Cum/Ex Convictions- Implications For Financial Institutions In The UK

German papers have called it the most complicated tax fraud trial in modern German history, but the “Cum-Ex” scandal could have implications for the entire financial services industry. Litigation & enforcement partners and attorneys Judith Seddon, Rosemarie Paul, Paige Berges and Chris Stott, along with Tax partners Kat Gregor and Andrew Howard team up with Sarah Wrigley, Derek Patterson, Anant Modi, Rob Mason and Simon Taylor of Forensic Risk Alliance, to discuss a recent conviction in a German court in what is described as the “biggest tax swindle in the history of Europe”, and its implications for financial institutions in the UK. The authors describe the specifics of this case, the tax evasion offences at hand, and touch upon a potential ripple effect throughout the finance industry.

On 19 March 2020, a German court found two former London-based bankers guilty of tax evasion offences in the first criminal trial related to “Cum Ex” trades.1 They received suspended sentences totalling 34 months, in light of their extensive cooperation with prosecutors. They and a Hamburg-based bank involved with the transactions are also reported to have been required to repay over EUR 190 million in illegally obtained earnings.

What is a Cum Ex trade?

Described as the “biggest tax swindle in the history of Europe”, “Cum Ex” transactions involve multiple reclaims for a single payment of dividend withholding tax.2 Transactions typically involve multiple counterparties with differing degrees of knowledge and can be very difficult to distinguish from less aggressive transactions involving equities taking place on or around the dividend record date.

What happened in this case?

The equity trading scheme orchestrated between 2006 and 2011 by the two individuals now convicted is believed to have resulted in a tax loss of approximately EUR 400 million (approximately USD 443 million).3 However, the scheme was part of a much broader pattern of trades which is said to have cost the German government as much as EUR 5.5 billion before the pattern was uncovered in 2017.

The case is notable for establishing for the first time that “Cum Ex” transactions were ineffective under prevailing German tax rules, and that this should have been so obvious to participants that the transactions in question amounted to criminal tax evasion.

What will happen next?

It has been reported that some of the participants affected by the verdict are considering an appeal.

Numerous banks...

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