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ACUMINOR REPORT 2019:4
During the last years several large-scale money laundering schemes have been exposed. Last year alone brought forth both the greatest tax swindle in the history of Europe, and potentially also the largest case of money laundering in the world. These cases revealed a world of professional money laundering, insiders, aggressive tax planning, tax havens, corrupt politicians, lobbyists and organised crime groups.
“CUM/EX SCHEMES ALLOW INVESTORS, BY USING MULTIPLE TRADERS
IN A VERY SHORT PERIOD OF TIME BEFORE THE DIVIDEND DISTRIBUTION,
TO ILLEGALLY AND REPEATEDLY CLAIM BACK WITHHOLDING TAX.”
Drain the tax system
The Cum/Cum and Cum/Ex schemes is nothing new for 2019. On the contrary- they allegedly have been around since the beginning of the 21st century, if not longer. The aim of the Cum/Cum schemes is to avoid withholding tax; internationally the different variants of these schemes are known as dividend arbitrage or dividend stripping and are not considered to be illegal (but questionable).
Cum/Ex schemes allow investors, by using multiple traders in a very short period of time before the dividend distribution, to illegally and repeatedly claim back withholding tax. The scheme, which is highly complex, involves the participation of investors across jurisdictions whereby high volumes of trading transactions are carried out in an organised and sophisticated way. The scheme and its transactions are designed to not interfere with price formation and therefore not detected by market surveillance systems monitoring for insider dealing and market manipulation.
Germany, reported as one of the central hubs in these schemes, changed the legislation to prevent Cum/Ex schemes in 2012, and Cum/Cum schemes in 2017. However, in 2018 the journalist network ‘Corrective’ found that Cum/Ex, Cum/Cum and several similar schemes were still ongoing. Other identified countries considered vul- nerable for these schemes were, among others, Denmark, Spain, Italy, Norway, Sweden and France. It was also announced that European taxpayers had been defrauded of at least EUR 55 billion since the schemes started.
This called for action in numerous other countries to protect their citizens from losing governmental finances to aggressive tax planning. The question whether these schemes are to be considered tax evasion lays upon the domestic courts to decide and currently private individuals (investors) stand accused of aggravated tax evasion in Germany. Cum/Cum and Cum/Ex schemes illustrate the importance of having regulations to counteract the misuse of loopholes in the legislation. Cum/Cum and Cum/Ex has been considered the largest tax swindle in the history of Europe.
Become rich on crime or start a war (and get away with it)
The EU memberships of Estonia, Latvia and Lithuania in 2004 increased the influx of money and investments in the Baltics and for a period the region flourished.
Several of the larger investors in the region were Scandinavian banks, and the Baltic banking sector became dominated by Scandinavian bank subsidiaries.
It seems however that the business opportunities came with some drawbacks. Throughout 2019 there have been continuous media reports about suspicious transactions in the Baltic operations of major Nordic banks. It is believed that more than EUR 200 billion in illicit funds have been transferred through these banks, originating from for example from Russia, Azerbaijan, Moldova and other Eastern European countries. The main media reporting has been related to sanctioned entities in Russia connected to the Crimea annexation, organised crime groups and politically exposed persons under corruption charges.
The alleged crime schemes follow a pattern that has been known for years. From a customer risk perspective, the pattern can be divided into two main categories:
Private individuals, who themselves are high-ranking public officials or extremely wealthy businessmen with close ties to government leaders. These individuals might not always be formally seen as a politically exposed person or known associate. However, the close connections between their business and the public sector has been known to enable for example corruption, tax crime and exposure to sanction programmes.
Companies, that are created exclusively to enable large-scale money laundering without revealing any connections to the main perpetrators. These companies often have a complex ownership structure, usually in legal forms such as Limited Liability Company, Trust, Private Limited Company (Ltd), Foreign legal persons, Other foundations and funds, Public Limited Company (Plc) or Limited Liability Partnership (LLP). The companies can be registered in tax havens (offshore) as well as in countries such as Sweden (onshore-offshore).
The companies can be registered in tax havens (offshore) as well as in countries such as Sweden (onshore-offshore).
“THROUGHOUT 2019 THERE HAVE BEEN CONTINUOUS MEDIA REPORTS ABOUT SUSPICIOUS TRANSACTIONS IN THE BALTIC OPERATIONS OF MAJOR NORDIC BANKS.”
Large-scale money laundering – an international problem
There are many things to learn from previous cases, one of them being that sophisticated money laundering schemes can take a long time to plan – but once the plan is in place it may last for decades. Large-scale money laundering is by its very core an international problem, as it relies on cross-border transactions and services. Cross-border transactions are fast and easy, whilst cross-border law enforcement investigations are not.
We just have to accept the fact that criminals will always look for new opportunities when old crime schemes no longer have the (un)desired effect. Large criminal profits will continue to be generated across the globe, and there is no doubt that new complex ways to launder the profits will arise. The last few years there has been a trend towards increased cooperation between criminals, both domestically and internationally. There is also a significant criminal use of hired specialists such as lawyers, tax planners, accountants and real estate agents to help design and carry out large-scale money laundering schemes.
Substantial efforts have been made by society to combat money laundering, terrorist financing and sanction violations – harmonisation of regulations, public-private partnerships and an enhanced financial crime risk management within the financial industry to name a few.
It is however painfully clear that the criminals are going to be ahead of us trying to stop them for a long time still. If we make sure to actually know and mitigate the risks in our own organisations – using a true risk-based approach – we might however minimise the distance between us and them. At least we can force them to keep moving and increase the risk of getting caught. Ultimately, it’s about making sure that society stays secure, safe and democratic.
You are free to use this report for your own personal development, in internal training or in other risk management activities. You are of course not allowed to resell this report, nor claim that you have made it yourself.
Please remember to state the source as follows:
Acuminor. (2019). Destabilising society – Large-Scale Money Laundering. Report 2019:4. Stockholm: Acuminor.
© Acuminor 2019
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