The FCA has fined Bastion Capital London Limited (in liquidation) £2,452,700 for serious financial crime control failings in relation to cum-ex trading. They failed to manage the risk of being used to facilitate fraudulent trading and money laundering.
Between January 2014 and September 2015 Bastion executed trading to the value of approximately £49bn in Danish equities and £22.5bn in Belgian equities on behalf of Solo Group clients. The purported trades were carried out in a way that was highly suggestive of financial crime. The trading appears to have been carried out to allow the arranging of withholding tax reclaims in Denmark and Belgium. Bastion received commission of £1.55m, a significant proportion of the firm’s revenue in the period.
In addition, Bastion executed a series of trades on behalf of 11 Solo Clients on 4 days. Opposite positions were then executed by the same clients within hours, at significantly different prices. This resulted in a loss of €22.7m for 1 Solo client (Ganymede Cayman Ltd, an entity wholly owned by the Solo Group’s controller) to the benefit of the remaining 10 Solo Clients.
Bastion ignored or failed to notice a series of red flags in relation to these trades, which had no apparent economic purpose except to transfer funds from the Solo Group’s controller to his business associates. Bastion should have considered financial crime risks when onboarding these Solo Clients and when executing the trading.
Steve Smart, Joint Executive Director of Enforcement and Market Oversight, said:
‘Bastion earned significant fees from executing trades on behalf of Solo Group which were ultimately for the purpose of making illegitimate tax reclaims from the Danish and Belgian exchequers. They failed to spot clear red flags which should have alerted them to the risk of being used for financial crime. Firms need to properly manage these risks.’
This is the fifth case brought by the FCA in relation to cum-ex trading and is part of a range of measures taken by the FCA in connection with cum-ex dividend arbitrage cases and WHT schemes. This has involved proactive engagement with global law enforcement authorities. The FCA has imposed fines of over £20m on firms which earned over £7m in fees from this trading.
As Bastion has not disputed the FCA’s findings and agreed to settle, it qualified for a 30% discount under the FCA’s Settlement Discount Scheme.
Notes to editors
- Final Notice 2023: Bastion Capital London Limited
- The first 4 cum-ex cases concluded in May 2021, November 2021, July 2022 and June 2023. There are a number of ongoing investigations into UK brokers for similar failings.
- The financial penalty of £2,452,700 imposed on Bastion reflects the elements of seriousness, multiple examples of misconduct and the protracted period of the breaches. As Bastion is in liquidation, the FCA will become a creditor of the firm. However, existing creditors will be given precedence over the FCA’s financial penalty.
- 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.
- Withholding tax (WHT) is a levy deducted at source from income and passed to the government by the entity paying it. Many securities pay periodic income in the form of dividends or interest, and local tax regulations often impose a withholding tax on such income. In certain cases where WHT is levied on payments to a foreign entity it may be reclaimed if there is a formal treaty, called a double taxation agreement (DTA), between the country in which the income is paid and the country of residence of the recipient. DTAs allow for a reduction or rebate of the applicable WHT.
- The FCA publication of Market Watch 52 highlighted various issues and concerns around dividend arbitrage in 2017. FCA contributed to the European Securities and Markets Authority (ESMA) Final Report on Cum-Ex, Cum-Cum and WHT in 2020.
- Bastion breached Principle 2 and Principle 3 of the FCA’s Principles for Business between January 2014 and September 2015.
- Principle 2 states that 'a firm must conduct its business with due skill, care and diligence'.
- Principle 3 states that 'a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems'.
- The FCA’s enforcement information guide.
- Find out more information about the FCA.