The process involves the banks temporarily moving ownership of a customer's shares to an area with lower taxes at the approximate time the customer expects to collect a dividend on the shares, according to the Wall Street Journal. Banks mostly run dividend arbitrage from London, according to the report.
The system generates more than $1 billion in revenue a year for banks, as dividend arbitrage usually allows clients to reduce taxes to 10% or even zero from up to 30% of the dividend payment.
Banks maintain the process is legal and an enticing way for customers to reduce taxes via the different withholding rates around the world. But U.S. regulators have been critical of dividend arbitrage and recently questioned Bank of America about its potential legal ramifications, a Federal Reserve Bank of Richmond spokesman told the Journal.
Bank of America is "responding to the risks that were raised," the spokesman said.
Separately, TheStreet Ratings team rates BANK OF AMERICA CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate BANK OF AMERICA CORP (BAC) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its expanding profit margins, notable return on equity and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
- You can view the full analysis from the report here: BAC Ratings Report