Banks raided in massive tax fraud case

France's financial prosecutor raided some of the biggest banks in France yesterday including Societe Generale, BNP Paribas and HSBC (0005) as part of a probe into tax fraud and money laundering related to dividend payments

Natixis and BNP's Exane unit are also being searched as part of the investigation.

The raids relate to a dividend arbitrage strategy known as cum-cum where shareholders transferred stock for a short period to investors based abroad to avoid a dividend tax. Investors held the shares during the period when dividends were paid out and either weren't taxed or taxes were refunded. They then sold the securities back to the original owner and the amount saved was split between the parties.

The French investigation involves 16 local magistrates, more than 150 investigators and six prosecutors from Cologne.

The avoidance of tax payments on dividends in Germany has been an ongoing scandal in that country for the best part of a decade. A similar scheme, known as cum-ex, allowed short-sellers and the actual holder of shares to all claim tax credits on a dividend paid only once.

A trader in a German trial in 2019 told the court that cum-ex was five to six times more profitable than cum-cum. However, cum-cum was far more widespread, especially in interbanking trading, as the legal risks were deemed to be much lower.

A cum-ex investigation by a group of European news outlets showed the amounts are suspected to have reached EUR140 billion (HK$1.19 trillion) over 20 years.