This is an incredible story. In short: Denmark automatically withholds taxes on dividends. If you’re a foreign shareholder, you can apply for a refund on the withholdings. But they weren’t actually checking whether you owned the shares.
No, they were checking buy orders but these were canceled after refunds. The fraudsters had a scheme with several American pension plans which where bogus trading with each other. It's a fraud.
The article, which appears to be trying its hardest not to describe what happened, specifies the following:
1. There was a pool of retirement accounts that traded with each other.
2. In an example of the scam, one of these accounts would place an order to sell Danish stocks short, presumably cum-dividend.
3. Another account would respond by placing an order to buy the same stocks. This order never went through, presumably because it was placed at a lower price point.
4. The "buy" account would get its dividend taxes spuriously refunded and then cancel the buy order. The "sell" account would cancel its sell order.
I don't see what the role of the "sell" account is. It looks to me like you could do exactly the same thing with just the "buy" account.
In this case, though, it involved a bank that owned the shares: The bank would loan the shares to a shorter, the shorter would sell them to a buyer, and both the bank and the buyer would collect the dividend refund.
I wonder if there's some detail the NYT author missed in terms of double ownership that would make the short sale make more sense.
A short sale that's unwound after the dividend makes a lot more sense. Both the buyer and the lender of the shares are owed a dividend, and depending on how the records reflect that, I could see both being able to claim the refund.
Under US law, a dividend paid to you by a borrower is taxable as ordinary income, not as a qualified dividend -- usually the borrower (short seller) will pay a premium on the interest to reflect the difference in effective tax rates.
I don't know the rules for Denmark, but it seems that having a withholding requirement on the dividend payer ads to complexity, because it requires a refund process. It might be better to have simply required reporting of the income, and maybe required withholding by brokerages.
Perhaps they should have been able to detect a mis-use of this scale because the refunds exceed the deductions by a wide margin. Or perhaps a lot of people never request a refund so they were used to keep billions of dollars in dividend taxes so this went under their radar?...
An interesting thing that a lot of people will find unacceptable is that a lot of banks have desks that exist explicitly to exploit this type of loophole. It's very lucrative. It's also pretty technical, you need to know a lot about the laws that apply to each country along with all the mechanisms for getting money from the authorities. Not something your average trader knows. I certainly did not until I made friends with some of these guys.
As for this claim that the guy makes, that he's just exploited a loophole, none of the guys I know in this niche believe that. There are also plenty of rumours surrounding his character, in the sense of "is he an honest guy", along with stories about how he might be lacking in the scruples department. None of which is hard evidence, of course.
On that note, I know a person working in an anti-money laundering office in a major bank. It's like a private detective force. Their system throws a bunch of automatically flagged accounts, they go through each one, looking for signs of not paying taxes, money laundering, crime, etc. They not only look at what you do in their bank but also they'll look at your social media profiles or anything else they can get their hands on. A lot of anecdotes of people receiving lots of small payments and when you look at their Facebook profile you see their selfies with guns and drugs. They would then compile a dossier and pass that on to the real cops.
Apparently, 9/11 is relevant here, because the bank through which it was financed just stopped paying the fine a few years ago. It was a pretty big sum. The bank was guilty of not policing its clients well enough.
One way in which a lot of terrorism is financed relatively safely is simply by switching banks, because banks don't have an adequate data-exchange mechanism. So for example, you fool one bank that the money being sent from Saudi Arabia to UK is an uncle sending money to a niece studying abroad. That looks normal. But then that money is sent from the niece to some third person, which might be suspicious. But if that third person uses a different bank than the niece, then this third person's bank will actually have no idea that one bounce ago the money was in Saudi Arabia. If the bank where the money first landed in UK didn't react, the money was moved successfully. I.e. the chances of it being traced back to Saudi Arabia are slim. Add a few more hops through different banks and tracing theses transactions becomes a nightmare.
This mess has two reasons, as far as I can tell. One is that there isn't a good way for banks to exchange data. They pretty much have to call the other bank and ask. The other reason is that they're policing themselves. Why do we have a decentralised money police?
