Central Bank told regulators it was ‘not resourced’ to investigate cum-ex tax fraud

The Central Bank told European financial regulators it was "not resourced" to investigate a complex trading scheme, known as cum-ex, which defrauded billions of euro from tax authorities in several EU countries.

The Irish regulator said this was because market surveillance for such suspected tax reclaim schemes was outside of its remit.

Cum-ex involved a network of traders, hedge funds, asset managers and banks claiming multiple refunds on dividend withholding tax that was only paid once, or not at all, through a series of trades.

An investigation by The Irish Times, in partnership with German newsroom Correctiv and 15 other media organisations, examined a large leak of documents related to the scheme, the Cum-ex Files.

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While Irish tax authorities were not defrauded, Irish investment funds were used as vehicles to carry out trades targeting larger EU countries, such as Germany.

The Central Bank told the EU markets authority it was “unlikely” cum-ex schemes could have been used to claim multiple tax refunds from authorities in Ireland.

However, in a letter dated July 12th, 2019, the Central Bank said “Irish entities may be used to engage in such schemes” to claim double refunds in other jurisdictions.

Illegal

The scheme, since deemed illegal by Germany’s Federal Court of Justice, worked by buying and selling huge volumes of shares in a co-ordinated circuit, at key times around the date companies paid out dividends.

The aim was to create confusion as to who was owed a refund on dividend withholding tax, allowing it to be claimed multiple times, costing European tax authorities billions of euro over two decades.

One source involved in cum-ex trades confirmed Irish tax authorities would not have been a target, given the country’s small size.

The Central Bank said it was “not resourced for the detection or investigation” of such schemes generally, which were outside its remit.

Similarly, the Central Bank told the European Banking Authority it had no plans to carry out any review into cum-ex, in a letter dated 18th July, 2019, seen by The Irish Times.

The regulator stated it had been notified by “two credit institutions operating in Ireland,” that they had been included in German authorities’ investigations into cum-ex.

The Central Bank said it had “discussed the cases with the two entities involved and is keeping a watching brief on these cases”. It added that “no supervisory actions were taken” against either financial institution.

Investment funds

The Central Bank also had engagement with two Irish investment funds involved in the scheme between 2010 and 2012, according to documents in the Cum-ex Files leak.

Sanjay Shah, one of the most-high profile hedge fund managers involved in cum-ex, set up Broadgate Ireland Funds in early 2010, to carry out trades.

In an interview with German outlet ARD Panorama, Mr Shah confirmed the Central Bank was “unhappy” with some issues related to the Irish fund.

The problems were discussed at a “difficult” meeting, where he said “we answered all their questions”.

Mr Shah says he took advantage of legal tax loopholes.

A non-executive director of another Irish fund used for cum-ex trades, told investigators he remained on the board of EQI Irish Funds at the request of the Central Bank in 2012.

He said he had attempted to resign, but remained until early 2014 as the Central Bank "wanted some form of continuity on the board in order to deal with a number of outstanding issues". EQI's founder Salim Mohamed did not respond to requests for comment.

The Central Bank said it could not comment, as it was “precluded by strict statutory conditions of confidentiality from disclosing any regulatory or supervisory engagement with the firms it supervises”.