Bank of America Used Subsidiary to Finance Trades, Helped Hedge Funds, Others, Avoid Taxes

According to The Wall Street Journal, internal documents show that Bank of America Corp. (BAC) used its Bank of America National Association, a subsidiary backed by the U.S. government, to finance controversial trades that allowed certain clients to get around paying taxes. A bank spokesperson said that the practice, which involved transactions by its investment banking arm in Europe, was phased out last year.

However, as far back as at least 2011 senior Bank of America investment bank officials in England purportedly began pressing at staff to avail of the lower funding costs of the U.S. unit, which doesn’t pay as much as business units for borrowing money. The purpose was to bring in more hedge fund clients, including those involved in dividend arbitrage tax trades. With that strategy, sophisticated investors are able to avoid or lower their withholding taxes on stock dividends.

There have been questions as to whether using an entity that holds federally insured deposits to pay for high-risk investment banking trades is appropriate. One employee even filed a whistleblower submission to the SEC about the banking subsidiary’s involvement.

Also, trades linked to U.S. Stock dividends were banned following government probes, as well changes to tax rules. In 2011, Bank of America settled for $63 million over previous U.S. dividend arbitrage trading.

The issue of whether certain banks are placing federally insured funds in peril has been a matter of interest ever since J.P. Morgan Chase & Co. (JPM) lost over $6 billion on bad trades involving a trader dubbed the “London Whale.” The firm paid $1 billion for violating securities laws.

Bank of America’s U.S. Deposit-Taking Unit Financed Tax Trades, The Wall Street Journal, February 11, 2015

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