That last question sort of leads me to my last point. This person I know confided that the distressing part of the job is that often you're helping put people in jail for dabbling in small crime (think selling some weed), but you're instructed to not pursue the big clients. In my friend's words, that's because the bank makes money off of the big clients, but the small ones are numerous, therefore expendable. They have to be able to demonstrate that they are thwarting money laundering and terrorism financing, meanwhile the big money crimes slip by unnoticed. So for the bank it's advantageous to do the policing themselves, because then they can discriminate.
If you're interested in the question you posed ("why do we have a decentralized money police?"), in part it is the consequence of a series of historical accidents, but you can get a pretty good answer from the book "Treasury's War."
That's just one issue facing the Danish tax authorities. The last 10 to 15 years have seen the politicians implementing numerous saving plan for SKAT. Among other things implementing new software and firing the people it would be replacing, before the software was even written. The software alone costed 260 million USD, and the project still failed. As an added bonus SKAT had to give up on collecting 300 million USD in old debt.
This article is one of the weirdest I've ever read as a dane. We have a vat refund system, that paid out 120 billion danish kroner to companies that weren't meant to have those 120 billion danish kroner.
It was made possible because the audit of every vat refund was just one guy, and that was ridiculous, but those 120 billion still exited our treasury.
It's kind of easy to prove wrong doing on vat, if your company hasn't registered a single transaction, then your company simply isn't owed any vat. Yet the article seems to want to make this complicated...
Yes, that's a VAT. But this case is described as being about dividends, which are not goods or services being traded. I've never heard of a tax code where dividends were subject to VAT. Typically they're treated as either a capital gains tax or an income tax.
Here’s how divident arb / cum-ex works. Say dividend is $10. You (or one of your accounts) buys the stock pre-dividend. You are then paid $10. However, the stock ex-dividend immediately falls. The trick is, it does not fall by $10 - it falls by tax-adjusted, market-agreed-upon amount. Say, everyone pays 30% tax - then the stock falls by $7. After that, you sell the stock.
Your pnl is simply this: you lost $7 on the stock but received $10 dividend. If you, like everyone else in that market, pay 30% tax on dividend - you are exactly breakeaven like everyone else. No arbitrage. Here for simplicity we assume you can’t tax-deduct loss on your stock position (that does not change anything).
However: if you somehow do not have to pay tax on dividend, or pay it at a reduced rate, you feel happy.
This could get tremendously complicated with cross-boarder transactions and international tax law. But nevertheless may be entirely legal, although understandably frowned upon. It could also be totally fraudulent depending on the setup. No idea what this guy was doing but the fact that he has not been criminally charged may be a hint that they actually cannot charge him with anything.
When I worked at a Fortune 50 I was in a group reassigning revenues to offshore entities. It was just a matter of assigning a team to an offshore manager (well, any one of the big 3 accounting firms then took our work and did whatever paperwork might have been required from there. All the major accounting firms were making millions from us so they were glad to help.) An executive explained to me that all the senior executives got a variety of classes of stock in offshore companies, which were essentially worthless on paper. Then offshore monies could be transferred to increase the value of any of the many classes of stock which were issued - allowing them to transfer any amount to any executive. And as long as the public stockholders were making profit, nobody complained, and money could be freely hidden and transferred offshore using a wide variety of techniques. At the time, this was considered standard practice by all the major accounting firms and all the C-suites at major software companies. We live in a society which is corrupt beyond the understanding of most people. I personally saw billions transferred offshore and hidden - think about that when Bill Gates says that he is giving it all away.
Reminds me of a consulting company I did some work for a few decades ago. Reportedly, they had many engineers filling out two 40hr/wk timecards: one for defense contracts, the other for non-government corporate clients.
FYI for anyone else in the US who reads this and is/has been in a similar situation: the DOD hotline for reporting fraud & abuse of contracts is +1-800-424-9098.
Soon after, an order was placed by another of the 27 plans to buy the order for the shorted shares. That open buy order — essentially, a promise to purchase shares that the other plan still didn’t own — was proof enough for SKAT to approve a refund. Once the refund was issued, the buy order was canceled.
