The UK Financial Conduct Authority (FCA) has imposed a financial penalty of £1,662,700 on Mako Financial Markets Partnership LLP for significant shortcomings in its systems and controls designed to prevent financial crime. The firm failed to effectively apply its existing policies and procedures against illicit activities.
This action marks the eighth enforcement case related to cum-ex trading investigated by the FCA. Collaborating with various EU and international law enforcement bodies, the FCA has levied fines exceeding £30 million connected to similar trading practices.
Between December 2013 and November 2015, Mako facilitated what appeared to be over-the-counter equity transactions for clients of the Solo Group, involving around £68.6 billion in Danish equities and £23.6 billion in Belgian equities. For these trades, Mako earned approximately £1.45 million in commissions. However, the nature of the trading was circular, raising suspicions of potential financial misconduct. This arrangement appeared aimed at enabling withholding tax (WHT) reclaims in Denmark and Belgium, leading to several convictions in Denmark associated with this operation.
Mako also neglected to notice several red flags regarding other transactions involving the Solo Group. These transactions lacked clear rationale and resulted in a €2 million loss for the Solo Group’s main manager, benefiting his associates instead. Furthermore, Mako received payments from a third party based in the United Arab Emirates, associated with the Solo Group, to cover debts owed by clients of the Solo Group, without conducting proper due diligence, which heightened the risk of money laundering.
Since Mako did not contest the FCA’s findings and opted to settle, it qualified for a 30% reduction in the fine due to the FCA’s settlement discount policy.
Cum-ex trading refers to the buying and selling of shares around the ex-dividend date, where parties may claim a tax rebate on withholding tax in jurisdictions that allow such a practice—often without proper entitlement. The aim of dividend arbitrage trading, with cum-ex as a notable example, is to move shares to different tax jurisdictions around dividend dates to either minimize withholding tax or facilitate withholding tax reimbursements. This method can involve various trading strategies, including the trading and lending of securities and derivatives, to mitigate price fluctuations surrounding dividend dates.