The people locked up are thought of as unsympathetic characters who deserve what they get.
Toronto: headquarters of Royal Bank of Canada, accused of dividend tax scam/ilkerender
US regulators last night accused Royal Bank of Canada (RBC) of trading hundreds of millions of dollars in illegal futures trades to secure ‘lucrative’ tax breaks.
In a New York federal court lawsuit filed yesterday, the Commodity Futures Trading Commission (CFTC) accused Canada’s largest bank of a ‘wash trading scheme of massive proportion’.
The CFTC, in its 25-page deposition, claimed RBC traded futures between its own offshore subsidiaries to hedge risk when the bank invested in Canadian stocks which, crucially, were eligible to hefty tax breaks on dividend payments. The alleged scam took place between 2007 and 2010.
In the Wall Street Journal, RBC dismissed the allegations as ‘absurd’ and said it is determined to defend itself against ‘such baseless allegations’.
The case is one of the biggest ever filed by the CFTC. The CFTC declined to say whether it is investigating similar dividend washing instances.
But dividend washing is not new. Last December, the Bureau reported how some of the city of London’s biggest banks are behind a huge tax avoidance trade ‘cheating’ European countries of hundreds of millions of euros a year.
Our two-month study uncovered a discreet $102bn (£64bn) market in European shares whose ‘central’ purpose is tax avoidance. The Bureau’s analysis suggests the European tax loss – now mainly understood to affect Germany, Italy, Austria and Belgium – is up to €595m (£496m) a year.
The Bureau understands European tax authorities are starting to take an interest in the shadowy world of dividend washing, a scheme with striking parallels to the allegations RBC now faces.
Also known as dividend arbitrage, the trade in Europe is currently in full swing as most companies pay out dividends in April and May.
To outsiders, the trade is fiendishly complex. Essentially it involves banks or hedge funds buying and then lending high-yielding equities in German, Belgian, Spanish or Austrian companies. Banks invest in futures in that same stock to offset risk. The stock is lent to subsidiaries or other institutions through a network of low- or no-tax jurisdictions before returning the equities to the original owner using a subsidiary in another tax haven. In this way, banks can avoid the 15% average withholding tax levied on dividends in European countries.
Tax avoidance is central to dividend arbitrage, according to leading US consultancy Finadium, one of the few to have studied the practice. In this respect, dividend arbitrage appears to fit into what Financial Services Authority chairman Lord Turner termed a ‘socially useless’ practice.
As regulators in the US and EU catch onto this trade, will European governments make concerted efforts to clamp down on dividend arbitrage with the same vigour they bring to bear on public spending cuts?