The UK's Financial Conduct Authority has fined Sapien Capital Ltd £178,000 for failings which led to the risk of facilitating fraudulent trading and money laundering. It reduced the fine due to serious financial hardship.
This is the first FCA case in relation to cum-ex trading, dividend arbitrage and withholding tax (WHT) reclaim schemes. Investigations are still in progress.
The phrase 'cum-ex' is from the Latin for 'with-without.' The website www.guengl.eu explains: "In essence, it’s a massive stock trading scam by bankers, brokers, hedge funds, international tax firms, investment companies, lawyers and insurance companies. By acting as promoters to help their clients get a refund for a tax they never actually paid for, they have defrauded EU member states by...€55 billion."
Between 10 February and 10 November 2015, Sapien failed to run systems and controls that were good enough to spot and offset the risk of being used to facilitate fraudulent trading and money laundering in relation to business introduced by the Solo Group.
The Solo trading appeared to be characterised by a circular pattern of extremely expensive trades that the traders undertook to avoid the normal need for payments and the delivery of securities in the settlement process. It involved the use of over-the-counter (OTC) equity trading, securities lending and forward transactions involving EU equities.
The FCA's investigation found no evidence of change of ownership of the shares traded by the Solo 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.
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, 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 in relation to 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.'
As Sapien agreed to resolve all issues of fact and liability and entered a Focused Resolution Agreement, under the Authority’s executive settlement procedures, it qualified for a 30% discount. The amount was further reduced from £219,100 to reflect Sapien’s serious financial hardship.
The publication of this Final Notice is part of a range of measures taken in connection with cum/ex dividend arbitrage cases, and WHT schemes. This has involved the proactive engagement with EU regulators and global law enforcement.
The FCA’s investigation into the involvement of UK based brokers in cum/ex dividend arbitrage schemes is continuing.