FCA fines Sapien Capital £178K for failings around cum/ex trading scheme
UK financial regulator The FCA has announced that it has fined Sapien Capital Ltd £178,000 for failings which led to the risk of facilitating fraudulent trading and money laundering. The fine was reduced due to serious financial hardship.
The regulator said that this is the first FCA case in relation to cum/ex trading, dividend arbitrage and withholding tax (WHT) reclaim schemes. There are currently a number of ongoing and overlapping investigations.
Cum-ex trading involves trading of shares on or just before the last cum-dividend date. If in a suitable jurisdiction this can then allow a party to claim a tax rebate on withholding tax, sometimes without entitlement. The intention of dividend arbitrage is to place shares in alternative tax jurisdictions around dividend dates, with the aim of minimising withholding tax or generating withholding tax reclaims. This may involve several different trading activities including trading and lending securities and trading derivatives, including futures and total return swaps, designed to hedge movements in the price of the securities over the dividend dates.
Between February and November 2015 Sapien failed to have in place adequate systems and controls to identify and mitigate the risk of being used to facilitate fraudulent trading and money laundering in relation to business introduced by the Solo Group.
The Solo trading was characterised by what appeared to be a circular pattern of extremely high value trades undertaken to avoid the normal need for payments and delivery of securities in the settlement process. The trading pattern involved the use of Over the Counter (OTC) equity trading, securities lending and forward transactions, involving EU equities, on or around the last day securities were cum dividend.
The FCA 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 FCA said that its investigation into the involvement of UK based brokers in cum/ex dividend arbitrage schemes is continuing.