Record £17 million fine for cum-ex trading scam
The Financial Conduct Authority (FCA) has fined ED&F Man Capital Markets Ltd (MCM) over £17.2 million ‘for serious failings in its oversight of cum-ex trading’.
The FCA said that these failings allowed the broker to collect fees for trading strategies designed to enable clients to reclaim tax illegitimately from the Danish authorities.
According to the regulator, between February 2012 and March 2015, MCM enabled significant volumes of dividend arbitrage trading on behalf of clients, allowing clients to make withholding tax reclaims.
Some £20 million of the withholding tax reclaims made by MCM clients to the Danish tax authority were illegitimate. The firm generated £5.06 million in fees from this.
The FCA said that MCM had ‘inadequate compliance checks’ and failed to ensure that this dividend arbitrage trading was legitimate.
“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. It failed to take any steps to understand the trading activities or properly consider the risks of dividend arbitrage trading,” the FCA explained.
Daniel Hyde spoke to The Law Society Gazette about this latest instalment in the global cum-ex dividend arbitrage trading scandal, commenting on why firms should pay attention to the FCA’s decision.
Dan explained that both the significant penalty in this case (which is almost eight and a half times greater than the FCA’s next largest) and the fact that the regulator has hinted that similar cases may be forthcoming suggest that this saga is far from over.
“This decision highlights the importance of an engaged compliance function that appropriately monitors, probes, and challenges those they supervise, as well as the need for firms to properly understand and assess the risks of all lines of business regardless of their complexity.
“Firms should also note the substantial penalty discount granted to MCM for its early settlement with the FCA, its proactive engagement of, and investigation by, forensic consultants and legal advisors, and its decision to waive the legal professional privilege in its investigation reports,” Dan said.