Cum-Ex: A Vision Of The Future For International Fraud Investigations?

• Published date: 15 June 2022
• Subject Matter: Tax, Criminal Law, Tax Authorities, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Hickman & Rose
• Author: Ben Rose and Olivia Dwan

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 focussed on regulatory breaches such as failing to identify and mitigate the risk of...