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The UK’s Financial Conduct Authority (FCA) says it is now investigating eight individuals for cum-ex tax fraud as of 24 February, up from six in October 2020, a freedom of information (FOI) request reveals.
The cases opened this year mark the regulator’s first new investigations into individuals since 2019, according to FCA data gained by SFT.
The latest figures show the regulator’s activity into what has been called the “crime of the century” peaked around 2016, with scant evidence of the many UK-based persons or entities believed to be involved being pursued.
An FOI made by business crime solicitors Rahman Ravelli to the regulator confirmed that in addition to the new, unnamed individuals, 14 firms already known to be under investigation were still under the spotlight as of February.
All the cases against entities and individuals have been open for several years, some as far back as 2015, with none resulting in enforcement action by the FCA so far.
Aziz Rahman, a senior partner at the law firm, says the low numbers are a “cause for concern” and highlight the challengers regulators face in untangling the web of dividend arbitrage trading strategies that stretch around the globe.
The formulation of UK tax law meant it was largely unscathed by the tax revenue losses caused by cum-ex trading is thought to have deprived European authorities of an estimated €55 billion lost revenue. However, a significant portion of the actual trading is believed to have taken place in London or have been conducted by individuals that are UK residents, making the FCA’s cooperation vital for EU authorities seeking damages.
As a result, the UK has remained largely removed from the cum-ex scandal that engulfed Europe in recent years where several continental tax authorities, most notably in Germany and Belgium, are proactively and publicly campaigning to bring several high-profile cases to trial despite COVID-19-related hurdles.
In a rare public comment on the matter, the FCA’s director of enforcement and market oversight Mark Steward confirmed in February that the regulator viewed cum-ex trading as “abusive” and said it was working closely with European authorities.
On the continent, the German prosecutor alone is understood to have a list of several hundred individuals that are suspected of contributing to a global network of cum-ex strategies in which London was one of several trading hubs.
Despite this, the number of investigations by the UK regulator remains in the teens.
A separate FOI request made by freelance researcher Jack Barnett on behalf of SFT shows that in 2016 the regulator began two investigations into the conduct of individuals, and opened a further six cases in 2017.
Since then, three additional cases began in 2019, along with the two earlier this year.
Other than the latest pair, it is unclear which of the 11 cases opened since 2015 are still active.
When looking at institutions, the FCA began four cases in 2015, six in 2016 and four in 2017. It has not opened a case into any entity since, the FIO shows.
Responding to the FIO, the FCA says it has not issued any fines to individuals or firms as a result of an investigation into them using cum-ex trading strategies that pertain to dividend arbitrage trading strategies.
The regulator further notes that none of its investigations have resulted in ‘final notices’ being issued, which denotes when an investigation becomes enforcement action.
Commenting on Rahman Ravelli’s FIO, Rahman says that while the figures can be partly explained by the UK’s limited involvement in cum-ex they also show the difficulties facing the FCA.
“There has always been the view that while some of the architects of cum-ex trades may have been based in the UK, the vast majority of those involved were in other countries; most notably Germany," he says. "This is why reports have come out about there being around a thousand suspects in Germany, while there are not believed to be so many in the UK.
“But even if this is taken into account, the FCA does seem to be struggling to sanction those it believes are responsible for wrongdoing related to cum-ex.”
Rahman further notes that even when the FCA does act, it is becoming entangled in a legal quagmire created by the cross-border nature of the arbitrage strategy which requires cases in multiple jurisdictions to set straight.
In February the FCA was forced to halt an investigation into a trader until next year, Rahman explains, when a separate court will decide on a case brought by Danish tax authorities against the former hedge fund manager Sanjay Shah — who is believed to be a central figure in one of the largest cum-ex schemes.
“This case is a matter that has been effectively taken out of the FCA’s hands for now,” he states. “But with the past year or more having seen many, many people being investigated in various European countries regarding cum-ex, the FCA not opening any new investigations in that time is a cause for concern.”
Elsewhere, some market commentators are speculating that, due to the nature of anti-fraud laws in several EU jurisdictions making it much easier to place blame on an individual rather than the company they worked for, prosecutors may be seeking convictions against specific people first in order to build a wider case against their employer to seek damages.
In order to recoup even a fraction of the multi-billion euro losses from a financial institution, prosecutors must establish that the dividend arbitrage strategy was mandated by senior management and part of a systemic culture of seeking to defraud the state, not the actions of a handful of rogue traders.
As part of laying the groundwork for meeting this threshold, the highly-anticipated case against Hanno Berger, a German tax auditor turned cum-ex legal mastermind, is expected to define the level at which a trader is considered to be responsible for the strategy pursued by his firm.
Due to Berger’s ill-health and the travel restrictions caused by the pandemic, it is unclear whether the case will be heard this year, despite several delays already.
