Partner Bambos Tsiattalou discusses the large-scale investigation of cum-ex trading spreading across Europe and the fallout that will inevitably hit the UK, in the FTAdviser.
Bambos’ article was published in the FTAdviser, 17 January 2020, and can be found here.
The trial of two former British investment bankers for tax fraud in Germany could yet unleash an unprecedented scandal in the city of London. Martin Shields and Nicholas Diable are being tried for their part in “cum-ex” equity trades. They stand accused of involvement in trades which defrauded the German treasury of over €400 million between 2006 and 2011. As large-scale investigations into cum-ex trading unfold across Europe, we can only sit and wait for the fallout to hit London.
Cum-ex trades derive their name from the Latin words for “with” and “without”, respectively. These trades allegedly involve the rapid lending of shares as dividends fall due, enabling two parties to simultaneously claim ownership of the same shares, so that both can claim tax rebates.
It is estimated that cum-ex trading has cost the treasuries of Europe an incredible €55 billion. Le Monde – one of the newspapers which broke the scandal – has called it the “robbery of the century”. Germany is the most severely impacted EU state, with estimated losses of over $36 billion. French losses are estimated at over €17 billion, while Italy is believed to have lost some €4.5 billion.
Cum-ex trades were known of in the US as far back as 1992. Yet Germany did not specifically ban them until 2012. Although the German authorities argue that cum-ex trades were always fraudulent, their illegality may not have been clear to all participants at the time of the trades. The line between legitimate tax avoidance and outright tax evasion can be blurred. Some involved may have been unaware of the wider purposes of a specific transaction, whereas others may have been fully aware of the effect of connected transactions.
The German Finance Ministry is currently investigating 500 cum-ex arrangements to the value of some €5.5 billion. Some €2.4 billion has already been recovered. Cum-ex trades involved bankers, lawyers and traders all across Europe.
It is believed that around 100 banks are being investigated by the German authorities, including big names such as Bank of New York Mellon Corp., Deutsche Bank AG, and Société Générale SA. Several major banks, and their advisors, have recently been raided by the German authorities.
Last month, a former global head of tax at Freshfields Bruckhaus Deringer was arrested by the German authorities in relation to the scandal. He has now left the Firm. Given the large number of well-known banks, traders and advisors in the spotlight, some very prominent people may be sitting nervously in their offices as investigations unfold across Europe.
While the focus so far has been on the European continent, it appears that there were many London-based participants in cum-ex trades, given the city’s leading role in European finance. Despite rumours that questions are already being asked in the UK, the Serious Fraud Office (SFO) and the Financial Conduct Authority (FCA) are remaining tight-lipped about any ongoing investigations. However, given the scale of the investigations ongoing on the continent, it seems all but inevitable that shared information may prompt significant UK investigations.
The cum-ex scandal has already been likened to the next Libor scandal. It is similar in that cum-ex trades were apparently so widespread as to be common practice within the industry. Likewise, cum-ex trades may become a once-common practice which could later be found to be unlawful. However, if the SFO authorities really want to sink its teeth into this issue, then it must surely keep in mind that it only secured five convictions in relation to its Libor manipulation investigation, despite how widespread that practice once was.
One of the British former bankers on trial in Germany, Martin Shields, has told the court that cum-ex trades were not “clandestine” but were rather the “clear and openly communicated expectation of most banks and their customers”. If cum-ex trades were indeed the “robbery of the century” it seems to have been carried out in broad daylight. It also appears that many major UK institutions and their advisors may shortly have difficult questions to answer.
15 Feb 2024
Partner Richard Cannon comments on the SFO and whistleblowers in The Times, City A.M. and The Law Society Gazette
09 Feb 2024