An ongoing investigation into so-called Cum-Ex trading is unfolding in Germany. The investigation has involved a number of high-profile raids by German authorities of offices belonging to household names from both the banking and legal sectors. The German prosecutors have also scored their first victory in court in Bonn with the conviction on 18 March 2020 of two UK former traders.

In this GT Alert, we provide an overview of Cum-Ex trading and the response of the authorities so far. We consider the position in the UK as well as the implications for both firms and individuals and suggest steps firms and individuals may now wish to consider.

While there has been little publicity in the UK, there is a strong UK connection. Many of the traders were UK nationals and much trading will have taken place in the City of London.

While UK enforcement agencies have taken little action to date, despite the apparent involvement of British banks, traders and fund managers, it is anticipated that this will change, particularly in light of the convictions following the 44-day trial in Bonn, which was expedited in light of the unfolding COVID-19 pandemic.

The overall results of the German investigation may have a significant impact not only on the 130 or so institutions that German prosecutors claim were involved, but on the financial services industry worldwide as regulators consider whether firms had sufficient systems and controls to flag any fraudulent transactions.

What is Cum-Ex?

In summary, the activity involves the transfer and/or borrowing of a share between investors just prior to the date on which a dividend is paid to the shareholder. The name ‘Cum-Ex’ is derived from the Latin words ‘with’ (‘cum’) and ‘without’ (‘ex’), referring to a security traded with or without the right to a dividend. The alleged tax scheme is based on the fact that in Germany (and some other European countries) dividends are subject to a withholding tax (WHT) (broadly, tax on income from securities, deducted at source), which in general is credited against the income tax liability of the shareholder. In order to receive the credit it is necessary to have a withholding tax certificate, certifying that the tax has been withheld.

Until 2012, when the German tax law was changed, these tax certificates could be issued by the company paying the dividend and by the bank where the shares were deposited at the time when the dividend was paid. Where shares were traded immediately prior to the date when the dividend was to be paid, there was a risk that several tax certificates could have been issued, even though the tax was only paid once. In other cases the transactions were structured in a way that made it unclear whether the seller or the buyer of the shares should be considered the owner of the shares and thereby entitled to the tax credit. These cases gave rise to a substantial risk that the certificate had been issued to the wrong person, who then claimed the tax credit without having been entitled to it. This opened the door to multiple withholding tax reclaims in respect of one withholding tax payment. Observers have likened Cum-Ex to having one child while claiming child allowance for many children.

According to German tax authorities and criminal investigators, a large number of the Cum-Ex transactions were structured with the intention that several withholding tax certificates were issued even though the tax was actually only paid once. In other words, the transactions were structured to allow investors to make a claim for a rebate to which they were not entitled. In the Bonn case, the judge ruled that these trades were illegal and did not merely exploit a loophole in the law.

The two British traders convicted in Bonn on 18 March 2020 in connection with allegations that they arranged deals costing German taxpayers over $400 million in unpaid tax received suspended sentences of 22 and 12 months, respectively, due to their apparent co-operation with the German authorities, with one also being ordered to repay EUR 14 million in compensation from the personal profits he made. In contrast, a private bank also involved in the proceedings was ordered to repay around EUR 176 million ($187 million), a decision which it has stated it intends to appeal.

Given these allegedly fraudulent trades have purportedly cost treasuries upwards of EUR 55 billion Europe-wide, enforcement may not stop with this one prosecution in Germany or elsewhere in Europe where similar schemes are the subject of investigation.

Given the significant amounts presently being pledged by governments to bolster the global economy in the present crisis, they may seek to recover what they perceive as significant losses to the taxation authorities through so-called Cum-Ex trading.

The UK Position

In June 2017, the Financial Conduct Authority (FCA) conducted a review of the activities of firms involved in so-called ‘dividend arbitrage’, concluding that ‘some firms may not have identified the risk posed by contrived or fraudulent trading for the purpose of making illegitimate WHT reclaims’. The FCA highlighted the need for firms to monitor existing business and assess new business and stressed the importance of highlighting any concerns to the FCA in accordance with the Principles for Business.

Since then, and until recently, the FCA had remained silent on the issue of Cum-Ex. However, in a February 2020 speech, FCA Executive Director of Enforcement and Market Oversight Mark Steward confirmed that ‘the FCA has worked closely with European authorities for some time on a story that appeared this week about the seizure of a property in London as part of proceedings against a trader allegedly involved in dividend stripping tax avoidance schemes that have operated in Denmark, Germany, France and Italy.’ He went on to confirm that ‘the FCA had been investigating substantial and suspected abusive share trading in London’s markets that has allegedly supported these schemes. These investigations are now very close to their conclusion and decisions about action are imminent.’

What Are the Possible Implications?

UK Firms

Given the FCA’s 2017 insight into how it will view such trading activity, how it expects firms to tackle the associated issues, and its recent confirmation that it has been actively investigating conduct in the UK, firms that have failed to tackle such conduct may find themselves subject to the full range of enforcement powers available to the FCA, including public censure and potentially severe financial penalties.

With the recent convictions, increasing media coverage worldwide, and the investigations and litigation in various jurisdictions expected to intensify, firms may wish to consider the following.

a. Understand if trading activity similar to Cum-Ex trading has occurred. Ascertain whether fraudulent Cum-Ex trading has taken place within the firm, and if any, by whom and when. Understand the context in which trading was done in particular to confirm that the trading was undertaken in good faith.

b. If Cum-Ex trading has taken place, consider next steps. Next steps may include further investigation and/or necessary action flowing from investigation findings. Action may consist of making a report to the FCA in accordance with their principles of business. Such proactive reporting (i.e. before the FCA make contact) may place firms in a better position in terms of any penalty that may be incurred.

c. Risk Assessments, Systems and Controls, Due Diligence. Ensure systems and controls are in place to prevent fraudulent Cum-Ex or similar trading.


If the UK authorities pursue individual traders, the FCA may do so under the civil regime available to it which can lead to various sanctions including financial penalties and the removal of the trader’s ‘authorised’ status.

Alternatively, the FCA, HM Revenue and Customs (HMRC) or the Serious Fraud Office (SFO) may open criminal investigations for offences of fraud which carry a maximum prison sentence of 10 years.

As with all financial crime, any investigation will also focus on how the proceeds of the criminal conduct are dealt with, which could lead to further allegations of money laundering under Part 7 of the Proceeds of Crime Act 2002. This could include the concealment, conversion, or acquisition of such criminal property, offences which carry a maximum punishment of 14 years imprisonment.

Such sentences are severe in comparison to those handed to the two UK traders in Germany. In the UK, following a conviction for fraud involving a similar amount, the sentencing court would take a starting point of between three and seven years immediate imprisonment, depending on an assessment of ‘harm’ caused by the conduct.

Convictions may lead to the application by the prosecuting authority for an order confiscating any benefit from the criminal conduct. Such an application will necessarily involve the realisation of any available assets of the convicted person. Such orders can impose a sentence in default of up to a further 14 years.

Whilst UK prosecutors may be encouraged by the result of the trial in Bonn, securing convictions may not be straightforward. Those subject to investigation and litigation in Germany have advanced complex and technical arguments about the lawfulness of Cum-Ex trading, the legislative history and the apparent awareness of the authorities of the nature of the structures involved as well as the lack of intent on their part.

In addition, UK authorities will face the usual challenges of bringing complex and technical allegations of fraud to trial. Such challenges have been well publicised in the UK, particularly after a string of failed prosecutions in the UK by the Serious Fraud Office (SFO) and others. The challenges include, but are not limited to, the presentation of cases which may lack direct evidence of dishonesty as well as the involvement of expert evidence in order to explain complex financial instruments and terminology to a jury.

A forensic assessment of the underlying evidence will therefore be important.


Although the implications of the Cum-Ex scandal have been seen almost exclusively in Germany, the speech given by Mark Steward suggests that UK enforcement actions may be imminent.