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A leading, award-winning UK and global law firm
“A distinguished, knowledgeable
and highly proactive team."
Legal 500
A Briefing Guide to
The Cum-Ex Guide for
Financial Institutions
The Cum-Ex Guide for Financial Institutions
Cum-Ex was a series of trade strategies which were
designed to allegedly exploit tax differences across Europe.
This was an arrangement where private investment holding
companies and finance companies were organising double
refunds of tax that had been paid on one dividend pay-out.
The aim was to take advantage of credit to which there was
no entitlement.
As a result of these trades, there are now Germany is the country at the heart of the
active investigations in various European scandal and the country whose
jurisdictions, including (but not limited to) investigations into Cum-Ex are most
UK, Germany, Denmark and Austria. advanced. The German authorities have
claimed that Cum-Ex has cost the country
As such, there were no perceived risks approximately €30 billion in lost revenue.
involved at the time - only profit. Cum-Ex However, various other EU treasuries have
was one of the most lucrative models in also been affected, with some estimates of
recent years. There were no provisions put €55.2 billion being lost in tax revenue as a
in place by European states to prevent result of such schemes.
Cum-Ex until it came to a head in 2012.
The Cum-Ex scandal is now a
The Cum-Ex Trading Scandal rapidly-widening cross-border tax fraud
Cum-Ex is the name given to a huge volume probe affecting many financial institutions
of dividend trading strategies (dividend and individuals across 11 EU jurisdictions;
arbitrage stock trading transactions) that with investigators engaging in regulatory, civil
took place largely prior to 2012. The and criminal proceedings against those
controversial practice involved exploiting a involved.
loophole on dividend payments to trade
shares in a way that concealed the identity How a Cum-Ex Trading
of the owner and enabled several parties to Scheme Works
claim multiple tax refunds for the same Cum-Ex is an example of a dividend
dividend pay-out. It has also been known as withholding tax (WHT) refund model.
dividend-stripping. Cum-Ex entitled overseas investors in
A Briefing Guide to : The Cum-Ex Guide for Financial Institutionsdomestic companies to obtain a refund Three or more entities are needed for a
on shares under double taxation treaties. successful Cum-ex scheme. A simplified
It is worth noting that the UK does not use summary example is outlined here:
WHT, so the UK tax authorities are not
affected by Cum-Ex transactions, unlike 1. Three investors come together, Investors A,
many other states. B and C.
2. Investor A owns shares in company X. The
Cum-Ex trading began when a tax shares are worth €20 million.
loophole was discovered in the 1990s. The 3. Investor B sells the same shares worth €20
loophole was utilised by a network of million to Investor C without owning them
institutions and professionals, including himself (short selling) before the dividend
traders, investors, tax advisers, lawyers, pay-out day.
brokerage firms and banks. It was a 4. Company X then distributes its pay-outs.
lucrative trading practice until legislative Investor A receives a dividend pay-out of
changes were introduced in 2012. €750,000 (75% of total dividend - €1 million).
After pay-out, Investor A's shares are worth
Put simply, banks and stockbrokers rapidly €19 million.
traded shares with (cum) and without (ex) 5. Investor A receives a tax certificate to
dividend rights, in a way that enabled reimburse €250,000 of dividend tax
them to hide the identity of the actual (representing the 25% tax reclaim).
owner. This meant that they could agree 6. Investor A sells shares worth €19 million to
to sell a company stock before the Investor B.
dividend was paid out, but then deliver it 7. Investor B delivers shares worth €19 million
after the dividend had been paid. This to Investor C and pays her an additional
tactic enabled both parties to claim tax €750,000
rebates of WHT on capital gains tax (a tax 8. Investor C sells shares worth €19 million
that had only been paid once, if at all) from back to Investor A.
EU tax authorities. 9. Investor C receives a tax certificate to
reimburse €250,000 of dividend tax.
Rapid trading between the various parties Investors A, B & C share the tax
could confuse the tax authorities reimbursements.
regarding beneficial ownership of the
shares, by creating an appearance that Risk vs Reward Strategies
the shares were short sold (selling when While the above is a simple example, the
the seller does not yet hold them) prior to reality is that Cum-Ex involved a highly complex
the dividend record date (cum-dividend), network of entities providing liquidity and
when in fact they were sold after the services essential to its operation.
dividend record date (ex-dividend).
Hedge funds and their Chief Investment
Officers (CIO’s) would develop and create
strategies for investments relating to Cum-Ex
A Briefing Guide to : The Cum-Ex Guide for Financial Institutionstrades. This could involve incorporating Reclaim agents to submit the tax refund
companies in various jurisdictions with the applications on behalf of offshore investors,
purpose of investing in certain listed obtain the refunds and then distribute them
securities. The hedge fund would create accordingly. Multiple offshore investors would
relationships with prime brokers, apply for refunds based upon allegedly falsified
custodians and banks. The investments dividend credit advices from custodian banks
would be funded through private equity and refund applications from reclaim agents.
and leverage provided by prime brokers.
