Markets

FCA fines ED&F Man £17mn over its role in ‘cum-ex’ tax scandal

The UK markets regulator has fined broker ED&F Man Capital Markets £17.2mn for its role in the “cum-ex” trading affair, marking the largest penalty imposed by British authorities for one of Europe’s largest tax scandals.

The Financial Conduct Authority on Monday fined the London broker for “serious failings” in its oversight of trading schemes that allowed clients to illegitimately reclaim tax on dividends in Denmark.

The regulator said ED&F Man had earned £5.1mn in fees as it oversaw the trading strategies, which resulted in at least £20mn in illegitimate claims to the Danish tax authorities between 2012 and 2015.

Regulators and tax authorities around Europe have followed a trail that stretches across the continent to Dubai, in which watchdogs have accused brokers of orchestrating a dodge for their clients that deprived authorities of billions of dollars in tax.

They have been accused of running a scheme in which brokers bought shares just before the cut-off date that established dividend payments, and obscured their ownership in different countries. Share ownership before and after dividend right cut-off dates is known in financial markets as “cum” and “ex”.

Governments in countries including Denmark, Germany and France were then duped into rebating billions of euros in dividend taxes that had never been paid.

“It is completely unacceptable for authorised firms to make money from this kind of trading,” said Therese Chambers, joint executive director of enforcement and market oversight at the FCA.

ED&F Man, one of the oldest commodities brokers in London, was bought by rival Marex last year after falling into financial difficulties.

“The FCA’s action relates to a legacy business area that was shut down by [us] in 2015. It was specifically excluded from the sale of assets to Marex and is a contingent liability that was ringfenced as part of that transaction,” ED&F Man said.

The FCA said ED&F Man had “enabled significant volumes of dividend arbitrage trading on behalf of clients”.

The broker set up an unregulated equity trading business in Dubai, and traded in the over-the-counter market, where large deals can be struck away from a transparent stock exchange.

Monday’s fine is the largest the FCA has imposed on London-based firms. In 2021, it fined interdealer broker Sunrise Brokers, now part of BCG Partners, £642,000 for facilitating suspicious trades. Smaller brokers Sapien Capital and TJM were fined £178,000 and £2mn respectively for their roles in the scandal.

The regulator added it was still investigating other UK-based brokers for similar failings.

The regulator said ED&F Man had “inadequate compliance checks”; the compliance team did not have the necessary expertise to review the trading, and it had failed to ensure trading was legitimate. The FCA added that the company’s compliance team had “limited understanding” of dividend arbitrage trading and believed it to be “essentially ’risk free”.

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