Banks in France face more than US$1.1 billion fines after raids

French banks including Societe Generale and BNP Paribas face collective fines of more than US$1.1 billion as part of a probe into tax fraud and money laundering related to dividend payments. 

HSBC Holdings, Natixis and BNP’s Exane unit are also part of the investigation, according to the prosecutors office in Paris, which said that the fines include penalties and back interest. Preliminary investigations related to the raids were opened in December 2021, the prosecutor said. 

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.

BNP, HSBC, and Natixis representatives didn’t immediately respond to requests for comment. A spokesman for SocGen confirmed that the bank is part of the probe. 

The raids add to further negative sentiment around the banking industry in both the US and Europe, where investors have been hit by the emergency rescue of Credit Suisse Group and seizure by regulators of Silicon Valley Bank. 

SocGen declined as much as 2.4 per cent before paring gains to trade down 1 per cent as of 1.03 pm in Paris. BNP was 0.5 per cent lower and HSBC fell about 0.2 per cent in London.

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The French investigation, which the prosecutor said has been in preparation for months, involves 16 local magistrates, more than 150 investigators and 6 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 Cum-Ex 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.

Cum-Cum has been widely practiced because it was believed to not raise any legal issues in the same way that Cum-Ex did. That long-running investigation has swept up thousands of potential suspects acrosss the financial sector and seen almost every major international bank raided in Germany. It has spawned civil and criminal cases in Germany, the UK and Denmark.

The French prosecutor also invited anyone wishing to bring further information related to the French inquiry to come forward. BLOOMBERG