On 12 May 2020, the European Banking Association (EBA) published an inquiryand announced a 10-point action plan on dividend arbitrage trading schemes and related threats to the integrity of the financial system. In 2018, the European Parliament had commissioned the EBA to conduct an inquiry after the Correctiv investigative journalism newsroom had exposed the fact that 11 Member States jointly lost over EUR 55 billion in dividend tax revenues due to what is termed cum-ex and cum-cum dividend arbitrage. Moreover, a large-scale criminal investigation in Germany had linked several banks to these practices.
Cum-ex is a criminal type of dividend arbitrage in which dividend tax that was paid once is fraudulently reclaimed multiple times. Cum-cum aims to ensure that less dividend tax is paid than the actual tax liability by transferring shares temporarily to a third party at the time of dividend distribution and subsequently having them returned. Although this is not a criminal offence, it is contrary to the purpose and intent of tax laws.
The EBA stresses that banks must organise their operational management in such a manner as to ensure the robust management of all relevant risks. These include the risk of becoming involved in or facilitating tax fraud such as dividend arbitrage, and the laundering of proceeds. The EBA notes that there is a strong link between weaknesses in operational management and the risks of becoming involved in tax fraud, such as dividend arbitrage, and related money laundering risks.
It expects supervisors to monitor these risks, assess prudential and integrity risks in conjunction, and actively cooperate with tax authorities.
We endorse the EBA’s findings and its expectations for banks and supervisors. We ensure they are reflected in our supervision, including in our regular thematic examinations and the good practices on tax integrity risks which we published. We also view this in a broader perspective, monitoring not only risks related to dividend arbitrage, but also how banks manage the prudential and integrity risks related to tax structures overall.
In its 10-point action plan, the EBA states that it will closely monitor the risks of financial and tax fraud, and amend its Guidelines on internal governance, suitability of directors, SREP, and risk relating to money laundering and terrorist financing. Subsequently, it will carry out an inquiry under Article 22 of the EBA Regulation into the way in which banks and supervisors comply with these amended Guidelines with regard to the risks related to dividend arbitrage.