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The UK’s Financial Conduct Authority (FCA) has fined Sapien Capital, a UK-based investment banking boutique, for “serious financial crime control failings” that facilitated fraudulent trading and money laundering related to cum-ex by entities connected to Sanjay Shah.
In 2015, Sapien Capital acted as a broker for Solo Group which in turn conducted a complex multi-million-pound equity and derivative trading strategy for clients connected to Shah and his alleged global cum-ex network.
In 2014 and 2015, the value of Danish and Belgian withholding tax reclaims made, which are attributable to Solo Group, were approximately £899.27 million and £188.00 million respectively. Over those two years, of the reclaims made, the Danish and Belgian tax authorities paid approximately £845.90 million and £42.33 million respectively.
The final notice comes shortly after the Danish tax agency had its case against Shah dismissed by the High Court due to being filed in the wrong jurisdiction.
This is the first FCA case concerning cum-ex trading, dividend arbitrage and withholding tax reclaim schemes that have come from the regulator’s various investigations into entities and individuals suspected of tax fraud.
Following its investigation, which began in 2015, the FCA has today imposed a penalty of £236,740, representing £178,000 disgorgement and £58,740 as the punitive element.
The non-disgorgement element of the penalty was reduced by 30 per cent as a reward for Sapien’s cooperation in the investigation.
The overall fine was further decreased once Sapien Capital produced evidence the penalty would “cause it serious financial hardship”, i.e go bust, if it was burdened with a penalty of that size.
The final penalty of £178,000 is payable over the next three years.
What happened?
The FCA says that Solo trading was characterised by what appeared to be a circular pattern of extremely high-value trades undertaken to avoid the normal need for payments and delivery of securities in the settlement process. The trading pattern involved the use of over-the-counter (OTC) equity trading, securities lending and forward transactions, involving EU equities, on or around the last day securities were cum dividend.
The FCA investigation found no evidence of change of ownership of the shares traded by Solo Group’s clients, or custody of the shares and settlement of the trades by the Solo Group.
The way these trades were conducted by the Solo Group and their clients, in combination with their scale and volume, were highly suggestive of financial crime, and appear to have been undertaken to create an audit trail to support withholding tax reclaims in Denmark and Belgium, the FCA says.
Sapien executed purported OTC equity trades to the value of approximately £2.5 billion in Danish equities and £3.8 billion in Belgian equities.
In addition, the UK regulator found that Sapien failed to exercise due skill, care and diligence in applying anti-money laundering policies and procedures and in failing properly to assess, monitor and mitigate the risk of financial crime by clients introduced by the Solo Group and the purported trading.
Sapien did not undertake appropriate due diligence and failed to perform effective risk assessments on the Solo clients.
Mark Steward, director of enforcement and market oversight, stated: “These transactions ran money laundering and other financial crime risks which Sapien incompetently failed to see.
“The FCA expects firms have systems and controls that test the purpose and legitimacy of transactions, reflecting scepticism and alertness to the risk of money laundering and financial crime, and failures here constitute serious misconduct.”
