Since 2011, investigations into dividend arbitrage transactions have been and still are ongoing in Germany and, in total, approximately 100 financial institutions are said to be subject to investigations. The discussion gained momentum and saw extended attention internationally when the "CumExFiles" were released mid-October 2018. CumExFiles is the project name for a joint investigation by 19 European media outlets from 12 countries, coordinated by the German non-profit newsroom CORRECTIV. The investigation team reviewed 180,000 pages of documents, finding that the practice was not unusual in Germany and appears to have been widespread across Europe. CORRECTIV report that the scandal has cost tax-payers across Europe up to €55.2bn.

What is "cum/ex" trading?

"Cum/ex" trading (also referred to as dividend stripping) involves the acquisition of real or synthetic shares just before the dividend (cum-dividend), and then selling the shares after the dividend record date (ex-dividend). The trades are conducted quickly meaning tax administrations struggle to identify the shares’ real owners, allowing both parties to claim tax rebates on capital gains tax that had only been paid once. Three parties are usually on the transaction – the owner of the stock, the bank or stockbroker which borrows the stock and sells it short, and a third party that buys the stock shortly before dividend day. The three parties often share the proceeds of the extra tax refund between them.

A loophole in the German tax code allowed the practice to run rife in Germany. Germany attempted to end the cum/ex practice by closing this loophole in 2012.

Who was involved?

The centre point of the scandal remains Germany, with national and international banks the focus of investigations. However, the German investigations into cum/ex trading forms part of a pan-European probe into the practice by a number of national regulators. The issue is now affecting several other European states, including France, Spain, Italy, the Netherlands, Denmark, Belgium, Austria, Finland, Norway and Switzerland.

The international dimension may arise through:

  • Actions by German authorities: trades were often processed by foreign custodian banks who in addition/alternatively controlled or lent capital to the schemes (Bank of America, Barclays, Macquarie, BNP Paribas and Soc Gen are said to have been implicated, with Santander being the latest to face a probe by the German authorities). German criminal and administrative law applies extra-territorially if the tax evasion took place in Germany; a participation in cum/ex trades abroad may suffice, there is no need for a further physical reference point in Germany.
  • Actions by other European authorities: there are/were a number of European jurisdictions which contained similar loopholes to that existing in Germany which were exploited, particularly after 2012, Denmark being a notable example. For example, there are civil proceedings in the High Court in London against 71 individuals and corporations (such as investment funds, who it is alleged received tax refunds to which they were not entitled). Denmark is also pursuing civil claims in the US.

What is the impact on financial institutions and D&Os?

  • Tax authorities can seek the repayment of tax refunds paid as a result of a cum/ex trade. Entities will also need to pay interest on the amounts at 6% per annum. In some cases, transactions can be interrogated as far back as ten years. There is some dispute as to the illegality of the transactions prior to the loophole closing in 2012 which will be examined if and when cases come to trial. The Cologne public prosecutor's office announced that it will bring one of the first cases to trial soon, with the trial expected to start in spring 2019. Cologne has been the centre of the criminal investigation in Germany due to the seat of the Federal Central Tax Office in Bonn, thus creating jurisdiction for the Higher Regional Court Cologne and its public prosecutor's office. The competent District Court Bonn has established four specialised chambers dealing with white-collar crime in anticipation of the caseload related to cum/ex.
  • Administrative offence proceedings can lead to fines and disgorgement orders against companies and individuals. Several financial institutions have paid fines in order to terminate the criminal investigation.
  • Criminal prosecutions of the acting D&Os based on possible tax fraud committed by the individuals and respective tax evasion committed by the involved institutions, thus exposing those involved to fines and/or imprisonment.
  • Entities may have their financial statements questioned/declared invalid. These entities potentially face tax claims in significant amounts.

There are also indirect exposures, for example, shareholder claims for damages, derivative claims against directors, and the opaque financial impact from the negative publicity.

