ICAP Memos Reveal Inner Workings of Now Notorious Cum-Ex Era
11 Apr 2021

ICAP Plc’s rules for running trades that enabled what German lawmakers have called one of the costliest tax dodges in history were clear: don’t ask, don’t tell.

“Do not enquire after the tax analysis of the German counterparty,” notes a 2008 memo signed off by a group of top officials at the brokerage. “Do not tell the counterparty to the German stock trade that we have sold short,” runs another directive.

The document, part of a Hamburg court case filed in January, highlights the tripwires that brokers on the firm’s structured-products desk had to navigate to enter into the trades. That dexterity helped make the deals a profitable niche for ICAP: the transactions pulled in 28 million pounds ($38 million) of revenue for the broker in 2006, or about 3% of the group total that year, according to another memo.

The filings also flag potential pitfalls if the procedures weren’t followed, including the risk of being drawn into a German tax evasion investigation.

That’s proved prescient as regulators across Europe today probe multiple finance firms that allegedly took part in the practice, which became known as Cum-Ex, a Latin term that means “with/without.” The strategy took advantage of loopholes to let multiple people claim ownership of the same stock and the right to a refund of taxes withheld from dividends. It is widely reported to have cost German taxpayers alone more than 10 billion euros ($12 billion).

Although it is contested whether such deals were illegal at the time, authorities in Germany and other nations affected now brand them as criminal and those investigations have drawn in banks like Deutsche Bank AG, Barclays Plc and Macquarie Group Ltd. as well as investment funds such as Duet Group. More than 20 people have been charged with various crimes.

And TP ICAP Group Plc, the company created after Tullett Prebon Plc bought ICAP’s voice-broking operations in 2016, says it has inherited a mounting pile of investigations and litigation.

As well as the civil lawsuit featuring the memos, which was filed against the firm by M.M. Warburg & Co., London-based TP ICAP says it’s aware of probes and proceedings involving the German Federal Tax Office, as well as prosecutors in Frankfurt and Cologne, and may face potential further civil cases. The broker has hired external lawyers and is carrying out its own investigation of “the relevant desk from 2006-2009,” according to the company’s 2020 annual report.

ICAP is also mentioned more than 800 times — more than any other broker — in the indictment of five former traders at UniCredit SpA’s German unit who are facing prosecution as part of another Cum-Ex case that began last month in the city of Wiesbaden.

Pivotal Role

The various cases underscore how ICAP and other interdealer brokers — intermediaries in the financial markets that match buyers and sellers — stood at the center of these now-notorious deals. Martin Shields, one of the former UniCredit traders facing charges who was also convicted in a separate trial last March, described them as “the glue that held the system together.”

Along with ICAP, the “most significant” players also included Equinet Bank AG, Novus Capital Markets Ltd. and Tullett Prebon itself, according to Shields’ testimony.

By Donal Griffin, Karin Matussek, and Ellen Milligan, Bloomberg, 9 April 2021

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