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11 February 2021

Extradition may become the tail which wags the dog: Cum ex and Brexit

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By Sangeeta Bedi

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Britain’s financial services industry was left out in the cold in the Christmas Eve trade agreement between Britain and the EU. Whilst the two sides sought to obscure the fact that for financial institutions it was a no-deal Brexit by pledging to continue to negotiate as to whether free trade or “equivalence” can resume, there is great uncertainty as to whether the EU will seek to topple Britain’s dominance in FX and derivatives.

Prosecutors in several EU states must be temporarily relieved about this truce but in the longer-term, anxious, as to whether they will be able to continue to apply for the extradition of UK nationals and residents who worked in the above markets to face trial in their countries. Cum ex criminal investigations are intensifying across the EU and it seems that because the suspects are predominantly based here, their success depends on continued free trade between Britain and the EU in relation to extradition.

It’s possible that extradition may become the tail which wags the dog in relation to the outcome of the above negotiations. If the EU sets too high a price for access to its financial markets it may find that not only that Britain refuses to pay but that it also implements a divergence strategy by erecting a series of bars to extradition resulting in at least several European cum ex investigations being stymied for want of someone to put on trial. Public fury in several EU states at the scale of the alleged fraud and the protracted indolence of the authorities to tackle it shows no sign of abating. Pressure on local prosecutors and their governments to bring those UK-based bankers to book will not dissipate soon. In Germany alone for instance Wessing & Partners, a criminal law firm, estimated that as of last December that there were 84 extant German cum ex related criminal investigations of companies and individuals.

Whilst it cannot be proven that apprehension about Britain’s continued willingness to accede to EU member-state extradition requests is a cause, the month after Brexit, January, witnessed a sharp increase in cum ex related prosecutorial activity across the Continent. First Danish prosecutors  announced fraud charges against Sanjay Shah and another unnamed UK citizen. Mr Shah and his associates have been accused for many years by state prosecutors across the EU of masterminding a billion dollar tax fraud based on their cum ex trades. Suddenly the Danes have increased the tempo. A request of the UK from Denmark for the extradition of the latter individual (Mr Shah having moved to Dubai several years ago) must be inevitable.

Second the UK court of first instance ordered the extradition to Belgium of a UK resident, Guenther Klar,  accused of orchestrating a $11 million cum ex fraud on the Belgian exchequer.

Third in the meantime German prosecutors were seeking the extradition of Vijaya Sankar for alleged complicity in an alleged $111 million cum ex fraud. His lawyers argued in the High Court that a consequence of Brexit was to deprive the courts with any power to extradite him to any EU country. The Court rejected all his arguments, see [2021] EWHC 53 (Admin). An order for his extradition was then promptly made by the magistrates court.

Finally at the end of last month prosecutors based in Frankfurt unveiled a $12 million settlement with Freshfields, an international law firm, which had advised various cum ex facilitators. These prosecutors confirmed that this deal would not inhibit their plans to prosecute individuals associated with that firm.

This activity can be contrasted with the situation in the UK. Cum ex trades were frequently if not mainly financed with equities lent to the orchestrators by London-based financial institutions. This fact is acknowledged by the FCA but beyond that the regulator seems inert. On 7th Feb 2020 Mr Steward the FCA Head of Enforcement made a speech about the FCA’s determination to “ratchet up” the risk of abusers being detected by the FCA. About cum ex he said “The FCA has been investigating substantial and suspected abusive share trading in London’s markets that has allegedly supported these schemes. These investigations are now very close to their conclusion and decisions about action are imminent.” It seems either that those decisions were ones of no further action or one year later are still awaiting action. The FCA of course can move slowly and its sluggish approach on this issue suggests that it prefers to wait and see what terms are eventually agreed between Britain and the EU concerning financial services.

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