"Combating Prime Bank and
High-Yield Investment Fraud"
Speech by Rosalind Wright CB,
Director of the Serious Fraud Office
At Barclays Bank World Head Office Presentation Theatre
54, Lombard Street, London
On 21st March 2002
(Organised by the Institute of International Banking Law & Practice)
1. In the Emperor's New Clothes, the familiar tale by Hans Christian Anderson,
the unscrupulous tailor was able to persuade the Emperor to parade naked through
the streets by way of a confidence trick familiar to many in this room today: he
persuaded him that the invisible suit of clothes could only be seen by the
cognoscenti, superior classes of persons, the upper echelons. The emperor was
taken in; so were the multitudes who flocked to see the emperor in all his
non-existent finery and did not want to expose themselves as discerning members
of the glitterati. It took a small, guileless child to see through the deception
and blow the gaffe.
2. There are many dupes out there who don't want to admit that they don't
understand what they are being sold. That the precious secret being made
available to them and them alone, which, up till then, has only been made
available to banks to make money between themselves, doesn't have substance in
reality; that it is a sham; an invisible suit of clothes.
3. Who wants to admit they are ignorant? When a honey-tongued salesman, or
"investment adviser" spins them a line that is fully of impressive financial
jargon, preferably peppered with reassuring words such as "prime", "guarantee",
"investment program", who has the guts to be like the little boy and say "But
the emperor is stark naked!" and reveal to the salesman that he is not one of
the cognoscenti?
4. Let me tell you another cautionary tale: A few years ago, a firm called David
Coakley Ltd which dealt in over-the-counter futures and options, set up a
dealing room in the City of London. They opened their doors to members of the
public: anyone who wanted to deal in futures and options, over the counter,
could come in and deal. Indeed, for a bit of free advertising, they invited
journalists to come in and try their luck , using a hypothetical sum of money,
to see how much they could make on this volatile and precarious market. Many
journalists made a very large profit, dealing on a pretend basis with the
hypothetical money and wrote up their experiences enthusiastically in such
sophisticated financial journals as the Daily Mail and the Mirror.
5. Punters piled in. They, unfortunately for them, didn't use sham money or
pretend transactions: they used their own money and lost it. Not only did they
lose it, they were made to pay enormous additional sums by way of margin calls
which, in some cases, wiped them out financially.
6. Now a lot of people like a flutter and are quite prepared to lose very large
sums on the horses, the dogs, at cards or in the casino. The number of people
who, with touching faith that they will be instant millionaires, put the weekly
pension or the dole into lottery tickets. But at least they understand how the
system works. They part with their money, maybe foolishly, but with their eyes
open. Many of the David Coakley investors were in this category; we interviewed
them, when we took disciplinary action against David Coakley, which, I am
ashamed to say, was a firm fully authorised under the Financial Services Act
1986, by my regulatory authority, the Securities and Futures Authority ("SFA"),
to conduct investment business.. One, a farmer, who had lost £70,000 (this is
pre-BSE and foot-and-mouth, when farmers had a bob or two) laughed ruefully and
said he deserved all he got. But many were not so sanguine. They reckoned they
had been very neatly had.
7. What David Coakley did, which is back to the Emperor's New Clothes scenario,
was to disapply the protections these investors were entitled to under the SFA
rules by designating these people "expert investors". They did that by offering
them a short correspondence course in investing in future and options: a very
short course, as it turned out, no more than a pamphlet followed by a single
multiple choice questionnaire. Once they had sent that back to the firm, they
were asked to tick a box on their client questionnaire if they did not want to
be designated as expert investors; they were even told that if they didn't tick
the box some SFA rules would not apply to them. Nobody whose client
questionnaire we saw had ticked the box. When we asked why, invariably they said
that they felt "flattered" to be categorised as "experts" in this sophisticated,
heady world of finance.
8. One gentleman was over 80; he lived in a nursing home whose fees had been
increased and he had feared he would not be able to meet them. His son-in-law, a
GP, who had made a small investment in David Coakley and seen a gain on his
investment, persuaded his father-in-law to invest all he had in David Coakley's
investment program. He lost everything he had and more.
9. SFA finally caught up with David Coakley and threw the firm and all its
directors out, as well as ordering them to repay as many investors as we had
been able to identify a proportion of their losses.
10. You are all very familiar with the phrase "if a thing looks too good to be
true, it usually is"; let me give you another one: "If you don't understand what
someone is trying to induce you to invest money in, don't invest a penny in it."
11. Another, even more glaring example of this, was another SFA disciplinary
case: this time against a major investment house which employed a whizz
salesman. This young man (he was in his twenties, with a Ph.D in maths) had
devised a very sophisticated variation on a derivative instrument that his firm
had been successfully marketing to the fund managers of large corporate clients
for some years. The firm's own financial instrument was complex and depended on
variations in international currencies; but it was comprehensible, if, in the
firm's view, unsuitable for private investors. Our man decided to use his
initiative and sell his own product, which he hedged about with some even more
abstruse and complex bells and whistles and marketed it to the firm's high-net
worth individual clients. He found five such; very rich gents, all residing
abroad, with one exception. That exception was a former colleague of his who had
left the bank and was working for himself. Maybe our young crook really believed
in the success of his own product, because he took his friend into the secret
and sold some of it to him. He was the first; indeed the only such investor to
complain when he started to lose money, hand over fist, by dint of his
investment in this new instrument.
