Download the full report here.

More than a dozen European governments are investigating cum-ex dividend arbitrage, a practice that was carried out by hundreds of firms over many years. Authorities may have paid out as much as EUR 60bn; up to EUR 32bn in Germany alone. Hundreds of individuals are under investigation and authorities have raided banks, law firms and other institutions’ premises.

German and Danish authorities are referring to their investigations as the biggest investigation into tax fraud in their countries’ histories. But that remains highly open to question, Scope says in a report out today. For banks and other parties involved, Scope says the key question is whether cum-ex trades amounted to tax fraud or to legal tax-driven investment strategies. A European Parliament cum-ex document as well as ESMA’s the July 2019 preliminary report both point to major tax loopholes as major drivers.

These loopholes enabled parties to claim more than one tax refund for the same dividend distribution via related transactions that – via short selling – created two or more owners of the same number of shares in the same companies at the same time. It is by no means clear, however, that all of the parties involved were even aware that transactions they were dealing with were cum-ex let alone illegal.

“In certain aspects, cum-ex is reminiscent of Libor manipulation in that it was a common and widespread practice conducted by a large number of banks in a number of countries and it wasn’t always crystal clear to those involved that it may even have been illegal. But if cum-ex is indeed found by the courts to have been illegal, the consequences could be significant,” said Dierk Brandenburg, head of the financial institutions rating team at Scope Ratings.

“This is another stark reminder of the credit implications of conduct risk in banks. Even if many of the deals under investigation are ultimately found to have been legal; as egregious examples of aggressive tax strategies they hardly portray the banks in a positive light.”

An important nuance will be whether the banks might be forced to repay any tax owed under new German profit disgorgement legislation. This could open up the banking sector to very significant redress claims. But German Federal tax authorities are running up against statutes of limitations that apply to prosecuting cases; the bulk of this activity took place in the years leading up to and after the global financial crisis.

At its heart, cum-ex brings into question the intent and purview of tax codes across Europe. “What has emerged as contributing factors as investigations have progressed are not just the gaps in tax interpretations but a relaxed attitude among authorities dealing with the issue, and the lack of due and proper process for verifying applications for rebates,” said Brandenburg.

Author: Keith Mullin: k.mullin@scopegroup.com