a. A short seller. This means a payment made before dividend is declared, on shares that will be transferred after the dividend is declared
b. A buyer of shares from the short seller
c. A supplier of shares to the short seller<\/p>\n<\/blockquote>\n\n\n
![\"\"](\"https:\/\/further.co.za\/amabwp\/wp-content\/uploads\/2021\/10\/CumEx-Graphic-Scenario-1.jpeg\")
<\/figure>\n<\/div>\n\n\n<\/p>\n\n\n\n
Consider three scenarios:<\/p>\n\n\n\n
First<\/b><\/span>, if Investor A<\/b> owns shares in a company which declares dividends, he gets a net dividend because the company has paid dividend withholding tax on his behalf. If the tax is 25%, then Investor A<\/b> gets 75% of the dividend plus a tax certificate for the other 25%. He gets that certificate from his custodian bank.<\/p>\n\n\n\n Second<\/b><\/span>, consider a case where Investor A<\/b> carries out a normal (read: legal) cum-ex sale. Investor A<\/b> has shares on the day (or the day before) a dividend gets declared but then sells them to Investor B<\/b>. The nature of the German market system meant that Investor B<\/b> was only going to get those shares two days later \u2013 ex-dividend. That\u2019s not fair because when he bought them they were cum-dividend.<\/p>\n\n\n\n So what kicks in is what the Germans called a \u201ccompensation payment\u201d. Investor A\u2019s<\/b> custodian account automatically gets debited by the net dividend amount he had received (75% of the dividend) and this goes to Investor B<\/b>.<\/p>\n\n\n <\/p>\n\n\n\n Most important, the dividend withholding tax certificate issued to Investor A<\/b> gets transferred to Investor B<\/b>, representing 25% of the dividend.<\/p>\n\n\n\n Third<\/b><\/span>, in order to rig the system and carry out a cum-ex fraud you introduce Investor C<\/b> \u2013 the short seller.<\/p>\n\n\n\n Investor C<\/b> sells shares to Investor B<\/b> without actually owning those shares. Instead, the two agree that Investor A<\/b> will deliver shares on some day in the future. Investor B pays upfront.<\/p>\n\n\n\n Come delivery day, Investor C<\/b> will acquire shares from Investor A<\/b>, the supplier, and deliver them to Investor B<\/b>, the buyer, as agreed.<\/p>\n\n\n\n Usually the point of a short sale is to bet on how the share\u2019s value will change because Investor B<\/b> paid a pre-arranged price while Investor C<\/b> is going to pay the market price at delivery day. Both have taken a risk: Investor C<\/b> could either be in the money or make a significant loss.<\/p>\n\n\n\n For a cum-ex scam, short-selling has a completely different function.<\/p>\n\n\n <\/p>\n\n\n\n The story still starts with Investor A<\/b> who owns shares at the time the dividend gets declared. However, before he sells the shares, his conspirators have to set up a covert short sale transaction in the background.<\/p>\n\n\n\n Investor C<\/b>, who doesn\u2019t have any shares before the dividend is declared, short sells shares to Investor B<\/b>. These yet-to-be-acquired shares are sold \u201ccum\u201d dividend before the dividend gets declared. After the dividend gets declared Investor C<\/b> goes to Investor A<\/b> to buy the shares he needs to deliver to Investor B.<\/b><\/p>\n\n\n\n Now there is a tricky situation. Investor B<\/b> had bought \u201ccum\u201d shares upfront from Investor C<\/b> but when Investor C<\/b> goes knocking at Investor A<\/b>\u2019s door to buy shares to pass on to Investor B,<\/b> these are now \u201cex\u201d shares minus the dividend and tax that got paid.<\/p>\n\n\n\n So who gets the tax certificate?<\/p>\n\n\n\n Investor A<\/b> has paid the tax and received the tax certificate but is selling to Investor C<\/b> ex-dividend. That means that there is no compensation payment and no transfer of the tax certificate. Investor A rides merrily into the sunset with his certificate in hand.<\/p>\n\n\n\n Investor C<\/b> had sold the shares upfront to Investor B<\/b> cum-dividend at the full price. So Investor B<\/b> still needs his \u201ccompensation\u201d. Crucially (and this is the foundation of the fraud) that includes a tax certificate that gets issued by Investor B<\/b>\u2019s custodian bank \u2013 a role Investec sometimes played while allegedly knowing full well Investor B<\/b> never actually paid tax.<\/p>\n\n\n\n So now there are two tax certificates even though there had only been one tax payment. Investor B <\/b>takes this \u201cextra\u201d certificate to the taxman, gets a refund and divides it between himself, Investor A <\/b>and Investor C<\/b>. The illicit profit is exactly equal to the tax that was not paid.<\/p>\n\n\n\n Investec implicated in investigations into the world\u2019s largest tax fraud \u2013 the cum-ex files part one<\/a> <\/em> Sidebar explainer for the Cum-Ex files: Investec.<\/p>\n","protected":false},"author":8,"featured_media":20965,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[2],"tags":[759,760,761,755,762],"class_list":["post-15260","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-stories","tag-cum-ex","tag-cumex","tag-cumexfinancials","tag-investec","tag-sidebar"],"acf":[],"_links":{"self":[{"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/posts\/15260","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/comments?post=15260"}],"version-history":[{"count":2,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/posts\/15260\/revisions"}],"predecessor-version":[{"id":30061,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/posts\/15260\/revisions\/30061"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/media\/20965"}],"wp:attachment":[{"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/media?parent=15260"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/categories?post=15260"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/further.co.za\/amabwp\/wp-json\/wp\/v2\/tags?post=15260"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"](\"https:\/\/further.co.za\/amabwp\/wp-content\/uploads\/2021\/10\/CumEx-Graphic-Scenario-2.jpeg\")
<\/figure>\n<\/div>\n\n\n![\"\"](\"https:\/\/further.co.za\/amabwp\/wp-content\/uploads\/2021\/10\/CumEx-Graphic-Scenario-3.jpeg\")
<\/figure>\n<\/div>\n\n\nThe above explainer forms part of our #CumExFinancials series, below:<\/em><\/h4>\n\n\n\n
\n
How Investec was a player in the world\u2019s largest tax fraud \u2013 cum-ex part two<\/a><\/em>
Investec\u2019s multi-billion Euro backing for legendary \u2018tax evader\u2019 \u2013 cum-ex part three<\/em><\/a><\/p>\n<\/blockquote>\n","protected":false},"excerpt":{"rendered":"