Blog: Cum-Ex: A vision of the future for international fraud investigations?

The Cum-Ex scandal has prompted criminal and regulatory investigations – and civil law actions – around the world. In a blog, Olivia Dwan and Ben Rose analyse how these are impacting individuals.

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Variously described as ‘the biggest tax theft in the history of Europe and ‘the robbery of the century’, the Cum-Ex scandal has led to hundreds of senior financial service executives being placed under criminal investigation for fraud-related crimes.

The investigations began in Germany, where the scandal was first exposed in 2018, and have since spread to England, the US, Denmark, Belgium, and Austria. London has been identified as a hotspot in the facilitation and execution of suspicious trades.

The international, interconnected nature of Cum-Ex marks a new era in the way major frauds are investigated. Overseas investigations have required suspects located in the UK to address difficult questions about what legal protections they will receive and whether they are likely to be treated consistently between jurisdictions.

What is Cum-Ex?

Cum-Ex trades are a form of dividend arbitrage by which banks and stockbrokers are said to have exploited the time lag between a share’s record date (the date when a trade is executed) and its settlement date (when the funds are transferred) to engineer more than one tax refund.

By selling a share before the payment of a dividend (‘cum’ meaning ‘with’ dividend); and delivering it afterwards (‘ex’ meaning ‘without’ dividend) the parties to a Cum-Ex trade are alleged to have deliberately created confusion over who owned the share on the dividend record date enabling both parties to the sale to claim a tax rebate. The total cost of the fraud to various national exchequers (and by extension to taxpayers) has been valued at 55 billion euros.

Regulatory reaction

The criminal and regulatory response to Cum-Ex has been led by Germany, where the fraud was first detected in 2018. By October 2021, the German authorities announced they were investigating over 1,000 people in connection with the alleged fraud. These individuals included junior and senior banking staff, lawyers, and brokers.

While the UK Exchequer was never a direct target of the Cum-Ex scheme, many such trades are said to have been co-ordinated by individuals based in London working in UK-registered companies.

The FCA has taken the lead in investigating Cum-Ex in the UK. So far it has focused on regulatory breaches such as failing to identify and mitigate the risk of institutions being used to facilitate fraudulent trading and money laundering.

In May 2021 the FCA concluded its first Cum-Ex case. Sapien Capital was found to have created a false audit trail of documents and trade figures to facilitate trades where there was no change in beneficial ownership or custody of shares. It paid a fine of £178,000.

Six months later, in November 2021, Sunrise Brokers was found to have failed to identify and mitigate the risk of facilitating fraud and money laundering in respect of Cum-Ex trades. It was fined £642,000.

Whilst the FCA has been active in relation to its regulatory role, it has not, at the time of writing, criminally prosecuted anyone in relation to Cum-Ex. There may be several reasons for this. It may, for example, be concerned not to step on the toes of foreign investigations, where the losses are said be higher and potential sanctions greater.

Having said this, the FCA clearly has more firms and individuals in its sights. A Freedom of Information request answered by the agency in March 2021 (i.e., shortly prior to the conclusions in the above two cases), revealed it was investigating 14 firms and eight individuals in relation to Cum-Ex trades.

A question of jurisdiction

A key issue for any organisation or individual caught up in Cum-Ex allegations is the question of which country will take the investigatory lead.

The first UK nationals to be criminally prosecuted in relation to Cum-Ex were Martin Shields and Nicholas Diable. The pair were tried in Germany in 2020 for their part in trades valued at 400 million euros. Both received suspended sentences. A higher sentence would, the prosecutor said, have “covered up the fact that the greatest tax robbery in German history was not conducted by two individuals but hundreds of people“.

Paul Mora is an investment banker whose role in Cum-Ex trading while at German bank HVB has been publicly described by German federal police as “decisive”.  Mr Mora is currently in his home country in New Zealand. Interpol have issued a Red Notice against him and whilst there is no extradition treaty between Germany and New Zealand, Mr Mora is likely to be arrested if he leaves the country.

British hedge fund manager Sanjay Shah recently lost a Court of Appeal case against the Danish tax authority, which is pursuing a £1.5 billion civil claim against him. The Court held that fraudulent Cum-Ex representations made by Mr Shah and others contributed to rebates being paid where none were due. The Court said that the outcome was the same as if the alleged defendants had “broken into the safe in [The Danish tax authority’s] office and stolen the money”.

The chequered history of criminal and regulatory actions relating to the alleged LIBOR fraud has shown how individuals can be treated very differently for the same conduct depending on where they are located. The Federal Court of Justice in Karlsruhe, the highest court in Germany, has held that Cum-Ex trades are, per se, unlawful. Other jurisdictions may not agree.

Foreseeable problems

The trans-national nature of Cum-Ex trading means law enforcement and regulatory bodies must co-operate across borders to obtain the evidence they need. This is sometimes hard to achieve and almost always very time consuming.

As the various Cum-Ex investigations gather pace, suspects and their lawyers will need to assess whether to co-operate with foreign investigators. Such judgements can be hard to make when those jurisdictions may refuse to share material without a guarantee of cooperation. Collaboration with local lawyers will be vital to navigate unfamiliar disclosure regimes.

Lawyers for any UK-domiciled suspect will need anticipate the potential domestic offences and defences. Aside from crimes under the Fraud Act 2006 such as Fraud by False Representation through assisting the buyer in making a false representation as to the beneficial ownership of a share, the Proceeds of Crime Act 2002 may also be used to prosecute a range of individuals and institutions for offences of transferring, concealing or being concerned in arrangements resulting in the acquisition, retention, use or control of criminal property.

In addition, any institution or individual who engaged in Cum-Ex trade activity in the UK may well have been obliged to make a Suspicious Activity Report (“SAR”) in relation to each one. A failure to do so, where there was a suspicion or knowledge of money laundering taking place, is a criminal offence.

What happens next?

The criminal and regulatory response to Cum-Ex shows no sign of relenting. The pool of suspects is expanding and the appetite for prosecution appears to be growing worldwide.

As the investigations mature and more examples are made of both corporates and individuals, clearer patterns are likely to emerge in how this conduct is investigated, prosecuted, and sentenced. 

To best assist suspects, lawyers will need to take a rounded view of how their clients are positioned in different jurisdictions against regulatory, criminal and civil actions. None of these issues are easy to navigate and all require a considerable degree of trust, cooperation and understanding.