HSBC Holdings (HSBC.US) agreed to pay 300 million euros to settle the French “Cum-Cum” tax scandal

The Zhitong Finance App learned that HSBC Holdings (HSBC.US) agreed to pay about 300 million euros (equivalent to 350 million US dollars) to settle the dual criminal and tax investigations initiated by France against its involvement in the so-called “Cum-Cum” dividend tax avoidance scandal.

A Paris judge outlined the settlement agreement in court on Thursday and will decide whether to approve it later. If the agreement is approved, the investigation of HSBC by the French National Financial Prosecution Service will be terminated without the bank admitting misconduct. The agreement includes fines of around €268 million and about €30 million in taxes already paid by HSBC.

HSBC representative Benjamin Rossan said in court on Thursday that the bank acknowledged the basic facts and that the transactions involved in the case were completed by its Paris traders between 2014 and 2019. He also added that “French taxes were not paid in full on the relevant transactions at the time.”

This settlement will put pressure on many other banks, including BNPQY.US (BNPQY.US) and its subsidiary Exane SA, Société Générale, and the French Foreign Trade Bank. According to information, in 2023, the French National Financial Prosecution Service carried out an unprecedented raid on these banks in terms of scale and scope. Currently, none of them have been formally charged with misconduct. In September of last year, the investment banking branch of Crédit Agricole agreed to pay about 134 million euros in fines and additional taxes to complete the investigation.

The operating logic of the transaction involved in the case is said to be that during the dividend distribution season, French stocks are lent to local banks and other entities that are eligible for tax exemption to help foreign stock holders avoid withholding dividend taxes.

The French authorities have adopted a “two-track system” to crack down on such transactions. In addition to initiating criminal proceedings, the French Ministry of Finance also stated that the tax authorities are working to recover about 4.5 billion euros of tax revenue lost due to domestic bank-related transactions.

In July of last year, it was reported that the tax department also carried out an audit of Wall Street banks with trading departments in Paris, involving institutions including Goldman Sachs (GS.US) and Bank of America (BAC.US).

Despite ongoing investigations, French banking lobbies have long denied any wrongdoing, insisting that such controversial transactions are for economic purposes such as hedging short positions and avoiding transaction risks, rather than for tax avoidance. Maya Atig, president of the French Banking Federation, stressed at a parliamentary hearing last year that “there is no systemic fraud.”

However, the French prosecution has taken a completely different position, believing that the “Cum-Cum” deal has become a common trend. The French National Financial Prosecution Service pointed out last year that there is evidence that, with the exception of Crédit Agricole, many banks are actively promoting financial products called “dividend income optimization” to customers in their product catalogs.

The “Cum-Cum” scandal also spawned wrestling at the political level. The French government is trying to balance tracking down tax fraud with maintaining Paris's appeal to the financial sector. The French Ministry of Finance clearly opposed a strict interpretation of the provisions of the new tax law last year to prevent a large loss of stock derivatives trading business to other financial hubs such as London.