The FCA has fined Mako Financial Markets Partnership £1,662,700 for failing to ensure it had effective systems and controls to guard against financial crime relating to cum-ex trading.
This eighth enforcement case brought by the FCA concludes its investigations into cum-ex trading, with fines totalling more than £30 million.
What is cum-ex trading?
Cum-ex trading involves trading of shares on or just before the last cum-dividend date. If in a suitable jurisdiction this can then allow a party to claim a tax rebate on withholding tax, sometimes without entitlement.
The intention of dividend arbitrage trading (of which cum-ex is an example) is to place shares in alternative tax jurisdictions around dividend dates, with the aim of minimising withholding tax or generating withholding tax reclaims. This may involve several different trading activities including trading and lending securities and trading derivatives, designed to hedge movements in the price of the securities over the dividend dates.
Withholding tax (WHT) is a levy deducted at source from income and passed to the government by the entity paying it. Many securities pay periodic income in the form of dividends or interest, and local tax regulations often impose a withholding tax on such income. In certain cases where WHT is levied on payment to a foreign entity it may be reclaimed if there is a formal treaty, called a double taxation agreement (DTA), between the country in which the income is paid and the country of residence of the recipient. DTAs allow for a reduction or rebate of the applicable WHT.
Between December 2013 and November 2015, the FCA says Mako executed purported over-the-counter equity trades on behalf of clients of the Solo Group, worth approximately £68.6 billion in Danish equities and £23.6 billion in Belgian equities. Mako received commission of approximately £1.45 million.
The trading was circular, which the FCA notes is highly suggestive of financial crime. It appears to have been carried out to allow the arranging of withholding tax (WHT) reclaims in Denmark and Belgium. Several individuals have now been convicted in Denmark as part of this scheme.
Mako additionally failed to identify red flags in other instances related to the Solo Group business. This involved a series of transactions which had no obvious rationale, and which resulted in the Solo Group’s controller incurring a €2 million loss, to the benefit of his business associates. Mako also received payment from a UAE-based third party connected to the Solo Group for outstanding debts owed by the Solo Group’s clients without performing any due diligence which created an increased risk of money laundering.
As Mako has not disputed the FCA’s findings and agreed to settle, it qualified for a 30% discount on its fine under the FCA’s Settlement Discount Scheme.
Therese Chambers, joint executive director of enforcement and market oversight at the FCA, said: “Mako failed to spot clear red flags and facilitated highly suspicious trading that made it vulnerable to being used to support financial crime.
“For UK financial services to grow and compete, investors need to have trust in it. That’s why it is vital we stamp out these unacceptable practices which risk the reputation and integrity of UK markets.”
