CORPORATE CRIME UPDATE | PARIS 30 APR 2021 What financial institutions need to know about cum-ex trading Denmark's journey to recover the proceeds of tax evasion from a British trader appears to have come to an end. What now for enforcement against cum-ex traders? The issue of cum-ex trading has returned to the spotlight after Denmark's £1.5 billion claim against hedge funder Sanjay Shah, expected to become one of Britain's longest and most expensive trials, was yesterday dismissed by the English High Court. The claim alleged that Shah, through his fund Solo Capital Partners, masterminded a cum-ex trading scheme that defrauded the Danish tax authority, SKAT, of vast sums of money between 2012 and 2015, naming 114 defendants. The English High Court's dismissal of the case, on a point of policy rather than merit, was a narrow escape for Shah, who has emerged as a central figure in the trades and remains subject to investigation and prosecution in other jurisdictions. Shah maintains that his actions were lawful. In a four-day trial covering preliminary matters, Shah's lawyers argued that the Court did not have the jurisdiction to hear the case, as it is "governmental in nature" and attempts to utilise the English court to enforce foreign revenue laws, forbidden under what is known as the 'Revenue Rule'. In his judgment released yesterday, Judge Baker agreed; holding that the claim was an attempt by the Danish authority to recover lost tax revenue, which is inadmissible in an English court. SKAT has stated its intention to appeal; arguing that it is seeking to recoup the proceeds of fraud rather than enforce its revenue laws. The tax authority has also filed civil suits against over 500 individuals or entities in six other countries; the US, Dubai, Germany, Malaysia, Canada and Denmark. Previously an employee of Credit Suisse and Rabobank, Shah claims he first became aware of traders profiting from dividend taxes in his early career and has since merely benefitted from a "legal loophole". Danish authorities disagree and have launched criminal prosecution against Shah for defrauding the treasury, which could result in a 12-year prison sentence in the event of a guilty verdict. Shah has also been charged with 55 counts of money laundering in Hamburg, covering trades between December 2011 and September 2015. German prosecutors argue that Shah laundered the profits from tax fraud by making untrue statements about dividend arbitrage trades when filing tax-refund claims. The investigations demonstrate how seriously cum-ex trading is being taken and the potential consequences for those involved. What is cum-ex trading? Cum-ex trading is a method used to engineer multiple refunds for withholding tax ("WHT") paid on a dividend. Typically, company shares are sold or swapped prior to a dividend payment in order to produce two tax refunds on one set of shares. In many cases, this is a temporary arrangement and the original holder aims to be put back in the same economic position as it would have been without the trade, with an additional WHT upside. Such trades are also known as 'dividend arbitrage'. The possibility and legality of dividend arbitrage is dependent on national tax law and/or any double taxation treaties between the relevant country and another. As such, it could potentially impact a number of European countries who impose withholding tax; it is estimated that the total costs to affected European national tax authorities are in excess of €55 billion between 2001 and 2012. Germany and Denmark are most heavily impacted, losing €5.7 billion ($6.4 billion) and 12.7 billion kroner ($2 billion) respectively. In France, despite the lack of an official assessment of tax losses , Le Monde's journalists who uncovered the issue estimated the tax losses to be roughly 3 billion euros. Investigations are also being carried out in Belgium and Austria, whilst the UK is assisting foreign authorities, including those of France, Germany, Italy and Denmark. What are the views of Regulators and Enforcement Authorities? German authorities consider that cum-ex trades made prior to a 2012 change to the tax code likely constitute tax evasion, and are considering around 1000 suspects in ongoing investigations, whilst the European Banking Authority stated that "multiple claims of the same withholding tax could amount to a tax crime", and that the “handling of the proceeds from tax crimes is likely to amount to money laundering, irrespective of where the tax crime took place". The UK Financial Conduct Authority ("FCA") has declared that trades made without sufficiently detailed assessment could be market abuse as they may give "false or misleading signals about the supply of, or demand for the relevant security". The FCA has launched investigations into eight individuals and 14 firms associated with cum-ex trades and has declared that it considers such trading abusive. One of its largest investigations was, however, recently halted after a High Court judge ruled that the FCA must wait until the conclusion of SKAT's case against Shah. The case's dismissal yesterday raises the possibility that the FCA may now restart its investigations. In France, cum-ex has been unlawful since 2005 but cum-cum practices remain lawful unless French tax authorities can establish that these practices have been designed for tax evasion purposes, which could then trigger enforcement action from French prosecuting authorities. How could UK financial institutions be affected? The UK does not itself impose WHT but, due to its position as a major European trading hub, UK financial institutions could be implicated. Many of the trades were allegedly executed through the UK, or linked to UK parties via divisions on continental Europe. Therefore, UK institutions and individuals may be subject to German or Danish law in this area, as well as that of other affected jurisdictions, which could result in prosecution, civil suits or regulatory action from European authorities. For example, three of the five individuals charged by Frankfurt prosecutors in May 2018 were formerly based at HypoVereinsbank's London division. The trades, and their possible illegality, impact a range of parties from traders to lawyers, banks or accountants. German authorities are investigating approximately 100 banks, including Deutsche Bank, DZ Bank, Commerzbank, HypoVereinsbank (the German division of Italian bank UniCredit), Maple Bank GmbH (the German branch of Canadian bank Maple Bank), Santander, Macquarie, and state-owned banks WestLB and HSH-Nordbank, whilst the Danish authorities have subpoenaed more than 420 companies and individuals suspected of involvement. Civil suits have also been brought against advisors such as EY, and against a partner at Freshfields Bruckhaus Deringer, in relation to advice given to Maple Bank GmBH, demonstrating the depth of possible implications from cum-ex trading and associated activities. Major French financial institutions such as BNP Paribas, Société Générale and Crédit Agricole have been interviewed by German prosecuting authorities in the course of their investigations. It is clear that a wide spectrum of financial institutions across Europe could be implicated and it seems likely that investigations could be ongoing for years to come. Authors: Ruby Hamid, Partner; Olivier Dorgans, Partner Key Contacts We bring together lawyers of the highest calibre with the technical knowledge, industry experience and regional know-how to provide the incisive advice our clients need. Ruby Hamid Olivier Dorgans PARTNER PARTNER LONDON PARIS +44 20 7859 3922 +33 1 53 53 54 25 [email protected] [email protected] The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions..