FCA fines TJM for facilitating Solo Capital cum-ex trades
18 July 2022 UK
Image: AdobeStock/Vitalii Vodolazskyi
The Financial Conduct Authority has fined The TJM Partnership slightly more than 拢2 million for control failures linked to cum-ex trading.
This is the third fine that the UK regulator has applied in connection with cum-ex and the largest penalty that it has imposed so far. These relate to trading activities that TJM conducted on behalf of Solo Group between January 2014 and November 2015, cases that have been extensively reported in 色花堂Finance Times .
The FCA rules that trades executed by TJM on behalf of clients of Solo Group were characterised by 鈥渁 circular pattern of purported trades鈥�, characteristics which the regulator suggests 鈥渨ere highly suggestive of financial crime鈥�.
This trading, it concludes, appears to have been conducted to enable withholding tax reclaims to be made in Denmark and Belgium. These trades were for an aggregate value of 拢59 billion in Danish equities and 拢20 billion in Belgium equities. The FCA indicates that TJM received a total commission of 拢1.4 million for executing these trades, which represented a 鈥渟ignificant proportion鈥� of the firm鈥檚 revenue for the period.
TJM, which is now in administration, also failed to maintain adequate systems and controls to mitigate risk that it was being used to assist fraudulent trading and moneylaundering.
The FCA also referred to two other cases related to Solo Group where TJM failed to identify or escalate concerns about financial crime or moneylaundering. In another instance, it found that TJM had accepted money from a third party without conducting necessary due diligence.
In March, Denmark established an extradition treaty with the United Arab Emirates to lay the foundations for the extradition of Sanjay Shah, founder of Solo Capital, who was resident in Dubai. Shah and another British national are accused by the Danish government of having defrauded the Danish exchequer out of more than DKK 9 billion (approx 拢1.5 billion) through illegal cum-ex trading and associated activities.
The FCA indicated that TJM had agreed to resolve all the issues of fact and liability that emerged from this case and, as a result, the fine was reduced by 30 per cent. Without this reduction under the FCA鈥檚 Settlement Discount scheme, the regulator indicated that the fine would have been 拢2,399,000.
In its Final Notice on the settlement, the regulator states that Solo Group purported to provide clearing and settlement services as custodian to its clients within a closed network. These clients were principally offshore companies, including entities incorporated in the British Virgin Islands and the Cayman Islands, along with US 401(k) pension plans.
According to the FCA, the Solo Group clients were often entities controlled by a small number of individuals, some of whom had previously worked for Solo Group, and which did not appear to have access to sufficient funds to settle the trades.
TJM was found to have executed OTC equity cum-ex trades for a value of approximately 拢58.33 billion in Danish equities and 拢19.71 billion in Belgian equities on behalf of Solo Capital clients during the period under investigation.
This reportedly featured a circular pattern of high-value OTC equity trades, back-to-back stock loan transactions and forward trades involving EU equities on or around the last day of the cum-dividend period. These trades were then subsequently unwound through trades conducted after record date.
The FCA says that OTC trades conducted by TJM were executed on platforms that did not have access to liquidity from public exchanges. These shares were reportedly filled 鈥渨ithin a matter of minutes鈥�, despite representing up to 24 per cent of the shares outstanding in the Danish-listed companies and up to 10 per cent of the equivalent Belgian stocks.
These OTC trades equated to an average of 47 times the total number of shares traded in the Danish stocks on the Danish stock exchange and 22 times the total number of the shares traded in the Belgian stocks on European exchanges on the last day that the shares were cum-dividend.
The purpose of this trading, The FCA concluded, was so that Solo Group could arrange for dividend credit advice slips (DCAS) to be created which purported to show that Solo clients were owners of the shares on the record date. In some cases, these DCAS were then used to reclaim withholding tax from the Danish and Belgium tax authorities under the relevant Double Taxation Treaties.
TJM staff were reportedly eager to maintain their relationship with Solo Group, which was referred to as the 鈥渃hicken that laid the golden egg鈥�, according to the FCA鈥檚 Final Notice. Before taking on this Solo Group business, TJM was losing approximately 拢20,000 to 拢30,000 each month, according to this statement.
