FCA £1.6m fine for failings in cum-ex trading/circular trading for WHT avoidance (FINANCIAL CRIME)

On Monday, the FCA fined Mako £1,662,700 for financial crime deficiencies, especially regarding its inability to identify the financial crime risk posed by the trades it facilitated on behalf of the Solo Group.

FCA

1. This eighth enforcement case brought by the FCA concludes its investigations into cum-ex trading.
2. Working closely with EU and global law enforcement agencies, the FCA has imposed more than £30m fines for this trading.

Mako Financial Markets Partnership LLP (Mako) failed to:-

1. Ensure it has effective systems and controls to guard against financial crime.
2. Adequately apply the policies and procedures it did have in place.

Key facts

1. The trades made on behalf of Solo Group were circular and highlighted as suggestive of financial crime
2. The trades seemingly were carried out to withhold tax
3. The trades had no obvious rationale
4. Quick reversal of trades within two hours of the initial request
5. The trades resulted in a loss of 2 million euros for the Solo Group’s controller
6. Payments were received from a third party located in the UAE
7. Individuals have been subsequently convicted in Denmark for this scheme.

The FCA states in the final notice below that Mako:

1. Failed to conducted appropriate due diligence
2. Failed to collect sufficient information on the underlying Solo client
3. Didn’t conduct a risk assessment on any of the Solo clients
4. Failed to recognise red flags and apply appropriate EDD
5.  Lack of ongoing monitoring of Solo clients' trades

Long read

1. The FCA has fined Mako Financial Markets Partnership LLP (Mako) £1,662,700 for failing to ensure it had effective systems and controls to guard against financial crime. 
2. Mako also failed to adequately apply the policies and procedures it did have in place. 
3. This eighth enforcement case brought by the FCA concludes its investigations into cum-ex trading. Working closely with EU and global law enforcement agencies, the FCA has imposed more than £30m fines for this trading.
4. Between December 2013 and November 2015, Mako executed purported over-the-counter equity trades on behalf of clients of the Solo Group, worth approximately
1. £68.6bn in Danish equities and
2. £23.6bn in Belgian equities.
5. Mako received a commission of approximately £1.45m. 
6. The trading was circular, which is highly suggestive of financial crime. It appears to have been carried out to arrange withholding tax (WHT) reclaims in Denmark and Belgium.
7. Several individuals have now been convicted in Denmark as part of this scheme.
8. Mako also failed to identify red flags related to the Solo Group business in other instances.
1. This involved a series of transactions with no apparent rationale, resulting in the Solo Group’s controller incurring a €2m loss to benefit his business associates. Mako also received payment from a United Arab Emirates-based third party connected to the Solo Group for outstanding debts owed by the Solo Group’s clients without performing any due diligence, which created an increased risk of money laundering.
9. Therese Chambers, joint executive director of enforcement and market oversight, said:
1. ‘Mako failed to spot clear red flags and facilitated highly suspicious trading that made it vulnerable to being used to support financial crime.
2. ‘For UK financial services to grow and compete, investors need to trust it. That’s why we must stamp out these unacceptable practices which risk the reputation and integrity of UK markets.’
10. As Mako has not disputed the FCA’s findings and agreed to settle, it qualified for a 30% discount on its fine under the FCA’s settlement discount scheme.  

Notes to editors

1. Final Notice: Mako Financial Markets Partnership LLP
2. This is the eighth and last enforcement case brought by the FCA about cum-ex trading. The previous 7 FCA cases relating to cum-ex trading include in:
• May 2021 – Final Notice: Sapien Capital Ltd;
• November 2021 – Final Notice: Sunrise Brokers LLP;
• July 2022 – Final Notice: TJM Partnership Limited (in liquidation); June 2023 – Final Notice: ED&F Man Capital Markets Ltd;
• July 2023 – Final Notice: Bastion Capital London Ltd;
• September 2023 – Decision Notice: Nailesh Teraiya; and
• January 2025 – Final Notice: Arian Financial LLP.  
3. Nailesh Teraiya has referred his Decision Notice to the Upper Tribunal. Therefore, any findings in his Decision Notice are provisional and reflect the FCA’s belief as to what occurred and how it considers his behaviour should be characterised.
4. The Solo Group comprises four previously authorised firms: Solo Capital Partners LLP, West Point Derivatives Ltd, Old Park Lane Capital Ltd and Telesto Markets LLP.
5. The ‘Solo clients’ means entities introduced by the Solo Group to Mako and the other broker firms, on some of whose behalf Mako executed purported equity trades during the relevant period.
6. Cum-ex trading involves trading of shares on or just before the last cum-dividend date. If in a suitable jurisdiction, this can allow a party to claim a tax rebate on withholding tax, sometimes without entitlement.
7. The intention of dividend arbitrage trading (cum-ex is an example) is to place shares in alternative tax jurisdictions around dividend dates to minimise withholding tax or generate withholding tax reclaims. This may involve several different trading activities including trading and lending securities and trading derivatives, designed to hedge movements in the price of the securities over the dividend dates.
8. 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 payment to a foreign entity, it may be reclaimed if there is a formal treaty, called a double taxation agreement (DTA), between the country where the income is paid and the recipient's country of residence. DTAs allow for a reduction or rebate of the applicable WHT.  
9. The FCA publication of Market Watch 52 highlighted various issues and concerns around dividend arbitrage in 2017. The FCA contributed to the European Securities and Markets Authority's Final Report on Cum-Ex, Cum-Cum, and WHT Link external in 2020.
10. Mako breached Principle 2 and Principle 3 of the FCA’s Principles for Business between 16 December 2013 and 16 November 2015.
11. Principle 2 states that a firm must conduct its business with due skill, care and diligence.
12. Principle 3 states that a firm must reasonably organise and control its affairs responsibly and effectively, with adequate risk management systems.
13. Read the FCA’s enforcement information guide.
14. Find out more information about the FCA. 

Here is the link 👉   https://www.fca.org.uk/news/press-releases/fca-fines-mako-failings-cum-ex-trading