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A UK trader is facing extradition to Denmark to stand trial over the share-selling tax scandal Cum-Ex. Salomé Lemasson of financial crime specialists Rahman Ravelli explains why this cannot be viewed as an isolated case.

It is, on the face of it, only one case: a London magistrates’ court has ordered the extradition of former trader Anthony Patterson to Denmark to face trial over his involvement in Cum-Ex. Putting it bluntly, Cum-Ex is a multinational tax fraud probe focused on a large volume of transactions before 2012 that exploited a loophole in dividend payments.

In Denmark, Mr Patterson faces a trial alongside his former boss Sanjay Shah, with both accused of being involved in the share-selling practice that managed to take millions out of Danish state coffers. If found guilty by Danish courts, Patterson risks up to 12 years in prison.

Mr Patterson’s argument that extradition would hamper his ability to contest civil proceedings brought by the Danish tax authority in the UK High Court over similar allegations was rejected by magistrates. He will now face charges in Denmark of aiding and abetting fraud, and conspiracy to aid and abet fraud. This latest development follows six years of investigations into Cum-Ex.

In the practice that Cum-Ex investigates, shares were traded in a way that disguised the identity of their owner so that more than one party could claim tax rebates on capital gains tax, even though that tax had only been paid once, at most. The authorities in various countries eventually caught on to what was happening and started taking action to both recoup what they believed they had lost in tax revenue and – as Anthony Patterson has found out – hold to account those they believe are responsible. Denmark is, alongside Germany and Austria, one of the most active countries in prosecuting Cum-Ex cases.

A bellwether case?

Mr Patterson’s case should not be viewed in isolation. If anything, the authorities in various countries will see it as a very important first piece that they have put in place as they look to complete an elaborate jigsaw and pursue those they blame for the draining of state funds via Cum-Ex.

At the time of writing, Mr Shah has so far been successful in overcoming Danish efforts to extradite him from Dubai. But he has been ordered to pay Danish tax authorities the equivalent of $1.25bn over his involvement in Cum-Ex. While he has arguably become the poster boy for Cum-Ex, he is far from the only individual that the authorities in various countries are seeking.

This now means that a number of financial institutions – and many individuals who worked or still work for them – are having to reassess their behaviour from previous years. As German courts held it, it will be increasingly difficult to argue for the existence of a legal and tax loophole to try and avoid criminal liability.

It is now 10 years since Cum-Ex was first recognised. Back then it was thought to be a problem that only affected Germany. But further investigations revealed that a dozen or so other European countries may also have been affected. And now those countries are looking to regain their losses and punish those they blame for losing them in the first place.

Take pre-emptive action

We are in a situation where the amount of Cum-Ex trading under investigation, the number of organisations believed to have taken part in it and the huge sums involved make it an issue that will be present for a long time. The repercussions for organisations and individuals could be seismic.

For many, there will be a need to take the most appropriate advice at the earliest possible time in order to determine the best course of action. Taking a ‘head in the sand’ approach and hoping any Cum-Ex problems will blow over is simply not an option. The storm clouds created by Cum-Ex are moving around the globe and many states are now looking to identify the architects and operators of what is now increasingly being viewed as an illegal practice. 

This means that anyone who feels they may be implicated has to be prepared for the possibility that they could, at some point, become the focus of investigators’ attention and not only in their own jurisdiction. This is one of the key aspects of Cum-Ex prosecutions: they target not only banks or legal entities, but also individual traders based outside of the concerned jurisdiction.

anyone who may be implicated must also take a cross-border view

For those who think they may face questions, monitoring Cum-Ex investigations throughout Europe is a necessary first step, as is seeking legal advice from those who have experience of those jurisdictions.

It has already been made clear that Cum-Ex is an issue that crosses borders. There have been numerous examples of the authorities in one country being active in another in order to hold to account those they believe are responsible for Cum-Ex practices. There would be little point, therefore, in anyone who anticipates being investigated over Cum-Ex taking the view that they only need to be concerned with the relevant law in the country in which their office or bank account is based. The very nature of Cum-Ex has made the investigations multinational, so anyone who may be implicated must also take a cross-border view of the situation.

On an internal level, any organisation that may be the subject of Cum-Ex investigations has to carefully plan and conduct an internal investigation to identify and remediate any possible red flags. Such remedial actions will obviously not magic away any past involvement in Cum-Ex, but they will help circumscribe any potential wrongdoing. It is also likely that this will be taken into account by the authorities when they decide whether to prosecute and, if they do, the size of the penalties they seek to impose.

Conclusions

In any investigation – whether it be into Cum-Ex or otherwise – the issue of evidence is central to how it proceeds. Any potential subject of a Cum-Ex probe must ensure all relevant documents are retained and properly stored. This is particularly true for emails, as retention policies can often result in the automatic deletion of crucial evidence.

Implementing a litigation hold may be the first thing to do if and when doubts arise as to the possibility of a Cum-Ex investigation. This course of action may form the bedrock of any defence and could be the most obvious way of demonstrating a person’s innocence to investigators. Again, seeking appropriate cross-border legal advice will be key in constructing an efficient defence strategy. 

With an unspecified number of individuals and organisations set to face such situations, there will be many who need to act now to minimise the fall-out that may be coming.

Salomé Lemasson is of counsel at financial crime specialists Rahman Ravelli. 

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