The global strategy was likely to involve Ownership of the shares was impossible to
obtaining a legal opinion approving such ascertain, given the speed of the transactions.
investment activities. The timing of the shorts and dividend
compensation payments had the effect of
Cum-Ex transactions commonly involved essentially muddying the true beneficial
four trade legs: ownership of the stock (shares).
• purchase of the stocks (shares) Legal Issues Surrounding the
• sale of the stocks Cum-Ex Investigations
• collateralised stock loan agreements to Cum-Ex trading allowed two parties to appear
facilitate the short sale to be the beneficial owners of the same
• over-the-counter (OTC) forward shares, creating the opportunity for multiple
agreements. WHT refunds on the same dividend payment.
• Several parties were essential to the Any examination of the beneficial ownership of
transactions, including finance and stock shares is likely to focus on whether beneficial
lending providers. Access to liquidity in ownership was actually transferred.
both the cash and the forward market
was essential. In the context of Cum-Ex transactions,
beneficial ownership of the shares and the
Each trade leg required a professional rights this carries includes:
intermediary, including:
• The right to share in the company's
• Brokers to execute the purchase and/or profitability, income, and assets.
sale of the stock. • A degree of control and influence over
• Custodians to hold the stock once company management selection.
purchased / sold. • Pre-emptive rights to newly-issued shares.
• Equity finance agents to execute the • General meeting voting rights.
stock borrowing. • The Cologne tax court held that under
• Legal and tax professionals to provide German law, in the case of an
advice and consultancy services. over-the-counter short sale, the share
Immediately prior to key dates, high purchaser would not become the beneficial
volumes of loans were taken out and owner of the shares to be delivered at a later
several parties obtained legal and tax stage at the settlement of the purchase
advice to seek to ensure the propriety of agreement.
their activity.
A Briefing Guide to : The Cum-Ex Guide for Financial InstitutionsIn the UK, the issue of beneficial Corporate bodies (and individual parties)
ownership of shares was addressed in J embroiled in Cum-Ex will, no doubt, have their
Sainsbury Plc v O’Connor [1990], in which own specific justifications for the practice. For
Millett J said beneficial ownership was example, they may state they had no
“more than equitable ownership. It responsibility over - or limited knowledge of -
requires more than the ownership of an the overall strategy and the counterparties
empty shell bereft of those rights of involved, with the understanding that all
beneficial enjoyment which normally parties had applied their own robust legal and
attach to equitable ownership.’’ tax advice.
Cum-Ex Defence How it Affects the UK
It is imperative that a defence strategy Many UK-based financial institutions were
tailored to the needs of the situation is involved in dividend arbitrage at the time,
devised the moment it is anticipated that whether that be through equities trading,
the authorities may take an interest in brokerage or in ancillary roles. Participants in
investigating a corporate body and /or its the Cum-Ex trades, such as hedge funds,
officers. In our experience, any defence would purchase substantial amounts of shares
will be dependent on the different trading in order to make a profit. Due to the borrowing
strategies that were executed by the facilities provided by UK prime brokers (who
corporate bodies and the roles that were offered services such as financing, securities
undertaken by CIO’s and their teams. lending and overdraft facilities), CIO’s or
portfolio managers of hedge funds would be
Generally, most dividend arbitrage able to negotiate and leverage substantial
transactions at the time were considered borrowing terms. As a result, the relationships
sensible and legal tax planning. Those and agreements between these parties could
involved in the Cum-Ex transactions are now face scrutiny by the authorities. In our
sure to raise the point that the practice view, this is one of the many reasons why
was not illegal or dishonest, and was European investigations may well now have a
actually typical market behaviour. The particular focus on London. Investigations
strategies deployed were market neutral. have already led to two former London traders
In many cases, companies relied on advice being convicted in March 2020 of tax fraud in
from their lawyers and accountants, and Germany – in what was the first criminal trial
would argue that they did nothing more relating to Cum-Ex trades.
than see an opportunity due to the
ambiguity of the law surrounding this area. Authorities in EU member states may well
Furthermore, it is a practice that had obtain evidence from the UK authorities to
arguably been accepted by legislatures in assist in criminal investigations. This process is
some EU states, as they had known about governed by the Criminal Justice (European
Cum-Ex for many years and took no early Investigation Order) Regulations 2017 (the
action. 2017 regulation). It is essentially a request for
sharing evidence in criminal investigations
through mutual legal assistance.
