The City regulator has fined Sapien Capital £178,000 after it failed to carry out proper due diligence on a client likely participating in financial crime.
Between 10 February and 10 November 2015, the boutique investment bank failed to have in place proper systems to find and mitigate the risk of being used to facilitate fraudulent trading and money laundering in relation to business introduced by the Solo Group, the Financial Conduct Authority (FCA) said.
The Solo Group trading was characterised by what appeared to be a circular pattern of extremely high value trades undertaken to avoid the normal need for payments and delivery of securities in the settlement process, according to the watchdog.
The trading pattern involved the use of Over the Counter (OTC) equity trading, securities lending and forward transactions, involving EU equities, on or around the last day securities were cum dividend.
The way these trades were conducted by the Solo Group and their clients, in combination with their scale and volume, were highly suggestive of financial crime, and appear to have been undertaken to create an audit trail to support withholding tax reclaims in Denmark and Belgium.
Sapien executed purported OTC equity trades to the value of approximately £2.5bn in Danish equities and £3.8bn in Belgian equities.
The FCA’s investigation found no evidence of change of ownership of the shares traded by the Solo clients, or custody of the shares and settlement of the trades by the Solo Group.
Solo Group’s trading relates cum-ex trading, the FCA said.
The cum-ex scandal led to billions of euros in losses for the treasuries of countries such as Germany, Denmark, France and Italy, and has led to arrests, raids and court cases dragging in some of the financial world’s largest players.
The name comes from the Latin for with-without and refers to the stocks with and without their dividends.
Cum-ex trading involved using a now-closed legal loophole to claim tax credits for both buyers and sellers of shares by buying shares just before their dividends expired and then selling them on straight away.
Numerous banks and investors are being scrutinised for their role in it.
Mark Steward, director of enforcement and market oversight at the FCA, said: “These transactions ran money laundering and other financial crime risks which Sapien incompetently failed to see.
“The FCA expects firms have systems and controls that test the purpose and legitimacy of transactions, reflecting scepticism and alertness to the risk of money laundering and financial crime, and failures here constitute serious misconduct.”
As Sapien agreed to resolve all issues of fact and liability and entered a settlement agreement with the FCA, it qualified for a 30 per cent discount.
The fine was then further reduced from £219,100 to reflect Sapien’s serious financial hardship.
The FCA said its investigation into the involvement of UK based brokers in cum/ex dividend arbitrage schemes is ongoing.