The UK's Financial Conduct Authority has fined ED&F Man Capital Markets Ltd (MCM) £17.2m for "serious failings which enabled millions in illegitimate tax reclaims" involving the trading strategy of a Dubai based trading firm within the same corporate group.
The serious failings in its oversight of cum-ex trading allowed MCM to collect fees for trading strategies designed to enable its clients to illegitimately reclaim tax from the Danish authorities, the regulator said.
Between February 2012 and March 2015 MCM enabled significant volumes of dividend arbitrage trading on behalf of clients, allowing clients to make withholding tax (WHT) reclaims.
It is established that £20m of the WHT reclaims made by MCM's clients to the Danish tax authority (SKAT) were illegitimate.
A Dubai based trading firm within the same corporate group as MCM participated in the trading strategy which resulted in these illegitimate WHT reclaims from SKAT. These reclaims were illegitimate because under this strategy WHT was reclaimed despite no shares being owned or borrowed, no dividend being received, and no tax being paid. MCM generated £5.06m in fees from this.
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.
Therese Chambers, 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."
This is the fourth case brought by the FCA in relation to cum-ex trading and the largest fine so far.
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 of income forfeited by MCM as a result of their 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 WHT schemes, which has involved proactive engagement with global law enforcement authorities.
The first 3 cum-ex cases concluded in May 2021, November 2021 and July 2022. There are a number of ongoing investigations into UK brokers for similar failings.