A Briefing Guide to : The Cum-Ex Guide for Financial InstitutionsThe requests are generally made to the Considerations for UK Financial
Home Office. But for investigations Institutions
relating to tax and fiscal customs matters Financial institutions involved with dividend
the requests are sent to HM Revenue and arbitrage could be at risk of a number of
Customs (HMRC). The issuing authority in consequences of Cum-Ex investigations. These
a European country will make an include both civil and criminal sanctions and
application to HMRC, explaining that an the reputational effect that either of these can
offence has been committed or that there have upon a firm.
are reasonable grounds for suspecting
that an offence has been committed. The Firms will be subject to FCA requirements, the
application will include the names of the Money Laundering Regulations 2017 and any
subject of the request, the operation legislation preceding this, depending on the
name and the reasons why a European period of alleged offending. In addition to this,
Investigation Order is sought. firms may well be subject to EU Market Abuse
Regulations (MAR). Financial institutions will
An order following such an application will need to have adequate and considered
only be made if it is necessary and systems and controls in place to satisfy AML
proportionate to make it for the purposes requirements, including due diligence on
of the investigation or the proceedings in clients/transactions. Firms who are concerned
question. A designated public prosecutor about their exposure should consider
in England and Wales will then validate an conducting an internal investigation and be
order pursuant to s7 of the 2017 prepared to self-report anything untoward to
regulation once the above conditions are the FCA and, possibly, the German authorities.
satisfied.
It is highly likely that European enforcement
In the UK itself, the Financial Conduct agencies will target financial institutions, in
Authority (FCA) has been conducting a particular those with substantial resources.
review into the practices of some firms This is so that significant financial penalties can
involved in dividend-stripping trades in be agreed; depending on how corporate
Germany. The FCA has confirmed it is bodies are perceived by investigators and what
currently investigating financial institutions investigations discover about those bodies’
and individuals implicated in the scandal. activities. Depending on the merits of the case,
With the passage of time, there are now a corporate body will need to carefully
extensive numbers of Cum-Ex-related consider a robust defence and/or remediating
criminal and civil investigations ongoing, as measures in order to limit reputational harm.
well as significant amounts of litigation. It is
highly likely there will be more in the near Glossary of Key Terms
future.
Cum dividend
The full extent of how the Cum-Ex scandal A share-quoted cum dividend carries the right
is affecting the UK is, therefore, still yet to to receive the next dividend. This is the
be seen. opposite of ex-dividend.
A Briefing Guide to : The Cum-Ex Guide for Financial InstitutionsCustodians business day before the record date. This
Custodians are those who hold and settle means traded positions at the start of
trade equity. This is a service to hold and business on the ex-dividend date represent
settle shares. the beneficial owner who is entitled to the
dividend, whether that is paid as a real
Declaration date dividend (if they are also the holder of record)
The date that the dividend is announced or paid as a manufactured dividend (if the
by the company’s board of directors. On shares have not settled by close of business
this day, the company will give information on record date). It is this beneficial owner who
about the size of the dividend, the date of is entitled to apply for a WHT reclaim.
record and the payment date. The
company usually has a legal responsibility Ex-dividend
to pay the dividend once it has been A term used in share listings to denote that the
declared. share is sold without the right to receive the
dividend payment, which is marked as due to
Delivery vs Payment (DVP) those shareholders who are on the share
This is a mode of settlement of securities. register at a pre-announced date. This is the
In DVP, the transfer of securities and funds opposite of cum dividend.
happen simultaneously. DVP settlement
ensures that funds are paid, and the Futures contracts
securities are then delivered. Futures are a contract that requires the buyer
to purchase an asset at a specific price on a
Dividend arbitrage future date. A seller of the futures contract is
Dividend arbitrage is an options trading contracted to deliver that asset at a specific
strategy that involves purchasing put date and price. This is a method that is often
options and an equivalent amount of used by sophisticated traders and financial
underlying stock before its ex-dividend institutions as part of hedging strategies.
date, and then exercising the put after
collecting the dividend. When used on a Hedge funds
security with low volatility (causing lower Privately-owned and privately-managed funds
options premiums) and a high dividend, that are generally formed by institutional
dividend arbitrage can result in an investor traders who have expertise working in
realising profits while assuming very low to investment banks, creating strategies that
no risk. would be funded by private capital. Private
investors invest in the fund for a return on
Ex-dividend date investment based on those strategies.