Below is a snapshot of some of the actions that have already arisen:

  • Frankfurt prosecutors have charged six people (former bankers at Unicredit SpA's HVB branch and a former lawyer) in relation to short sales of shares on the German benchmark DAX between 2006 and 2008. The trades were valued at €15.8bn, which, according to the Frankfurt General Prosecutor's Office, cost tax authorities €106m. The bank settled the action and then brought a claim in 2016 for €140m against three former directors for their role in shaping the banks cum/ex trading policy. The criminal proceedings are still pending; the competent District Court Wiesbaden has to decide whether to admit the case to trial.
  • Cologne prosecutors have announced that a case will come to trial at the District Court Bonn in spring 2019. These proceedings mainly involve two of the six key witnesses who have been cooperating with the prosecution. The court has so far not signalled that it will grant leniency with regard to the key witnesses.
  • Cologne prosecutors have also initiated proceedings related to a major European bank (Santander) for short sale involvement in the cum/ex scandal.
  • The German regulatory authority, BaFin, shut down a financial institution (Maple Bank) in 2016 and the institution had to enter insolvency proceedings shortly thereafter.
  • Between 2015 and 2017, HypoVereinsbank paid large fines and has stated that all criminal investigations relating to cum/ex transactions had been settled.
  • DZ Bank, which was raided in July 2018, paid back €149m in wrongly claimed tax refunds plus interest to the German tax authorities. Four employees/former employees of DZ Bank are currently subject to a criminal investigation.

Impact on professionals

The CumExFiles investigation also highlighted that several accountants and lawyers were involved, either directly participating in the fraud or aiding and abetting the fraud. Professionals may, therefore, find themselves subject to administrative/regulatory/criminal investigations and may also face civil claims from shareholders and other parties for their role in setting up and advising on these transactions. Indeed, two partners at the Frankfurt office of a major law firm are now under investigation for aiding and abetting tax fraud related to cum/ex trades.

Professionals may also be indirectly affected. Authorities can exercise their criminal investigation powers to carry out raids and require production of information/documents pertinent to an investigation. These can be exercised against the targets themselves or against anyone who has information that may be pertinent to the investigation. Accountants and lawyers are frequently issued with production orders due to their handling of/involvement in tax affairs and the cost of compliance and disruption to the professional can be enormous. In addition, the process can throw up difficult issues in relation to confidentiality and privilege.

Impact on insurers

Activity against FIs and D&Os naturally impacts on D&O insurers, with insureds looking to insurers for cover, including for internal investigation costs, formal investigation costs and defence costs.

Depending on the wording, costs of such investigations may trigger policies but conduct and prior knowledge exclusions may bite, potentially leading to insurance disputes. Insureds may also look to insurers for indemnities in relation to any fines and penalties imposed, the insurability of which would then require analysis based on the applicable law of the policy in question.

Professional indemnity insurers are also exposed as a result of actions against accountants and lawyers.


Given the scale of the fraud, we can expect to see more and more actions arise in Germany and elsewhere in Europe. Indeed, in addition to what is already underway, on 4 December 2018 members of the European Parliament called for an inquiry to examine various aspects of the cum/ex scandal to establish the ‘real actors’ behind the scam, whether there were breaches of national laws and the actions undertaken by supervisors. It is intended that the probe will lead to reform and action. Further, in February 2019, the EU’s European Parliament adopted a detailed road map to tackle financial crimes. The recommendations adopted by the Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance include improving cooperation between authorities and setting up new bodies, such as a European financial police force. The Committee also recognised that the cum/ex fraud scheme exposed legal loopholes and that multilateral, not bilateral, tax treaties should be put in place to address the issue.

From the UK point of view, whilst the UK has, thus far, not been directly implicated in CORRECTIV's investigation, the FCA warned banks and interdealer brokers about dividend arbitrage in 2017 following a review in which a "small number" of firms were found not to be doing enough to assess why clients were undertaking transactions with the ultimate aim of claiming withholding tax. In its Market Watch dated June 2017, the FCA states that “this raises the risk that some firms may become involved in potentially contrived transactions created in order to support fraudulent withholding tax reclaims”. This, the FCA says, is potentially criminal, and could also amount to market abuse.

This is one to watch.