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CumEx trading schemes under the spotlight by ESMA in MAR review report19th November 2019 Business Crime
There may be increased regulation and even the possibility of prosecution coming for asset management companies and persons who have managerial responsibilities for issuers of financial instruments which include dividends.
The European Securities and Markets Authority (ESMA) has held an open hearing on its consultation paper (the Consultation), published on 3 October 2019, on the provisions of the Market Abuse Regulation (MAR). The deadline for responses to the Consultation is 29 November 2019.
So-called CumEx trading is in the spotlight, especially in light of the ongoing trial of Britons Martin Shields and Nick Diable in Germany which is expected to last until next year. The former bankers stand accused of 34 instances of serious tax fraud between 2006 and 2011, with the investigation which led to their arrest having potentially wide ranging repercussions for banks, financial institutions and their employees stretching across multiple European Member States (Member States) including the United Kingdom.
The Consultation focusses in part on the fraudulent abuse of the tax reimbursement schemes made possible by the existence of a ‘withholding tax’ in some Member States. Such abuse has resulted in the loss of at least €60bn of taxpayers’ money across several Member States.
The schemes involve dividend arbitrage strategies which have been commonly used in EU financial markets for many years. Such strategies can involve placing shares in different tax jurisdictions to take advantage of varying dividend dates in an attempt to reduce the tax impact on payments. ESMA acknowledges that dividend arbitrage schemes are not necessarily fraudulent and that such schemes fall within the wider tax evasion/tax avoidance debate.
The Consultation proposes amending MAR to give National Competent Authorities (NCAs) increased powers to investigate and carry out sanctions against regulated entities that represent a threat to the integrity of the financial markets as a whole. Such powers would go beyond their current powers in relation to insider dealing and market manipulation. The proposals also include giving NCAs the framework to share information with tax authorities across the EU. If such proposals are made and adopted the result will be an increase in regulation and the possibility of prosecution for those suspected of criminality within the schemes.
The full Consultation paper can be found here.
Defending allegations of CumEx fraud
Whether someone should ultimately be held liable for their role in the fraudulent abuse of CumEx trading will depend on the charge(s) levelled at them and the jurisdiction or jurisdictions the wrongdoing is alleged to have taken place in. Charges of conspiracy are very likely to be alleged in order for the authorities to bring into the case the many parties which would be involved by necessity in even a single scheme, as well as to deal with the cross-border nature of these cases. The Director of the Serious Fraud Office (SFO), Lisa Osofsky has made clear the intention of the SFO in working with cross-border agencies to tackle alleged perpetrators within this jurisdiction.
In the UK, if the offence to be prosecuted is one of conspiracy to defraud the key consideration for any person accused of any wrongdoing will be whether the act they carried out in furtherance of the scheme was performed with a dishonest intent. Equally, if the allegation is one of conspiracy to cheat the public revenue, the considerations will be different and will include whether the accused person did some deliberate act or omission with a view to prejudicing HM Revenue & Customs’ right to the tax in question. The schemes under investigation will need to be scrutinised closely to see where they sit within the avoidance/evasion argument and whether the accused party had knowledge of the full extent of actions taken by others further down or before them in the chain.
The detail is outside the scope of this blog post but anyone under investigation will have to deal with the associated ramifications of an investigation such as authorities seeking to freeze their assets or those of their companies which will drastically limit the scope of the individual or company to deal with their day to day affairs until the order is either varied or discharged.