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The FCA has fined Sapien Capital Limited £178,000 in its first ever case related to cum-ex trading, dividend arbitrage and withholding tax reclaim schemes. On 6th May, Sapien Capital, a UK based corporate finance advisory and brokerage firm, were found to have had significant gaps in their financial crime systems and controls, which led to material risk of facilitating fraudulent activity and money laundering.
Between February and November 2015, Sapien executed purported Over-The-Counter (OTC) equity trades on behalf of BVI and Cayman Islands companies introduced by four authorised entities known as the ‘Solo Group’. The purported trades consisted of a circular pattern of “extremely high value” OTC equity trading, back to back securities lending arrangements and forward transactions involving EU equities on or around the last cum-dividend date. In certain jurisdictions, including Denmark and Belgium, this can give rise to a right to claim a rebate on withholding tax.
The purported trades performed by Sapien amounted to roughly £2.5 billion in Danish equities and £3.8 billion in Belgian equities, giving rise to circa £899 million and £188 million withholding tax reclaims respectively. This resulted in substantial pay-outs by the Danish and Belgian authorities. Sapien themselves received a gross commission of £297,044 in respect of the trades, representing 13% of their total revenue for the February to November period. The trades are recognised as ‘purported’ in acknowledgement of the lack of evidence that either Solo’s clients actually owned the shares or Solo Group facilitated custody or settlement of the shares, which the FCA has deemed highly suggestive of sophisticated financial crime, especially in the context of the volumes concerned.
Sapien’s shortcomings were many and led to failures in assessing the risks related to the client relationships and detecting “implausible” volumes of activity. They included:
- Inadequate customer and enhanced due diligence policies and procedures
- Inadequate transaction monitoring procedures and processes, including suspicious activity reporting
- Inadequate customer risk assessment processes
- Insufficient customer due diligence, including deliberate alteration of internal forms under client pressure
- Failure to gather sufficient expected activity information
- Failure to apply enhanced due diligence in spite of high risk factors present
- Failure to accurately categorise and risk assess the clients
- Failure to conduct transaction monitoring and recognise numerous red flags on the purported trades
- Failure to report suspicious transactions despite concerns raised by both employees and the FCA.
The failings in this case clearly go beyond inadequate systems and controls, demonstrating Sapien’s deliberate efforts to obfuscate (already lacking) controls and ignore red flags that were in their line of sight. The severity of this is reflected in the Regulator’s response.
What is also clear from the Regulator’s final notice is the focus on proportionate and appropriate risk sensitive controls, and firms’ ability to comprehend and react to the risks in front of them. This serves as a lesson to all firms about the relevance of their controls and the extent to which they are fit for purpose; not just to meet regulatory requirements, but to mitigate actual financial crime risk.
If you would like to talk to Bovill’s financial crime experts about the appropriateness of your financial crime controls, please get in touch.
You can read the FCA Final Notice here: Final Notice 2021: Sapien Capital Limited
