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  • European Banking Authority to Act on Dividend Arbitrage Trading Schemes
    05/12/2020
    In response to the November 2018 request of the European Parliament to conduct an enquiry into dividend arbitrage trading schemes, the European Banking Authority has published a report (dated April 28, 2020) on the approach of national regulators across the EU to tackle market integrity risks associated with dividend arbitrage trading schemes. The EBA has also published a ten-point Action Plan to address the risks arising from such schemes. Both the report and Action Plan accompanied the EBA's letter to the European Parliament that describes its actions and the steps it intends to take in the future on this issue.

    The report sets out the findings arising from the enquiry, which consisted of surveys of national authorities responsible for anti-money laundering and counter terrorist financing and of national prudential regulators. The EBA found that dividend arbitrage trading schemes are not possible in all EU member states and that, where they are possible, they are not always regarded as a tax crime. The EBA concluded that AML and prudential authorities approach dividend arbitrage trading schemes in different ways and there are variations in the extent to which the handling of the proceeds from these schemes by financial institutions constitutes money laundering.

    The EBA's Action Plan is to:
    1. Amend the prudential Guidelines on Internal Governance to require firms to have policies on acceptable and unacceptable behavior linked to misconduct and financial crime, including tax crimes through dividend arbitrage schemes. The EBA intends to have consulted by Q3 2020 and to publish the final amended Guidelines by Q1 2021.
    2. Amend the prudential Guidelines on the Assessment of the Suitability of Members of the Management Body and Key Function Holders to bring tax crimes, including through dividend arbitrage schemes, within scope of the assessment. The EBA intends to have consulted by Q3 2020 and to publish the final amended Guidelines by Q1 2021.
    3. Amend the prudential Guidelines on Supervisory Review and Evaluation Process to include an appropriate reference to tax crimes, such as dividend arbitrage schemes. This will reflect the relevant amendments in the guidelines on internal governance and fit and proper assessments. The EBA intends to have consulted by Q2 2021 and to publish the final amended Guidelines by Q4 2021. Certain aspects of the changes may be included in an Opinion on the prudential treatment of ML/TF risks under SREP, to be published by Q4 2020.
    4. Monitor how prudential colleges have followed up on guidance in the 2020 convergence plan. The outcomes will be incorporated into the Supervisory Convergence Report due in Q2 2021.
    5. Consider whether the draft Guidelines on ML/TF risk factors (on which the EBA is consulting) are sufficient to address the risk of dividend arbitrage schemes.
    6. Amend the Guidelines on Risk-Based AML/CFT Supervision to add further requirements on how AML/CFT authorities should, in a risk-based approach, identify, assess and address ML/TF risks associated with tax crimes such as illicit dividend arbitrage schemes. The EBA will consult in Q4 2020 and finalize them in 2021.
    7. Incorporate a more detailed assessment of ML/TF risks associated with tax crimes into the next EBA biennial Opinion on ML/TF Risks, due to be published in Q1 2021.
    8. Continue to allocate time to authorities' handling of ML/TF risks associated with tax crimes, where this risk is significant. The EBA next summary report of its implementation reviews is due to be published in Q2 2021.
    9. Monitor discussions in AML/CFT colleges to ensure that AML/CFT colleges for financial institutions address risks related to tax crimes.
    10. Conduct an enquiry into how supervisors, authorities and financial institutions have implemented the above changes.

    View the EBA's report.

    View the Action Plan.

    View the EBA's letter to the European Parliament.

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