May 2021 - CA fines Sapien Capital Ltd for serious financial crime control failings in relation to cum/ex trading

The FCA has fined Sapien Capital Ltd £178,000 for

• Failings which led to the risk of facilitating fraudulent trading and money laundering.
• The fine was reduced due to serious financial hardship.

This is the first FCA case in relation to:

• Cum/ex trading, dividend arbitrage and withholding tax (WHT) reclaim schemes. There are currently a number of ongoing and overlapping investigations.

Between 10 February 2015 and 10 November 2015 Sapien failed

• To have in place adequate systems and controls to identify and mitigate the risk of being used to facilitate fraudulent trading and money laundering in relation to business introduced by the Solo Group.

The Solo trading was characterised by:

• What appeared to be a circular pattern of extremely high value trades undertaken to avoid the normal need for payments and delivery of securities in the settlement process.
• The trading pattern involved the use of Over the Counter (OTC) equity trading, securities lending and forward transactions, involving EU equities, on or around the last day securities were cum dividend.

The FCA investigation found no evidence of change of ownership of the shares traded by the Solo clients, or custody of the shares and settlement of the trades by the Solo Group.

• The way these trades were conducted by the Solo Group and their clients, in combination with their scale and volume,
• were highly suggestive of financial crime, and appear to have been undertaken to create an audit trail to support withholding tax reclaims in Denmark and Belgium.

Sapien executed purported OTC equity trades to the value of approximately £2.5 billion in Danish equities and £3.8 billion in Belgian equities.

In addition, Sapien

• Failed to exercise due skill, care and diligence in applying anti-money laundering policies and procedures and in failing properly to assess, monitor and mitigate the risk of financial crime in relation to clients introduced by the Solo Group and the purported trading.
• Sapien did not undertake appropriate due diligence and failed to perform effective risk assessments on the Solo clients.

Mark Steward, Director of Enforcement and Market Oversight, stated:

• 'These transactions ran money laundering and other financial crime risks which Sapien incompetently failed to see.
• 'The FCA expects firms have systems and controls that test the purpose and legitimacy of transactions, reflecting scepticism and alertness to the risk of money laundering and financial crime, and failures here constitute serious misconduct.'

As Sapien agreed to resolve all issues of fact and liability and entered a Focused Resolution Agreement, under the Authority’s executive settlement procedures, it qualified for a 30% discount. The amount was further reduced from £219,100 to reflect Sapien’s serious financial hardship.

The publication of this Final Notice is part of a range of measures taken in connection with cum/ex dividend arbitrage cases, and WHT schemes.

This has involved the proactive engagement with EU regulators and global law enforcement.

The FCA’s investigation into the involvement of UK based brokers in cum/ex dividend arbitrage schemes is continuing.

Press Releases First published: 06/05/2021 Last updated: 06/05/2021 - https://www.fca.org.uk/news/press-releases/fca-fines-sapien-capital-ltd-serious-financial-crime-control-failings-relation-cum-ex-trading

Notes to editors:

1. Final Notice: Sapien Capital Limited https://www.fca.org.uk/publication/final-notices/sapien-capital-limited-2021.pdf
2. Cum-ex trading involves trading of shares on or just before the last cum-dividend date. If in a suitable jurisdiction this can then allow a party to claim a tax rebate on withholding tax, sometimes without entitlement.
3. The intention of dividend arbitrage is to place shares in alternative tax jurisdictions around dividend dates, with the aim of minimising withholding tax or generating withholding tax reclaims. This may involve several different trading activities including trading and lending securities and trading derivatives, including futures and total return swaps, designed to hedge movements in the price of the securities over the dividend dates.
4. Withholding tax 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 payments to a foreign entity it may be reclaimed if there is a formal treaty, called a double taxation agreement (DTA), between the country in which the income is paid and the country of residence of the recipient. DTAs allow for a reduction or rebate of the applicable WHT.
5. The FCA publication of Market Watch 52
   • Highlighted various issues and concerns around dividend arbitrage in 2017. FCA contributed to the European Securities and Markets Authority (ESMA) Final Report on Cum/Ex, Cum/Cum and WHT in 2020. https://www.fca.org.uk/publication/newsletters/marketwatch-52.pdf
6. Principle 2 of the FCA Principles for Business states that “A firm must conduct its business with due skill, care and diligence.” https://www.handbook.fca.org.uk/handbook/PRIN/2/1.html
7. Principle 3 states that “a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.”
8. The FCA’s enforcement information guide. https://www.fca.org.uk/publication/corporate/enforcement-information-guide.pdf