RegulationJan 17 2020

Cum-ex trading: coming soon to a court near you

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Cum-ex trading: coming soon to a court near you

The trial of two former British investment bankers for tax fraud in Germany could 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 that defrauded the German Treasury of more than €400m (£341m) 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.

The German Finance Ministry is investigating 500 cum-ex arrangements to the value of some €5.5bn

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 cum-ex trading has cost the treasuries of Europe an incredible €55bn.

Le Monde – one of the newspapers that broke the scandal – called it the “robbery of the century”.

Germany is the most severely impacted EU state, with estimated losses of more than $36bn (£27.1bn). French losses are estimated at more €17bn, while Italy is believed to have lost some €4.5bn.

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 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 investigating 500 cum-ex arrangements to the value of some €5.5bn. Some €2.4bn 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, Deutsche Bank AG, and Societe Generale SA.

Several major banks and their advisers have recently been raided by the German authorities. Given the large number of well-known banks, traders and advisers in the spotlight, some prominent people may be sitting nervously as investigations unfold.

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 and the Financial Conduct Authority are remaining tight-lipped about any ongoing investigations.

The cum-ex scandal has already been spoken of as 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 wants 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 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.

Bambos Tsiattalou is the founding partner of Stokoe Partnership Solicitors