FCA fines ED&F Man Capital Markets Ltd £17.2m for serious failings which enabled millions in illegitimate tax reclaims

The FCA has fined ED&F Man Capital Markets Ltd (‘MCM’) £17,219,300 for serious failings in its oversight of cum-ex trading. These failings allowed MCM to collect fees for trading strategies designed to enable its clients to illegitimately reclaim tax from the Danish authorities. 

Between February 2012 and March 2015 MCM enabled significant volumes of dividend arbitrage trading on behalf of clients, allowing clients to make withholding tax (‘WHT’) reclaims. 

It is established that £20m of the WHT reclaims made by MCM’s clients to the Danish tax authority (SKAT) were illegitimate. A Dubai based trading firm within the same corporate group as MCM participated in the trading strategy which resulted in these illegitimate WHT reclaims from SKAT. These reclaims were illegitimate because under this strategy WHT was reclaimed despite no shares being owned or borrowed, no dividend being received, and no tax being paid. MCM generated £5.06m in fees from this.

MCM had inadequate compliance checks and failed to ensure that this dividend arbitrage trading was legitimate. The firm’s compliance function did not have the necessary expertise to monitor or review the trading and only carried out a high-level annual compliance review of the department responsible. It failed to take any steps to understand the trading activities or properly consider the risks of dividend arbitrage trading. 

Therese Chambers, Joint Executive Director of Enforcement and Market Oversight, said:

'MCM facilitated a significant volume of trades for the purpose of making illegitimate tax reclaims from the Danish Exchequer and earned themselves significant fees. It is completely unacceptable for authorised firms to make money from this kind of trading. It’s essential that all firms have the right controls and expertise in place to avoid the risk of being used to facilitate financial crime.'

This is the fourth case brought by the FCA in relation to cum-ex trading and the largest fine so far. As MCM has not disputed the FCA’s findings and agreed to settle, it qualified for a 30% discount under the FCA’s Settlement Discount Scheme. The fine includes £5.06m of income forfeited by MCM as a result of their breaches in relation to cum-ex trading.

This action is part of a range of measures taken by the FCA in connection with cum-ex dividend arbitrage cases and WHT schemes, which has involved proactive engagement with global law enforcement authorities.

Notes to editors

  1. Final Notice 2023: ED&F Man Markets Capital Limited 
  2. The first 3 cum-ex cases concluded in May 2021, November 2021 and July 2022. There are a number of ongoing investigations into UK brokers for similar failings.
  3. The financial penalty of £17,219,300 imposed on MCM is the largest of the 4 concluded cum-ex trading cases, which reflects the elements of seriousness, the nature of the breaches and the significant revenue it generated for the firm. 
  4. 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.
  5. 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.
  6. MCM supported its clients’ trades, where those clients failed to demonstrate their genuine entitlement to the WHT reclaims submitted, by failing to evidence ownership of shares, either directly or indirectly.
  7. 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.
  8. MCM breached Principle 2 and Principle 3 of the FCA’s Principles for Business between February 2012 and March 2015.
  9. Principle 2 states that 'a firm must conduct its business with due skill, care and diligence'.
  10. Principle 3 states that 'a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems'. 
  11. The FCA’s enforcement information guide.
  12. Find out more information about the FCA.