Shares of Citigroup Inc. C dipped around 2.82% over the last two trading sessions, following the investigation conducted over the bank’s German unit by the German tax authorities related to dividend stripping. According to Reuters, German daily Handelsblatt published a report mentioning that Frankfurt-based tax authorities have demanded €706 million ($791.07 million) in back taxes from the New York-based major bank.
The equity trading strategy, which is also known as "cum-ex", entails buying the stock immediately before the expiry of its dividend right, thereby earning tax benefits for both buyers and sellers.
Citigroup is not the first bank to be investigated over dividend stripping. Numerous banks have paid hundreds of millions of euros in back taxes to German authorities. Notably, Citigroup, along with its several subsidiaries, is included in the list of 130 banks probed over “cum-ex” trade-related issues.
Citigroup is under the purview of broad investigation conducted by German authorities over dividend stripping involving banks, hedge funds, private equity firms and private institutional players and brokers. Currently, the regulators estimated damages of €12 billion from dividend stripping.
Germany’s 1,800 lenders have been asked by BaFin – the German financial regulatory authority – to provide information related to all dividend-related stock trades in 2000–2012 for verification of multiple tax refunds. Notably, local operations of Canada’s Maple Financial Group Inc. were forcibly closed by the German regulators over risk of financial indebtedness following the tax-evasion investigation.
"Citi's Germany unit has never been trader, broker or structurer of cum ex trades," a Citigroup spokesman in Frankfurt said. He added that the bank did act as a settlement agent for clients' trades, but only supplied its infrastructure and had no knowledge of the actual trades being carried out.
Conclusion
Banks across the globe have been facing increasing scrutiny for their business practices. Many of the firms have paid billions of dollars as fines and compensation to settle lawsuits and probes. Such settlements help restore their confidence in law-enforcement agencies. Moreover, it reduces the existing litigation burden of banks.
During the financial crisis, many banks resorted to fraudulent practices. Weakness in the economy continues to induce banks like JPMorgan Chase & Co. JPM, The Goldman Sachs Group, Inc. GS and Deutsche Bank AG DB to engage in various misconducts, which eventually lead to nothing but legal fines.
Currently, Citigroup carries a Zacks Rank #4 (Sell).
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