It is extremely rare for a single criminal case to be evaluated as a percentage of a European country’s gross domestic product (GDP). But that is precisely the case with Denmark’s recent extradition of Sanjay Shah. Mr. Shah is the founder of Solo Capital, a company specializing in the collection of withholding taxes from the Danish Treasury. These claims amounted to approximately £1.46 billion.
This practice is widespread at some of Europe’s largest financial institutions. These institutions are alleged to have filed fraudulent payment claims totaling approximately 50 billion euros from several European countries, including Germany. This practice was quite widespread in the country until the tax reform. Mr. Shah’s extradition and subsequent trial, scheduled to begin in 2024, is one in a series of lawsuits against people who sought to profit from flaws in the tax system.
The value of the alleged fraud is enormous, and while the victims are state treasuries such as the Danish tax authority SKAT, the real victims are likely ordinary taxpayers. In fact, the fiscal losses could have been put to better use.
background
CumEx stock trading (Latin: with or without (dividend)) is a form of dividend arbitrage, often involving the lending, selling, and returning of shares around the dividend payment date. This seeks to take advantage of the fact that stock trading has a “window” of a certain number of days between the sale of shares and settlement (and therefore update of the share register).
May operate in countries where dividend withholding tax (WHT) is paid to the state by the company in which the shares are traded (subject to local law), and the amount may be approximately 25% of the amount of dividends paid. There are many. Annually to shareholders.
If a shareholder is registered as owning the shares on the dividend payment date, that shareholder will receive a net dividend withholding tax paid to the Treasury. Shareholders can recover WHT if permitted under the local laws of the company’s location.
flaws in the tax system
Because it can take several days between execution and settlement, some European countries, including Denmark, allow shareholders to lend their shares to a third party, who then executes a short sale to the buyer on the stock market. It is possible to admit that. The period of time recorded in the shareholder register by the day before the dividend payment date.
A buyer who acquires shares before the dividend payment date could theoretically get their WHT back, but the original shareholder would remain on the share register as the owner of the shares.
The results are clear. Both parties may be able to claim a refund for WHT that each state’s treasury has only received once.
If the transaction is effectively canceled and the original shareholders regain their shares immediately after the dividend payment date, the status quo will revert to its original state. Many of these types of transactions have undoubtedly been conducted under the legal and tax advice of the time.
delivery
Danish authorities sought Shah’s extradition from Dubai after conducting a long-running investigation into the takeover of WHT, which was allegedly influenced by Solo Capital. But absent a special extradition agreement with the UAE, Shah could resist extradition for some time.
In March 2022, Denmark entered into a General Extradition Treaty with the UAE, at which time it announced, among other things, that this was to expedite extradition requests for foreign nationals residing in Dubai, including Mr. Shah, in relation to CumEx trade operations.
On December 6, 2023, Mr. Shah was extradited to Denmark to face criminal prosecution for his alleged involvement in the CumEx transaction.
The UAE is no longer a safe haven for foreign nationals who have allegedly committed large-scale fraud in other jurisdictions, both in terms of the extradition treaties in place with the UAE and as interpreted by local courts. may not be considered.
Each case will be decided on its own merits. However, Dubai’s extradition regime appears to be subject to significant legal controversy. This is evidenced by the recent extradition of the Gupta brothers from Dubai to South Africa over corruption and bribery allegations during former President Jacob Zuma’s government.
Danish criminal prosecution
It is noteworthy that after Denmark’s successful extradition of the Shah, he repeatedly maintained his innocence and had received legal advice that the transactions undertaken were legal.
It is notable that another criminal trial was launched in November 2023, involving the first of several charges against up to nine people in Denmark for CumEx trading. In early February 2024, a Danish court sentenced Günther Kler, a British trader who defrauded the Danish state treasury of more than $45 million for his involvement in CumEx trading, to six years in prison.
There have already been successful criminal prosecutions against CumEx trading in Germany, but the outcome of these prosecutions will be eagerly awaited by both SKAT and other European treasuries. Very recently, A Frankfurt court has found Ulf Johannemann, former head of German tax at Freshfields Bruckhaus Deringer, guilty of advising Maple Bank on the multi-year CumEx scheme.
Ancillary UK civil proceedings and wider implications for UK authorities
Also in November, SKAT won an appeal to the Supreme Court in London, which allowed SKAT to continue its civil action in respect of the same losses it had suffered. [see Skatteforvaltningen (the Danish Customs and Tax Administration) v Solo Capital Partners LLP (in special administration) and others [2023] UKSC 40, on appeal [2022] EWCA Civ 234).
Essentially, the Supreme Court ruled that SKAT was not simply seeking to recover taxes, a matter normally reserved for domestic courts. Rather, it alleged fraudulent claims that did not violate the Dicey revenue doctrine, which limits jurisdiction over tax claims to the state in the country where the claim arose.
The civil trial is expected to begin in April 2024 and last for one year.
A UK court ruling regarding the validity of the CumEx transaction has not yet been issued. Additionally, while much of the trading activity was carried out in London by financial institutions and their brokers, the involvement of the Financial Conduct Authority (FCA) has so far been limited to minor interventions around identity verification and due diligence. No judgment has been made regarding the legality of the transaction. CumEx trading. Other FCA investigations are understood to be ongoing.
Time will tell whether the FCA, and indeed the Serious Fraud Office, will become more strategically involved.
Currently, more than 100 financial institutions and 450 individual bankers are known to have received suspicious letters from Germany. Meanwhile, other European finance ministries continue to investigate allegations of fraud surrounding CumEx trading.
In response to these developments, many financial institutions are likely to conduct internal investigations to understand the scope of the transactions. We will investigate whether there are any matters that need to be reported based on the compliance system, with a particular focus on the timing of dividend payments.
These investigations are lengthy and complex, involving analysis of substantive transaction data and communications between related parties, as well as legal advice received at the time.
Employees and former employees will wait with some trepidation to find out whether they may face criminal charges for their roles at CumEx.
This has all the hallmarks of the LIBOR scandal that arose from the 2008 financial crisis. This scandal will continue for some time, but crime of the century or not, the true impact of the CumEx deal will only be felt once the dust has settled. Or they simply take advantage of weaknesses in the country’s tax system.
David Stern is a barrister and co-head of financial crime at 5 St Andrews Hill.