With another bank having been raided as part of the ever-growing investigation into the Cum-Ex tax scandal, Aziz Rahman of business crime solicitors Rahman Ravelli explains the background to it, the issues at stake and how those investigated should respond.
A matter of days ago, ABN Amro NV joined the likes of BlackRock Inc, Commerzbank AG, Deutsche Bank AG, Deutsche Boerse AG, M.M. Warburg and the law firm Freshfields in being raided as part of a huge investigation into Cum-Ex. Spain’s Santander bank is also being investigated as is the Australian bank Macquarie, which one central suspect in the investigation has already said he had advised in relation to Cum-Ex.
Never heard of Cum-Ex? It is likely many more people will be hearing a lot more about it in the future. Many individuals and organisations may well be requiring advice on how to respond if and when they find themselves part of what is already a rapidly-widening cross-border probe that is taking in dozens of financial institutions and individuals.
The Background to Cum-Ex
Cum-Ex is the name given to a huge volume of transactions prior to 2012 that involved exploiting a loophole on dividend payments that enabled a number of parties to claim the same tax refund. Banks and stockbrokers rapidly traded shares with ("cum") and without ("ex") dividend rights, in a way that enabled them to hide the identity of the actual owner. This meant they could agree to sell a company stock before the dividend was paid out but then deliver it after the dividend had been paid. This tactic enabled both parties to claim tax rebates on capital gains tax - a tax that had only been paid once – and rapid trading between various parties could give the appearance of numerous owners, creating large profits. The authorities in Germany have already said that this tactic has cost the German government 10 billion euros in lost revenue. But recent reports now indicate that there may be at least another 10 European countries that have been affected by this; with some estimates putting the losses to these countries’ treasuries at around 55 billion euros in total. France, Spain, Italy, the Netherlands, Denmark, Belgium, Austria, Finland, Norway and Switzerland have been identified as having been affected.
The Implications of Cum-Ex
It is not exaggerating to say that Cum-Ex could have major implications for the whole financial services industry. In a world where financial institutions aim to minimise their clients’ tax liabilities consideration will always be given to schemes that look to exploit loopholes. The crucial factor in any such scheme is whether it is viewed as legal by the authorities and regulatory agencies.
While the UK has not – so far at least – made it on to the list of nations affected by this, it is inevitable that the authorities here will look at it closely. The volume of trading under scrutiny, the number of organisations involved and the sheer scale of profits that were made make it likely that there will be a UK connection to what appears to be a Europe-wide issue. There may be enough information shared between European enforcement agencies to prompt the UK’s Serious Fraud Office (SFO), Financial Conduct Authority (FCA), HM Revenue and Customs (HMRC) or even the Pensions Regulator – if institutional investors are involved - to start investigating. That could well mean banks, corporates, brokerage companies and a wide variety of individuals needing to prepare for the likelihood of coming under investigation. And that will require the right response.
Responding to Cum-Ex Investigators
In order to respond appropriately to any questioning by agencies that investigate Cum-Ex, any subject of such investigations has to have in place a strategy. Such a strategy is of huge importance when it comes to ensuring an organisation that is investigated knows the extent of any problems it is involved in and how to proceed once it knows what has happened. It can also be of great value in ensuring all legal avenues, mitigating circumstances and possible defences are considered – and in making sure the investigating authorities do not overstep the mark.
We could write a vast amount on such a response but the crucial aspects are:
Conduct an internal investigation: Only by carrying out a root and branch probe into what, if any, wrongdoing has been committed can problems be identified. If nobody within the organisation has the experience and expertise necessary to conduct such an investigation, external legal expertise should be sought. A properly planned and conducted legal investigation will pinpoint when and how problems have developed. This can be essential for devising procedures to prevent any repeat occurrences. But crucially this can be of huge value in convincing the authorities that all possible efforts have now been made to tackle the problem, which can lead to negotiation with investigators and more lenient treatment.
Prepare for a raid: This is not as dramatic as it sounds. Raids can be a commonplace event in major investigations. The important thing is to have procedures in place to ensure the damage caused is minimised. Devising measures to retain copies of all data seized, question those conducting the raid and record their answers, maintain a schedule of all items taken and ensure the company lawyer can be present if and when a raid is carried out can all be of immense importance in keeping a company functioning afterwards.
Seek appropriate representation: Cum-Ex is already a large, international investigation that is likely to involve numerous agencies from many countries. Anyone who is investigated needs to be represented by lawyers who have in-depth experience of co-ordinating cases that cross borders and involve various agencies and acknowledge expertise in the legal issues at stake. Matters such as, for example, legally privileged documentation, Section 2 interviews conducted by the SFO and disclosure of material could fill an article in their own right – and these and other issues could well arise in this investigation. Which is why anyone facing such an investigation has to be represented by those whose day-to-day workload involves such issues.
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