The Financial Conduct Authority (FCA) has fined ED&F Man Capital Markets £17.2 million for enabling its clients to make £20 million in illegal tax refunds through mergers or dividend arbitrage trades. Britain's financial regulator disclosed the fine on Monday, noting that the trading and investment services firm made about £5.06 million in fees from the tax fraud.

FCA slams ED&F for 'serious failings'

Cum-ex transactions are a form of financial fraud that exploits loopholes in dividend tax laws in several countries. Dividend carry trades involve traders buying and selling stocks around the time a dividend is declared. In this way, they can claim multiple tax refunds from countries with double taxation agreements.

According to the FCA, between February 2012 and March 2015, ED&F Man, as a result of its "serious failings", enabled its customers to illegally claim withholding tax (WHT) from Danish tax authorities. The regulator claimed the company failed to ensure that customers owned the shares, directly or indirectly. It also blamed the fraud on "inadequate compliance checks" by ED&F Man.

In addition, the FCA alleges that a Dubai-based subsidiary of ED&F Man was involved in the trading strategy. It added that the trading company did not deny its findings and had agreed to settle the case.

In a statement, the FCA explained: "These recoveries are illegal because under this strategy WHTS are recovered despite not holding or borrowing any shares, receiving no dividends and paying no tax."

The largest penalty in a Cum-Ex case

Meanwhile, the UK regulator said the case against ED&F Man was its fourth investigation into dividend carry trading fraud. The penalty against the company is also the largest ever imposed by the FCA in such a case.

In July last year, the financial markets regulator imposed a £2 million penalty on financial services firm TJM Partnership for failings in its merger deals. It also previously fined Sunrise Brokers and Sapien Capital for similar lapses in 2021.

"Empowering firms to make money from this trade is completely unacceptable," said Therese Chambers, joint executive director of enforcement and market surveillance at the FCA. "It is vital that all firms have the right controls and expertise to avoid the risk of being used to facilitate financial crime."