The FCA hits ED&F Man with a £17.2 million fine for allowing users to commit financial fraud

The Financial Conduct Authority (FCA) recently discovered that ED&F Man Capital Markets enabled its clients to gain £20 million in illegal tax reclaims. This was possible through dividend arbitrage trading, also known as cum-ex, which is a type of financial fraud where loopholes in dividend tax laws are exploited.

The UK’s financial regulator hit the company with a fine of £17.2 million, which it disclosed this Monday, June 5th. The financial watchdog also noted that the trading and investment services company managed to make around £5.06 million in fees from tax fraud.

ED&F Man failed to reduce risks of financial fraud

Dividend arbitrage trading is something that happens when traders buy and sell shares just before or immediately after a dividend is declared. This allows them to claim several tax refunds from multiple countries that have double taxation agreements.

According to the regulator, ED&F Man’s “serious failings” allowed its customers to claim withholding tax (WHT) illegally between February 2012 and March 2015, from the tax authority of Denmark. The FCA further claims that the company failed to ensure that its clients owned the shares, directly or indirectly. Furthermore, the financial watchdog said that the firm’s inadequate compliance checks are the main reason why clients were able to commit fraud without getting caught before now.

The FCA’s statement explains that the reclaims of tax money were illegitimate, since the strategy allows them to reclaim the money despite the fact that they neither owned nor borrowed shares, and there was no tax being paid, or dividends received.

The British watchdog concluded by saying that the case against ED&F Man was not the first case of this kind that it had to tackle recently. In fact, it comes as the fourth investigation into this type of fraud. Now, the penalty against the firm is the largest fine that the FCA has ever issued for a case like this. However, the regulator believes that the punishment fits the crime, and the size of the penalty should be taken as an indication of the problem is importance.

Four similar cases in three years

Previously, the regulator also had to issue a £2 million penalty on a financial services company called TJM Partnership due to lapses that led to cum-ex trading. This was in July 2022, and before that, it also fined two other companies — Sapien Capital and Sunrise Brokers — for similar failures in 2021.

In light of everything that happened, the FCA’s Joint Executive Director of Enforcement and Market Oversight, Therese Chambers, said that it is unacceptable for authorized firms to make money from this type of trading. Chambers added that it is essential that all companies stay in control and have the proper expertise in place, so that risks of being used for conducting financial crimes would be reduced, or even completely eliminated.