The Financial Conduct Authority (FCA) has hit ED&F Man Capital Markets with a fine of £17.2 million for enabling its clients to gain £20 million in illegal tax reclaims through cum-ex or dividend arbitrage trading. The UK financial regulator disclosed the fine on Monday, noting that the trading and investment services firm made about £5.06 million in fees from the tax fraud.

FCA Slams ED&F Man for ‘Serious Failings’

Cum-ex trading is a type of financial fraud in which loopholes in dividend tax laws in several countries are exploited. Dividend arbitrage trading happens when a trader buys and sells shares just before and after a dividend is declared. This way, they are able to claim multiple tax refunds from countries with double taxation agreements.

According to the FCA, between February 2012 and March 2015, ED&F Man as a result of its ‘serious failings’ enabled its clients to illegally claim withholding tax (WHT) from the Danish tax authority. The regulator alleged that the firm failed to ensure that the clients owned the shares, either directly or indirectly. On top of that, it blamed the fraud on ED&F Man’s ‘inadequate compliance checks’.

Furthermore, the FCA alleged that a Dubai-based subsidiary of ED&F Man participated in the trading strategy. It added that the trading firm did not deny its findings and has agreed to settle the case.

“These reclaims were illegitimate because under this strategy, WHT was reclaimed despite no shares being owned or borrowed, no dividend being received, and no tax being paid,” the FCA explained in a statement.

Biggest Penalty in Cum-Ex Trading Case

Meanwhile, the British watchdog said the case against ED&F Man is its fourth investigation into dividend arbitrage trading fraud. Moreover, the penalty against the company is the FCA’s largest fine so far in such a case.

In July last year, the financial markets supervisor slammed a £2 million penalty on financial services firm TJM Partnership for lapses related to cum-ex trading. Previously, it fined Sunrise Brokers and Sapien Capital for similar failures in 2021.

“It is completely unacceptable for authorized firms to make money from this kind of trading,” said Therese Chambers, FCA’s Joint Executive Director of Enforcement and Market Oversight. “It’s essential that all firms have the right controls and expertise in place to avoid the risk of being used to facilitate financial crime.”

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