ED&F Man Capital Markets Ltd Fined £17.2m by FCA for Enabling Illegitimate Tax Reclaims

The formerly ED&F Man Capital Markets Ltd, now known as Marex Capital Markets (MCM) has been slapped with a hefty fine of £17,219,300 by the Financial Conduct Authority (FCA) due to serious oversights in its management of cum-ex trading. These oversights enabled MCM to charge fees for trading techniques that allowed its customers to fraudulently recoup tax from Danish authorities.

MCM enabled high quantities of dividend arbitrage trading on behalf of its customers between February 2012 and March 2015, allowing these clients to make withholding tax (WHT) reclaims. However, it has been revealed that £20 million of these WHT reclaims made by MCM's clients to the Danish tax authority (SKAT) were illegitimate. A trading firm based in Dubai, operating under the same corporate group as MCM, also participated in this trading strategy that resulted in these fraudulent WHT reclaims.

The reclaims were deemed illegitimate because the trading strategy enabled the reclaiming of WHT despite the absence of owned or borrowed shares, the non-receipt of dividends, and the non-payment of taxes. MCM managed to accumulate £5.06 million in fees through this illicit activity.

The FCA investigation found that MCM had inadequate compliance checks in place and failed to ensure the legitimacy of the dividend arbitrage trading. The firm's compliance function lacked the necessary expertise to effectively monitor or review the trading activities, conducting only a superficial annual compliance review of the department responsible. No steps were taken to understand the nature of the trading activities or properly assess the risks associated with dividend arbitrage trading.

In response to the findings, Therese Chambers, Joint Executive Director of Enforcement and Market Oversight, expressed her dismay: “MCM facilitated a significant volume of trades with the aim of making illegitimate tax reclaims from the Danish Exchequer and profited substantially from it. It is completely unacceptable for authorized firms to profit from such practices. It is crucial for all firms to have appropriate controls and expertise in place to prevent the facilitation of financial crimes.”

Marex Group (MCM) acquired the global ED&F Man Capital Markets business in stages throughout the latter part of 2022. This acquisition significantly strengthens Marex's services and abilities to cater to clients, establishing Marex as a prominent player in the United States market.

This is the FCA's fourth case involving cum-ex trading, and the punishment issued is the highest yet. MCM elected to settle rather than contest the FCA's findings, making them eligible for a 30% reduction under the FCA's Settlement Reduction Scheme. The penalties include £5.06 million in profits that MCM had to forfeit as a consequence of their cum-ex trading violations.

The FCA's enforcement action delivers a clear message to financial businesses about the necessity of rigorous monitoring, compliance, and risk assessment systems. It is a warning that assisting financial crimes will not be permitted, and authorized businesses must take all required efforts to avoid being engaged in illegal activity.

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