Ex-dividend is where a stock is trading
without the value of the next dividend Institutional Trader
payment. The ex-dividend date is the day A trader who works for an investment bank,
the stock starts trading without the value brokerage firm, mutual fund or hedge fund.
of its next dividend payment. Typically, the
ex-dividend date for a stock is one
A Briefing Guide to : The Cum-Ex Guide for Financial InstitutionsInterdealer broker have settled before the close of business on
This is an intermediary who helps with the the record date. The opportunity for Cum-Ex
transactions between the financial existed where this was not the case, as
institutions and the banks. described above. Share registers are kept
electronically. Settlement is the delivery of title
Leverage to shares against payment in accordance with
The margin your broker provides you with, the sale contract.
based on the capital in your account. The
leverage varies between brokers and may Short selling
depend on what you are holding in the This occurs when you borrow shares from a
account (cash and securities) and share broker and sell them with the expectation that
price. the price will go lower and can be bought back
at a lower price. You return the borrowed
Payment date share to your broker and keep the profit.
The date dividends are actually paid. The
length of time between the initial record T + 2 Settlement
date and payment date varies between This is a processing time. When an order is
stock exchanges but is typically anywhere placed and executed on the stock exchange
between the ex-date and one or two between buyer and seller, this is known as the
months. trade day (T – day). The transaction is then
entered into the company’s record books
Prime brokers (settled) “T + 2” days after the trade day (i.e.: 2
In short, prime brokers would hold and days after the settlement of the transaction).
settle shares and offer additional services
such as financing, stock lending, overdraft Withholding tax (“WHT”)
facilities and credit lines. A withholding tax takes a set amount of money
out of an employee's payslip and pays it to the
Record date government. The money taken is a credit
The record date is used to determine who against the employee's annual income tax. If
is on the share register and, therefore, too much money is withheld, an employee will
entitled to the dividend. The company sets receive a tax refund; if not enough is withheld,
the date of record after it has announced an employee will have an additional tax bill.
that it will pay a dividend. At the close of
business on the record date, the registrar Meet our CUM-EX
takes a snapshot of who is physically Investigations Team
holding the shares (the holders of record) Rahman Ravelli was one of the very first UK law
and pays the real dividends to these firms to recognise the possible legal
holders. Recent changes in most markets implications of Cum-Ex and its potential impact
mean that the record date is timed to on all levels of the financial services industry. As
ensure that cum-dividend trades, i.e.: a firm that prides itself on a rapid response to
those executed before ex-date, should the needs of existing or potential clients, we
A Briefing Guide to : The Cum-Ex Guide for Financial Institutionscompiled a team of specialists in represents benefit from bespoke, intelligent
anticipation of a Cum-Ex caseload. That defence that challenges each and every aspect
caseload continues to grow – and our of the allegations made against his clients.
experts are on hand to manage each and
every aspect of such cases. SYEDUR RAHMAN
Syed's great depth of experience and his
NEIL WILLIAMS accomplishments in cross-border fraud and
Neil’s achievements and his expertise in business crime cases and high-stakes
regulatory and criminal investigations have commercial and financial investigations have
led to him being viewed as a cross-border put him in high demand with corporates and
financial crime specialist with a flair for their directors, financial institutions and high
high-profile, international white-collar net worth individuals
crime matters. His advice is sought
regularly by senior business and financial His caseload includes many of the most
figures, corporates and major complex, challenging cases involving national
organisations and he is consistently and international agencies. He has expertise in
highlighted by national and international handling regulatory and compliance cases in a
legal guides. wide variety of countries and regularly handles
the most notable financial services cases.
With a reputation for mounting the
strongest possible legal challenges and an JOSIE WELLAND
acknowledged skill for forensically Josie is highly-rated for her defence of
examining every aspect of a case, his track white-collar crime cases, having built a
record in financial investigations is reputation for intelligent and forceful
enviable. representation of corporates and individuals in
investigations spanning countries and
AZIZ RAHMAN continents.
Aziz’s success in some of this century’s
most notable financial crime cases and his Her intelligent management of investigations in
robust, incisive defence of clients mean he various jurisdictions and her eye for detail in
is viewed by legal guides and the large, complex cases have led to her
profession itself as one of the elite impressing senior figures in both the legal and
international solicitors handling business world. As a result, she has been
large-value, high-profile investigations. He heavily involved in some of the most significant
is a solicitor who has set legal precedents. tax fraud cases of recent years.
His expertise in criminal and regulatory
matters and his skill in leading
cross-border legal teams ensure that the
organisations and individuals he
A Briefing Guide to : The Cum-Ex Guide for Financial InstitutionsLondon Office Northern Office Midlands Office 36 Whitefriars Street Roma House, 59 Pellon Lane 3 Brindley Place London Halifax, West Yorkshire Birmingham, West Midlands EC4Y 8BQ HX1 5BE B1 2JB +44 (0)203 947 1539 +44 (0)1422 346 666 +44 (0)121 231 7025 www.rahmanravelli.co.uk
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