This is the third fine that the UK regulator has applied in connection with cum-ex and the largest penalty that it has imposed so far. These relate to trading activities that TJM conducted on behalf of Solo Group between January 2014 and November 2015, cases that have been extensively reported in 色花堂Finance Times .
The FCA rules that trades executed by TJM on behalf of clients of Solo Group were characterised by 鈥渁 circular pattern of purported trades鈥�, characteristics which the regulator suggests 鈥渨ere highly suggestive of financial crime鈥�.
This trading, it concludes, appears to have been conducted to enable withholding tax reclaims to be made in Denmark and Belgium. These trades were for an aggregate value of 拢59 billion in Danish equities and 拢20 billion in Belgium equities. The FCA indicates that TJM received a total commission of 拢1.4 million for executing these trades, which represented a 鈥渟ignificant proportion鈥� of the firm鈥檚 revenue for the period.
TJM, which is now in administration, also failed to maintain adequate systems and controls to mitigate risk that it was being used to assist fraudulent trading and moneylaundering.
The FCA also referred to two other cases related to Solo Group where TJM failed to identify or escalate concerns about financial crime or moneylaundering. In another instance, it found that TJM had accepted money from a third party without conducting necessary due diligence.
In March, Denmark established an extradition treaty with the United Arab Emirates to lay the foundations for the extradition of Sanjay Shah, founder of Solo Capital, who was resident in Dubai. Shah and another British national are accused by the Danish government of having defrauded the Danish exchequer out of more than DKK 9 billion (approx 拢1.5 billion) through illegal cum-ex trading and associated activities.
The FCA indicated that TJM had agreed to resolve all the issues of fact and liability that emerged from this case and, as a result, the fine was reduced by 30 per cent. Without this reduction under the FCA鈥檚 Settlement Discount scheme, the regulator indicated that the fine would have been 拢2,399,000.
In its Final Notice on the settlement, the regulator states that Solo Group purported to provide clearing and settlement services as custodian to its clients within a closed network. These clients were principally offshore companies, including entities incorporated in the British Virgin Islands and the Cayman Islands, along with US 401(k) pension plans.
According to the FCA, the Solo Group clients were often entities controlled by a small number of individuals, some of whom had previously worked for Solo Group, and which did not appear to have access to sufficient funds to settle the trades.
TJM was found to have executed OTC equity cum-ex trades for a value of approximately 拢58.33 billion in Danish equities and 拢19.71 billion in Belgian equities on behalf of Solo Capital clients during the period under investigation.
This reportedly featured a circular pattern of high-value OTC equity trades, back-to-back stock loan transactions and forward trades involving EU equities on or around the last day of the cum-dividend period. These trades were then subsequently unwound through trades conducted after record date.
The FCA says that OTC trades conducted by TJM were executed on platforms that did not have access to liquidity from public exchanges. These shares were reportedly filled 鈥渨ithin a matter of minutes鈥�, despite representing up to 24 per cent of the shares outstanding in the Danish-listed companies and up to 10 per cent of the equivalent Belgian stocks.
These OTC trades equated to an average of 47 times the total number of shares traded in the Danish stocks on the Danish stock exchange and 22 times the total number of the shares traded in the Belgian stocks on European exchanges on the last day that the shares were cum-dividend.
The purpose of this trading, The FCA concluded, was so that Solo Group could arrange for dividend credit advice slips (DCAS) to be created which purported to show that Solo clients were owners of the shares on the record date. In some cases, these DCAS were then used to reclaim withholding tax from the Danish and Belgium tax authorities under the relevant Double Taxation Treaties.
TJM staff were reportedly eager to maintain their relationship with Solo Group, which was referred to as the 鈥渃hicken that laid the golden egg鈥�, according to the FCA鈥檚 Final Notice. Before taking on this Solo Group business, TJM was losing approximately 拢20,000 to 拢30,000 each month, according to this statement.
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