In late 2018 the European Parliament asked the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) to ‘conduct an inquiry into dividend arbitrage trading schemes such as cum-ex or cum-cum.’ The EBA has now published its report, concluding that under the current regulatory framework, dividend arbitrage trading cases may give rise to questions about the adequacy of financial institutions’ internal anti-money laundering systems and controls and governance arrangements, and setting out an action plan to enhance the future regulatory requirements applicable to dividend arbitrage trading schemes. This reinforces the message that any financial institutions that may have been involved in this activity need to consider the prospect of investigation from regulators as well as tax authorities.

Unlike the earlier ESMA report, the EBA does not spend time trying to differentiate between dividend arbitrage generally and “multiple WHT refund schemes”. Distinctions which may be very significant to tax authorities are clearly less important to regulators. However, readers of the EBA report may well ask how systems are supposed to draw the line between tax evasion, tax avoidance and tax planning when the report itself does not define clearly the type of activity it is targeting.

The EBA found that national regimes did not always treat such schemes as tax crimes, and therefore they would not generally be considered as a "predicate offence" to money laundering.  However, the EBA noted that banks are required to "implement policies and processes to evaluate and manage the exposure to operational risk, which includes internal and external fraud and the risk of losses caused by the circumvention of laws by a third party". Therefore the EBA expects that, under current AML/CFT regimes, regulators will take a "comprehensive view of the risks highlighted by dividend arbitrage trading cases looking at the adequacy of financial institutions’ internal controls and internal governance arrangements, [and] their systems and controls of AML/CFT."

The EBA found that, despite these governance and control requirements, most AML/CFT regulators had not previously considered the AML risks of dividend arbitrage schemes or evaluated banks' ability to detect potential tax crimes. The EBA concluded that it expects regulators to consider financial institutions' controls to prevent and detect suspicions of tax crimes in their overall evaluation of AML/CFT compliance. It seems that such evaluation will be on a going-forward basis, as the EBA says that "[w]here appropriate, competent authorities should take mitigating measures" such as conducting a thematic review of the issue within their jurisdiction (including review of FIs' relevant AML/CFT governance and controls), and setting out regulatory expectations with respect to dividend arbitrage schemes.

To ensure more consistent treatment of such schemes, the EBA proposes to:

- amend its Guidelines on Internal Governance, Guidelines on the Assessment of the Suitability of Members of the Management Body and Key Function Holders, and Guidelines on Supervisory Review and Evaluation Process (SREP) 

- monitor prudential colleges' approach to guidance in the Supervisory Guidance plan

- assess the responses the EBA will receive to its ongoing consultation on its Guidelines on ML/TF risk factors to identify whether the existing references to tax crimes contained in the draft Guidelines are sufficient to address the risks arising from dividend arbitrage trading schemes; and

- amend its Guidelines on Risk-Based AML/CFT Supervision, and Opinion on ML/TF Risks to include AML/CFT risks associated with tax crimes 

The EBA will also allocate additional resource to evaluating regulators' and authorities' approaches to managing AML/CFT risks associated with tax crimes. 

While the EBA is amending applicable guidance, it expects regulators and competent authorities to evaluate the risks of tax crimes and adequacy of financial institutions' governance and controls to detect suspicious activity, under existing AML/CFT regimes. It is unclear whether this will mean any regulatory action for controls failings even where dividend arbitrage was not considered a crime.

See our prior alert on this topic here.