The Financial Conduct Authority (FCA) has fined ED&F Man Capital Markets (MCM) £17.2m for serious failings in its oversight of cum-ex trading.
These failings allowed MCM to collect fees for trading strategies designed to enable its clients to illegitimately reclaim tax from the Danish authorities.
Between 2012 and 2015, the FCA found that MCM enabled significant volumes of dividend arbitrage trading on behalf of clients, allowing clients to make withholding tax (WHT) reclaims.
The regulator 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 £5.1m in fees from this.
According to the FCA, the firm had inadequate compliance checks and failed to ensure that this dividend arbitrage trading was legitimate. MGM’s compliance function did not have the necessary expertise to monitor the trading and only carried out a high-level annual compliance review of the department responsible. The FCA said it had failed to take any steps to understand the trading activities or properly consider the risks of dividend arbitrage trading.
“MCM facilitated a significant volume of trades for the purpose of making illegitimate tax reclaims from the Danish Exchequer and earned themselves significant fees,” said joint executive director of enforcement and market oversight at the FCA, Therese Chambers.
“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.
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