The FCA has fined The TJM Partnership Limited (in liquidation) £2,038,700 for failing to ensure it had effective systems and controls to identify and reduce the risk of financial crime and money laundering in its business. This is the third case brought by the FCA in relation to cum-ex trading and the largest fine so far. This reflects the multiple examples of serious misconduct over a lengthy period.
TJM did not have adequate procedures, systems and controls to identify and mitigate the risk of being used to facilitate fraudulent trading and money laundering in relation to trading on behalf of clients of the Solo Group between January 2014 and November 2015. It also failed to adequately apply its anti-money laundering policies and did not properly assess, monitor and mitigate the risk of financial crime.
Trading executed by TJM on behalf of the Solo Group’s clients 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.
TJM executed trading to the value of approximately £59 billion in Danish equities and £20 billion in Belgian equities and received commission of £1.4 million, which was a significant proportion of the firm’s revenue in the period.
The firm also failed to identify or escalate any potential financial crime concerns and money laundering risks in two other instances related to Solo Group business. This involved transactions with no apparent economic purpose except to transfer substantial windfall profits of €4.3 million amongst its clients. TJM also accepted payment from a third party without appropriate due diligence.
As TJM agreed to resolve all issues of fact and liability, it qualified for a 30% discount under the FCA’s Settlement Discount Scheme.
The investigation process involved proactive engagement with law enforcement agencies and regulatory partners around the world.
Mark Steward, Executive Director of Enforcement and Market Oversight, said:
‘TJM allowed itself to become involved in a self-evidently suspicious scheme of circular transactions that looked like shams. TJM demonstrated a complete lack of care and diligence in participating in these transactions of dubious purpose.’
Notes to editors
- Final Notice: The TJM Partnership Limited (In Liquidation).
- The first two cum-ex cases concluded in May and November 2021 and there are a number of ongoing investigations into UK brokers for similar failings.
- The financial penalty of £2,038,700 imposed on TJM is the largest of the three concluded cum-ex trading cases, which reflects the elements of seriousness, multiple examples of misconduct and the protracted period of the breaches. As TJM is in creditors’ voluntary liquidation, the FCA will become a creditor of the firm. However, existing creditors will be given precedence over the FCA’s financial penalty.
- 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 (WHT) 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.
- TJM breached Principle 2 and Principle 3 of the FCA’s Principles for Business between January 2014 and November 2015.
- Principle 2 states that ‘A firm must conduct its business with due skill, care and diligence’.
- Principle 3 states that ‘a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems’.
- The previous two FCA case relating to cum-ex trading concluded in May 2021 – Final Notice: Sapien Capital Ltd and November 2021 – Final Notice: Sunrise Brokers LLP
- The FCA’s enforcement information guide.
- Find out more information about the FCA.