So they weren't actually buying the shares at all, or receiving the dividend.
SKAT... When paying my taxes in Denmark using a foreign bank I have to manually "enter my CPR number and describe what the payment is for" in the message field.
That's for reporting someone who is actually exploiting the loophole. I think OP is proposing a bounty for finding and reporting loopholes before anyone takes advantage of them.
In other words, make it more profitable to tell the government what to look for instead of taking advantage of it yourself.
Reading that article makes me deeply cynical about capitalism in general. I don't dislike capitalism, but this news is really gold for people who want to advocate against capitalism. It's scary.
I might not be very smart, I'm having a hard time understanding how this scheme was accomplished. What worries me is how invisible this is, and how much harm it does. I really wonder how much fraud of this scale is not being caught, because most people don't really understand what is being done, on top of it happening in ways which are hard to grasp.
It really reminds me how big multinationals have committed tax avoidance for decades, but the voters cannot see it, don't understand how it hurts them, and are never really protesting it.
There are laws and a justice system, but to me it's really hilarious that those people are getting away with this, and how loopholes are tolerated and not an abuse of the law. I cannot understand how the world can just look away and not try to fix this. I fear that if this keeps happening, it may be a source of instability and would really undermine political stability. How would you make a country work properly is the state budget is shrinking?
"makes me deeply cynical about capitalism in general. I don't dislike capitalism, but this news is really gold for people who want to advocate against capitalism."
Funny because the first thing I think of is government incompetence and stupidity.
A hole in a system a billion dollars wide will always be taken advantage of in whatever kind of economic system, i.e. this is not 'capitalism' just 'quasi legal hacking'.
That's a pretty big hole and I wonder how many people will lose their jobs over it? One? More? Any?
I like fair regulatory systems, especially those easier to watch ... but this isn't that.
This is enough of an embarrassment that the government should be brought down over it. That's just an quite amount of money to lose for a small country. $2B buys a lot of services for a country the size of a city.
35 comments
[ 3.0 ms ] story [ 52.7 ms ] thread1. There was a pool of retirement accounts that traded with each other.
2. In an example of the scam, one of these accounts would place an order to sell Danish stocks short, presumably cum-dividend.
3. Another account would respond by placing an order to buy the same stocks. This order never went through, presumably because it was placed at a lower price point.
4. The "buy" account would get its dividend taxes spuriously refunded and then cancel the buy order. The "sell" account would cancel its sell order.
I don't see what the role of the "sell" account is. It looks to me like you could do exactly the same thing with just the "buy" account.
https://www.reuters.com/article/germany-dividends/dividend-t...
In this case, though, it involved a bank that owned the shares: The bank would loan the shares to a shorter, the shorter would sell them to a buyer, and both the bank and the buyer would collect the dividend refund.
I wonder if there's some detail the NYT author missed in terms of double ownership that would make the short sale make more sense.
Under US law, a dividend paid to you by a borrower is taxable as ordinary income, not as a qualified dividend -- usually the borrower (short seller) will pay a premium on the interest to reflect the difference in effective tax rates.
I don't know the rules for Denmark, but it seems that having a withholding requirement on the dividend payer ads to complexity, because it requires a refund process. It might be better to have simply required reporting of the income, and maybe required withholding by brokerages.
Where did this idea come from? cum is Latin for "with". ex is Latin for "out of" or "from" (as in "exit"). sine is Latin for "without".
Compare the Spanish for "with" and "without", con and sin.
...and somehow, this article talks constantly about cum-ex trades without ever bothering to explain what they are. https://en.wikipedia.org/wiki/Dividend_stripping
As for this claim that the guy makes, that he's just exploited a loophole, none of the guys I know in this niche believe that. There are also plenty of rumours surrounding his character, in the sense of "is he an honest guy", along with stories about how he might be lacking in the scruples department. None of which is hard evidence, of course.
Apparently, 9/11 is relevant here, because the bank through which it was financed just stopped paying the fine a few years ago. It was a pretty big sum. The bank was guilty of not policing its clients well enough.
