA’s charges and agreed to the settlement.
These failings, relating to inadequate oversight of activities associated with cum-ex trading, enabled MCM clients to reclaim withholding tax (WHT) illegitimately from Skatteforvaltningen, the Danish tax authority (‘Skat’).
Securities Finance Times has reported extensively on this body of legal action as it has developed over the past three years, and on parallel cum-ex and cum-cum actions running in other jurisdictions.
The UK regulator claimed that MCM enabled significant volumes of dividend arbitrage trades on behalf of clients between February 2012 and March 2015, leading to the loss of close to £20 million by the Danish exchequer as a result of these illegitimate WHT reclaims.
According to the FCA, MCM applied inadequate compliance checks and it failed to verify that these dividend arbitrage trades were legitimate. It also failed to take any steps to understand these dividend arbitrage trades or to evaluate the associated risks.
“The firm’s compliance function did not have the necessary expertise to monitor or review the trading and only carried out a high-level annual compliance review of the department responsible,” says the regulator.
Commenting on the penalty, FCA joint executive director of enforcement and market oversight says: “MCM facilitated a significant volume of trades for the purpose of making illegitimate tax reclaims from the Danish Exchequer and earned themselves significant fees.
“It is completely unacceptable for authorised firms to make money from this kind of trading. It’s essential that all firms have the right controls and expertise in place to avoid the risk of being used to facilitate financial crime.”
This action is part of wider measures taken by the FCA in connection with cum-ex div arb cases and WHT schemes, which has involved proactive engagement with global law enforcement authorities.
In April, a Dubai court upheld a claim by Skat for the extradition of Sanjay Shah, a UK-national based in Dubai and former hedge fund trader, who is accused of making up to US$1.9 million through illegitimate WHT claims from the Danish tax authorities.
The UAE and Denmark signed an extradition treaty on 15 March 2022, with the Danish state seeking to pursue recovery of more than US$1.5 billion in losses sustained in what it termed a “well designed and organised fraud scheme” where Shah and his associates submitted more than 3000 applications to unlawfully receive dividend tax refunds from the Danish exchequer.
In a separate case widely reported in SFT, cum-ex lawyer Hanno Berger was sentenced to eight years of gaol time, having been extradited from Switzerland to his native Germany to face trial.
There has been a step up in enforcement actions in Germany after successful prosecutions were confirmed in the German courts over the past three years. In March 2020, two UK bank employees were given suspended sentences following their involvement cum-ex activities.
In June 2021, a former execution of MM Warburg received a five-year sentence from judges in Bonn, having been convicted of aggravated tax evasion connected with cum-ex trades. In February 2022, another MM Warburg employee was sentenced to 3.5 years in prison on related charges.
This is the fourth prosecution applied by the UK financial regulator and the largest fine that it has applied to date. This includes just over £5 million in income forfeited by MCM as a result of their breaches relating to cum-ex transactions.
MCM qualified for a 30 per cent reduction in the penalty under the FCA Settlement Discount Scheme since it did not dispute the FCA’s charges and agreed to the settlement.
These failings, relating to inadequate oversight of activities associated with cum-ex trading, enabled MCM clients to reclaim withholding tax (WHT) illegitimately from Skatteforvaltningen, the Danish tax authority (‘Skat’).
Securities Finance Times has reported extensively on this body of legal action as it has developed over the past three years, and on parallel cum-ex and cum-cum actions running in other jurisdictions.
The UK regulator claimed that MCM enabled significant volumes of dividend arbitrage trades on behalf of clients between February 2012 and March 2015, leading to the loss of close to £20 million by the Danish exchequer as a result of these illegitimate WHT reclaims.
According to the FCA, MCM applied inadequate compliance checks and it failed to verify that these dividend arbitrage trades were legitimate. It also failed to take any steps to understand these dividend arbitrage trades or to evaluate the associated risks.
“The firm’s compliance function did not have the necessary expertise to monitor or review the trading and only carried out a high-level annual compliance review of the department responsible,” says the regulator.
Commenting on the penalty, FCA joint executive director of enforcement and market oversight says: “MCM facilitated a significant volume of trades for the purpose of making illegitimate tax reclaims from the Danish Exchequer and earned themselves significant fees.
“It is completely unacceptable for authorised firms to make money from this kind of trading. It’s essential that all firms have the right controls and expertise in place to avoid the risk of being used to facilitate financial crime.”
This action is part of wider measures taken by the FCA in connection with cum-ex div arb cases and WHT schemes, which has involved proactive engagement with global law enforcement authorities.
In April, a Dubai court upheld a claim by Skat for the extradition of Sanjay Shah, a UK-national based in Dubai and former hedge fund trader, who is accused of making up to US$1.9 million through illegitimate WHT claims from the Danish tax authorities.
The UAE and Denmark signed an extradition treaty on 15 March 2022, with the Danish state seeking to pursue recovery of more than US$1.5 billion in losses sustained in what it termed a “well designed and organised fraud scheme” where Shah and his associates submitted more than 3000 applications to unlawfully receive dividend tax refunds from the Danish exchequer.
In a separate case widely reported in SFT, cum-ex lawyer Hanno Berger was sentenced to eight years of gaol time, having been extradited from Switzerland to his native Germany to face trial.
There has been a step up in enforcement actions in Germany after successful prosecutions were confirmed in the German courts over the past three years. In March 2020, two UK bank employees were given suspended sentences following their involvement cum-ex activities.
In June 2021, a former execution of MM Warburg received a five-year sentence from judges in Bonn, having been convicted of aggravated tax evasion connected with cum-ex trades. In February 2022, another MM Warburg employee was sentenced to 3.5 years in prison on related charges.
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