FCA Imposes £642k Fine for Lapses in Financial Crime Control re cum-ex trading

On Friday, the U.K Financial Conduct Authority (“FCA”) fined Sunrise Brokers LLP (“Sunrise”) £642,400 for deficiencies in its anti-money laundering controls. These failings related to cum-ex trading, a strategy involving

• Placing shares in different jurisdictions on or just before cum-dividend dates used to secure multiple refunds of withholding tax (“WHT”) paid on dividends.

In this case, the FCA found that red flags in circular trading patterns which were:

• “Highly suggestive of sophisticated financial crime” were not identified or escalated.

The case centred around:

• Business introduced to Sunrise by the Solo Group between 17 February 2015 and 4 November 2015.

the Final Notice notes, remain under investigation by a number of other tax and other enforcement authorities.

Two particular failings were highlighted by the FCA.

• Firstly, Sunrise executed a trade at almost twice the prevailing stock market price on behalf of a Solo-introduced broker client.
• Secondly, it accepted a payment from a Solo-connected entity based in the United Arab Emirates in respect of outstanding debts owed to them by Solo's clients.

The FCA has found that these trades were “self-evidently suspicious”, and that Sunrise should not have participated in them without carrying out the correct due diligence.

Commentary

This case is the second to be concluded by the FCA in relation to financial crime systems and controls failings regarding cum-ex trading.

In May 2021, the FCA fined Sapien Trading £178,000 for similar deficiencies in financial crime systems and controls to those identified in this case.

• https://www.fca.org.uk/news/press-releases/fca-fines-sapien-capital-ltd-serious-financial-crime-control-failings-relation-cum-ex-trading

The FCA has indicated that its investigations into the alleged involvement of UK based brokers in cum-ex dividend arbitrage and WHT schemes are continuing with the assistance of EU and global law enforcement authorities.

The FCA’s Final Notice runs to 56 pages and contains detailed analysis of the trading activity in which Sunrise was involved. However, the central message is clear and straightforward.

• In order to meet their financial crime compliance obligations, firms must implement transaction monitoring solutions which can be calibrated to provide effective oversight of the customer relationship.
• Here, a number of red flag features were present but were not identified either by manual oversight, or through an effective transaction monitoring tool.

Sunrise did not ignore or improperly discount transaction monitoring alerts; instead the trades did not generate alerts at all.

Staff alertness is also an important consideration; the FCA’s Final Notice makes clear its expectation that unusual trades such as

• The one executed at twice the prevailing stock market price should be spotted and escalated for further scrutiny.

This fine underlines messages sent by the FCA in various contexts about its expectations of firms’ transaction monitoring solutions and controls.

For example, in its Dear CEO letter to retail banks sent in May 2021, it highlighted

• Widespread failures by firms properly to calibrate automated solutions to business activities or to tailor group-led TM solutions to UK entity business activities and customer base.

Other themes emerging from the action against Sunrise resonant of the messages conveyed in the Dear CEO letter are:

• Deficits in understanding of the technical set-up of transaction monitoring systems by Individuals with responsibility for the operation and effectiveness of those systems and failures by firms properly to record the rationale for discounting alerts.

Levels of enforcement activity led by UK enforcement authorities in relation to cum-ex trading are unlikely to rise to the very substantial levels seen for example:

• In Germany and Denmark, where the availability of WHT means that trades involving securities listed on their exchanges are at the centre of numerous major investigations involving the loss of tens of billions of Euros to tax authorities.

Nonetheless, the FCA is still actively investigating numerous cases involving trading patterns such as those in this case, and taking action where it considers that firms should have acted more decisively to identify, curtail and report activity indicative of financial crime.

These cases provide the FCA with an opportunity to reinforce messages about its expectations of all firms in relation to financial crime systems and controls, and in particular that these expectations apply equally to firms involved in the wholesale markets.

They are unlikely to be the last of their type.

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