One way in which a lot of terrorism is financed relatively safely is simply by switching banks, because banks don't have an adequate data-exchange mechanism. So for example, you fool one bank that the money being sent from Saudi Arabia to UK is an uncle sending money to a niece studying abroad. That looks normal. But then that money is sent from the niece to some third person, which might be suspicious. But if that third person uses a different bank than the niece, then this third person's bank will actually have no idea that one bounce ago the money was in Saudi Arabia. If the bank where the money first landed in UK didn't react, the money was moved successfully. I.e. the chances of it being traced back to Saudi Arabia are slim. Add a few more hops through different banks and tracing theses transactions becomes a nightmare.
This mess has two reasons, as far as I can tell. One is that there isn't a good way for banks to exchange data. They pretty much have to call the other bank and ask. The other reason is that they're policing themselves. Why do we have a decentralised money police?
That last question sort of leads me to my last point. This person I know confided that the distressing part of the job is that often you're helping put people in jail for dabbling in small crime (think selling some weed), but you're instructed to not pursue the big clients. In my friend's words, that's because the bank makes money off of the big clients, but the small ones are numerous, therefore expendable. They have to be able to demonstrate that they are thwarting money laundering and terrorism financing, meanwhile the big money crimes slip by unnoticed. So for the bank it's advantageous to do the policing themselves, because then they can discriminate.
It was made possible because the audit of every vat refund was just one guy, and that was ridiculous, but those 120 billion still exited our treasury.
It's kind of easy to prove wrong doing on vat, if your company hasn't registered a single transaction, then your company simply isn't owed any vat. Yet the article seems to want to make this complicated...
Why is that?
It’s the tax you pay when you trade any product.
Your pnl is simply this: you lost $7 on the stock but received $10 dividend. If you, like everyone else in that market, pay 30% tax on dividend - you are exactly breakeaven like everyone else. No arbitrage. Here for simplicity we assume you can’t tax-deduct loss on your stock position (that does not change anything).
However: if you somehow do not have to pay tax on dividend, or pay it at a reduced rate, you feel happy.
This could get tremendously complicated with cross-boarder transactions and international tax law. But nevertheless may be entirely legal, although understandably frowned upon. It could also be totally fraudulent depending on the setup. No idea what this guy was doing but the fact that he has not been criminally charged may be a hint that they actually cannot charge him with anything.
http://dodig.mil/hotline
Soon after, an order was placed by another of the 27 plans to buy the order for the shorted shares. That open buy order — essentially, a promise to purchase shares that the other plan still didn’t own — was proof enough for SKAT to approve a refund. Once the refund was issued, the buy order was canceled.
So they weren't actually buying the shares at all, or receiving the dividend.
In other words, make it more profitable to tell the government what to look for instead of taking advantage of it yourself.
nytimes.com, bbc.com, bloomberg.com, arstechnica.com, techcrunch.com
No one here reads anything else anymore.
I might not be very smart, I'm having a hard time understanding how this scheme was accomplished. What worries me is how invisible this is, and how much harm it does. I really wonder how much fraud of this scale is not being caught, because most people don't really understand what is being done, on top of it happening in ways which are hard to grasp.
It really reminds me how big multinationals have committed tax avoidance for decades, but the voters cannot see it, don't understand how it hurts them, and are never really protesting it.
There are laws and a justice system, but to me it's really hilarious that those people are getting away with this, and how loopholes are tolerated and not an abuse of the law. I cannot understand how the world can just look away and not try to fix this. I fear that if this keeps happening, it may be a source of instability and would really undermine political stability. How would you make a country work properly is the state budget is shrinking?
Funny because the first thing I think of is government incompetence and stupidity.
A hole in a system a billion dollars wide will always be taken advantage of in whatever kind of economic system, i.e. this is not 'capitalism' just 'quasi legal hacking'.
That's a pretty big hole and I wonder how many people will lose their jobs over it? One? More? Any?
I like fair regulatory systems, especially those easier to watch ... but this isn't that.
This is enough of an embarrassment that the government should be brought down over it. That's just an quite amount of money to lose for a small country. $2B buys a lot of services for a country the size of a city.