The UK FCA has fined ED&F Man Capital Markets Ltd (MCM) £17.2m ($21.4m) for serious failings which enabled millions in illegitimate tax reclaims.

Cum-ex trading is a complex tax avoidance scheme that involves selling and buying shares just before and after a dividend is paid. This allows investors to claim multiple refunds of withholding tax, which is paid to the government on dividends.

The FCA found that MCM enabled significant volumes of dividend arbitrage trading on behalf of clients between February 2012 and March 2015. These trades allowed clients to make withholding tax reclaims, some of which were illegitimate.

A Dubai-based trading firm within the same corporate group as MCM participated in the trading strategy which resulted in these illegitimate withholding tax reclaims from the Danish tax authority. These reclaims were illegitimate because under this strategy withholding tax was reclaimed despite no shares being owned or borrowed, no dividend being received, and no tax being paid. MCM generated £5.06m ($6.3m) in fees from this.

Serious failings

The FCA said that MCM’s failings included:

• failure to complete adequate compliance checks;
• failure to ensure that the dividend arbitrage trading was legitimate;
• failure to have a compliance function with the necessary expertise to monitor or review the trading;
• failure to carry out adequate compliance reviews of department responsible – only carried out a high-level annual compliance review;
• failure to take any steps to understand the trading activities or properly consider the risks of dividend arbitrage trading. 

Therese Chambers, the FCA’s Joint Executive Director of Enforcement and Market Oversight, said: “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.”

Rob Mason, Director of Regulatory Intelligence at Global Relay, our parent company, observed that: “This is a good enforcement action around a material and deliberate tax fraud utilising a complex trading strategy seeking to avoid detection. While possibly one of the last of its type due to changes made to avoid future loopholes, this is a great outcome for the FCA and a clear and credible deterrence message.”

Largest fine so far

This is the fourth case brought by the FCA in relation to cum-ex trading and the largest ever imposed on a UK financial institution for its involvement in cum-ex trading. The fine reflects the seriousness of the breaches and the significant revenue that MCM generated from its involvement in the illegitimate trading activity.

As MCM has not disputed the FCA’s findings and agreed to settle, it qualified for a 30% discount under the FCA’s Settlement Discount Scheme. The fine includes £5.06m ($6.3m) of income forfeited by MCM as a result of its breaches in relation to cum-ex trading.

This action is part of a range of measures taken by the FCA in connection with cum-ex dividend arbitrage cases and withholding schemes, which has involved proactive engagement with global law enforcement authorities.