FCA fines Sunrise Brokers LLP £642,400 for serious financial crime control failings in relation to cum-ex trading
12 Nov 2021 01:08 PM
Sunrise Brokers LLP has been fined over £600,000 for deficient anti money laundering systems and controls.
This is the second case brought by the FCA in relation to cum-ex trading, dividend arbitrage and withholding tax (WHT) reclaim schemes. The first FCA case relating to cum-ex trading concluded in May 2021.
The FCA found that Sunrise had deficient systems and controls to identify and mitigate the risk of facilitating fraudulent trading and money laundering in relation to business introduced by the Solo Group, between 17 February 2015 and 4 November 2015.
On review it was found that the Solo trading throughout the period was characterised by a circular pattern of purported trades – characteristics which are highly suggestive of financial crime. The trading appears to have been carried out to allow the arranging of withholding tax reclaims in Denmark and Belgium.
In particular, in 2 instances the firm failed to identify or escalate any potential financial crime concerns or suspicions when it should have done, where:
- Sunrise executed a trade on behalf of a broker client, introduced by the Solo Group, at nearly twice the prevailing market price of the stock.
- Sunrise accepted a payment from a UAE-based entity connected to the Solo Group in respect of outstanding debts owed to them by clients of Solo.
Mark Steward, Executive Director of Enforcement and Market Oversight, recently said:
“Sunrise should not have carried out these self-evidently suspicious trades without proper due diligence. Sunrise’s failings were significant and this outcome demonstrates we will not tolerate firms’ lax controls and that we will work with overseas agencies to ensure London is not viewed as a haven for poor controls and practices.”
More generally, the FCA found that Sunrise failed to exercise due skill, care and diligence in applying anti-money laundering policies and procedures and failed properly to assess, to monitor and to mitigate the risk of financial crime in relation to clients introduced by the Solo Group and the purported trading.
As Sunrise agreed to resolve all issues of fact and liability, it qualified for a 30% discount under the FCA’s executive settlement procedures.
The action taken is part of a range of measures taken in connection with cum-ex dividend arbitrage cases, and WHT schemes. This has involved proactive engagement with EU and global law enforcement authorities.
The FCA’s investigation into the involvement of UK based brokers in cum-ex dividend arbitrage schemes is continuing.
Notes to Editors
- Final notice: Sunrise Brokers LLP.
- Sunrise breached Principle 2 and Principle 3 of the FCA’s Principles for Businesses between 17 February 2015 and 4 November 2015.
- The Solo trading was characterised by a circular pattern of large-scale purported OTC equity trading, back-to-back securities lending and forward transactions – characteristics which are highly suggestive of financial crime.
- 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.
- 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.
- 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.
- 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.
- Principle 2 of the FCA’s Principles for Businesses states that 'A firm must conduct its business with due skill, care and diligence'.
- Principle 3 of the FCA’s Principles for Businesses states that 'a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems'.
- The first FCA case relating to cum/ex trading concluded in May 2021 – Final Notice: Sapien Capital Ltd
- The FCA’s enforcement information guide.