Jenny Strasburg of the Wall Street Journal is reporting that Bank of America used its U.S. banking subsidiary to finance billions of dollars in trades assisting hedge funds avoid taxes beginning in 2011, according to internal documents and company sources.
According to the sources, earlier this year BoA started to phase out the practice of using funds from its U.S. banking unit to finance transactions by its European investment-banking arm to help hedge funds avoid taxes on stock dividends. A BoA spokesperson contacted for this story said the practice has ended.
Details on Bank of America’s tax avoidance trades
This tax-avoidance strategy had received criticism from federal regulators regarding “reputational risks” and the responsibility to protect the U.S. deposit-holding subsidiary from risky activities, according to internal bank documents. The practice also led to a series of complaints to regulators by a bank employee concerning BoA’s use of U.S. bank funds for tax-minimization trades.
According to the sources, this has been going on since at least 2011. They say senior Bank of America IB officials in London started pushing lower ranking managers to take advantage of the lower funding costs enjoyed by the U.S. unit called Bank of America National Association. Apparently, the goal was to bring in more hedge-fund clients to BoA’s European investment-banking unit, especially clients involved in dividend-arbitrage tax trades.
BANA is the holding company for BoA’s U.S. retail-banking division, including most of its federally insured deposits. Of note, BANA can borrow money at lower rates than business units that undertake higher risk investment-banking activities.
Sheila Bair says this kind of tax-avoidance scheme is inappropriate
“I don’t think it’s an appropriate use,” commented Sheila Bair, the former chairman of the Federal Deposit Insurance Corp., on BANA activities. “Activities with a substantial reputational risk… should not be done inside a bank. You have explicit government backing inside a bank. There is taxpayer risk there.”
Statement from Bank of America
A Bank of America spokesperson noted that “BANA no longer finances dividend-arbitrage activity.” The WSJ’s sources say other divisions of Bank of America, like some other major banks, continues to offer the tax-trading services in other countries. The spokesperson also emphasized neither BANA nor any other related business “has suffered losses as a result of the transactions.”