France’s banks face more than $1.1 billion in fines after raids

In an investigation into tax fraud and money laundering in relation to dividend payments, French banks including Societe Générale SA as well as BNP Paribas SA will face collective fines exceeding 1 billion euros ($1.1B).

According to Paris’ prosecutors, HSBC holdings Plc and Natixis SA are also under investigation. The fines include back interest and penalties. The prosecutor stated that preliminary investigations into the raids began in December 2021.

These raids are related to the dividend arbitrage strategy Cum-Cum, where stock was transferred for a brief period to foreign investors to avoid paying dividend taxes. The shares were held by investors during the dividend payment period. They were either not taxed on the earnings or refunded. The original owners were notified and the securities were returned to them.Representatives from Natixis, HSBC and BNP didn’t respond immediately to requests for comment. SocGen’s spokesperson confirmed that the bank was part of the investigation.

These raids further fuel negative sentiment in the banking industry in the U.S. as well as Europe. Investors have been affected by Credit Suisse Group AG’s emergency rescue and seizure and regulators at Silicon Valley Bank.

SocGen fell as high as 2.4%, before paring gains and trading down 1% as at 1:03 p.m. in Paris. BNP fell 0.5% in London, while HSBC dropped 0.2% in London.

According to the prosecutor, the French investigation has been in progress for several months. It involves 16 local magistrates as well as more than 150 investigators. There are also 6 Cologne prosecutors. Since the beginning of the decade, Germany has been roiled by tax avoidance on dividends. Cum-Ex was a similar scheme that allowed short-sellers as well as the actual holder to claim tax credits for dividends paid only once.

In 2019, a German Cum-Ex trader testified that Cum-Ex was five- to six times more profitable then Cum-Cum. Cum-Cum was more popular, particularly in interbank trading, because the legal risks were much lower.

Cum-Cum is a widely-used practice because it was not thought to raise legal issues the same as Cum-Ex. This long-running investigation has led to the arrest of thousands of suspects in the financial sector. In Germany, almost all major international banks were raided. It has led to civil and criminal cases in Germany and the UK.

Anyone wishing to provide additional information about the French inquiry was also invited by the French prosecutor to come forward.