Commentary

Investigations into Dividend Stripping at Some French Banks Could Lead to Penalties, but Potential Impact Manageable

Banking Organizations

Summary

DBRS Morningstar has published a commentary focusing on Investigations into Dividend Stripping at Some French Banks.

Key highlights include:

• The headquarters of five French banking institutions (BNP Paribas SA and its subsidiary Exane, Société Générale SA, Natixis SA - Groupe BPCE's investment bank and HSBC Continental Europe - part of HSBC Holdings plc) were raided on March 28, 2023 by French authorities as part of an investigation into a potential EU-wide tax fraud case.

• These French banks allegedly participated in dividend fraud practices known as “Cum-Cum” i.e. complex legal frameworks allowing clients to avoid paying the taxes due on dividends. These practices do not only concern French banks, but have been used by global financial institutions across Europe.

• The fraud is estimated to have cost several European countries around EUR 140 billion for the 2001-2021 period and similar civil and criminal cases have taken place in Germany, the UK and Denmark.

• Tax authorities in France are reportedly seeking to impose fines for a total of around EUR 1 billion on the several banks involved.

“We expect the investigation to last for a very long time due to the large amount of transactions that will have to be analysed by investigators,” said Arnaud Journois, Vice President, Global Financial Institutions at DBRS Morningstar. “Tax authorities in France are reportedly seeking to impose fines for a total of around EUR 1 billion on the several banks involved. Whilst this adds to the negative sentiment around banks in the wake of the collapse of Silicon Valley Bank and the rescue of Credit Suisse, we view the potential impact of the investigations as manageable at this point.”