12. None of the others realised they had been duped; when things started to go
wrong, our crook falsified their statements of account so they thought they were
making money; he then fleeced them for more money. His motive was to increase
his commission, for his last year at the firm, before he fled abroad, was over
£2 million.
13. When we interviewed his clients, many of whom did not want to talk to us,
though they had taken civil proceedings against the firm, it was clear that none
of them had understood the first thing about what they had been sold. High
net-worth they may have been; curious to find out what they were committing
their funds to they weren't. They were mesmerised, as so many are, by the
jargon; by the appeals to their sophistication, their knowledge of the financial
markets; the implication that "I don't have to explain this to you; you
understand it better than I do". They didn't. They didn't ask and they didn't
want to expose their seeming ignorance Between them, the five rich gentlemen
lost a total of $15 million.
14. Some years ago, I was asked to speak on the topic of prime bank instrument
fraud to an audience consisting largely of solicitors, accountants and their
wealthier clients. I told them that there was no such thing as a "prime bank
guarantee" and that if anyone tried to induce them to invest in one, he was a
con-man. Afterwards, several members of the audience approached me and asked me
if I was sure I was correct. They had themselves invested in prime bank
guarantees, sold to them by people they implicitly trusted. They were even now
waiting for large returns on their money. I wondered whether they had asked
questions; what research they had conducted themselves into these novel
instruments; where they had heard of them first? They were all sure these
instrument had been around for a long time; they had read about them in the
financial pages of the better papers; they were, after all, guaranteed by "prime
banks" weren't they? It is always sad to have to shatter people's dreams;
especially when they have put money up. But life's a bitch like that, isn't it?
15. If they read about them in the financial pages, I suggested, surely it was
in connection with a warning "not to invest in them"? Perhaps we should all put
out clearer warnings: like "Don't put your money in anything other than a large
sock under your mattress". But nobody would take any notice even if the letters
were in 72 pt and in red ink.
16. Another cautionary tale: even longer ago than my time at the SFA, I worked
for the DPP, where we investigated boiler-room frauds (not quite as popular now
as they used to be). One such, run by a Canadian fraudster was stopped in
mid-flow by the Metropolitan Police (pause for applause) and the Evening
Standard published a front-page photograph of the Canadian gentleman being led
away by officers of the law. The half-page photograph was wittily captioned: "Mr
50%", that being the rate of interest this fraudster was allegedly offering
would-be punters.
17. That evening, the Met Police received several calls from the public asking
where the company was based in order that they could send money in for him to
invest; one or two cheques, made payable to the Canadian's company, were
received at Richbell Place (then the HQ of the Met Police Fraud Squad) asking
the officers there kindly to forward their money to Mr 50%.
18. Well; what is our current experience of this type of fraud? Prime bank
instrument fraud is a comparatively new kid on the block but continues to
flourish. High-yield investment fraud is a growth industry, possibilities for
expansion in this area made all the more exciting by the availability of the
internet.
19. We currently have under investigation a number of major prime bank
instrument frauds. Some are at the sensitive stage of investigation which means
that it would not be politic for me to go into any detail about them. Those
which have gone through the trial process, however, can be mentioned and
illustrate the modus operandi very graphically.
20. We have had recently had cases involving both the use of "prime bank
guarantees" and the involvement of professional people to help relieve the
victims of their cash. In one, a solicitor was one of the principals involved;
in the other, a licensed conveyancer was the prime mover. This may be
coincidence, but is a worrying trend, indicating that Law Society warnings are
being ignored by exactly those to whom they are principally addressed. (When the
new money laundering reporting and record-keeping provisions bite on solicitors
very soon, I hope we don't see a similar pattern). In some cases, we see the use
of professional client accounts or "blocked" funds. Typically, a solicitor or
accountant undertakes to "verify documentation" and will only release funds when
"genuine" Prime Bank Guarantees or other evidence deposited, making the
investment "risk free". Professionals are recruited or embroiled in this sort of
fraud in order to give it an aura of respectability and safety. If you ever do
see a Prime bank instrument, Prime Bank Guarantees or standby letters of credit
- it is claimed these 'instruments' or 'notes' represent inter-bank debt and are
traded on a secret market only available to bankers – watch out.
21. High-yield investment frauds are as old as Croesus, who, fortunately for
him, didn't have to resort to such devices to make himself a gilt-edged
proposition.
22. We have numerous examples of high-yield investment schemes on our books:
many have international connections and several originate overseas. The US
experience of trading program frauds is now mirrored over here; the novelty
factor has not yet worn off in the UK and the danger signals which are now more
likely to alert sophisticated US investors do not ring alarm bells loudly enough
to deter victims over here.
23. There is a widespread incidence of this type of fraud. The SFO and a number
of police forces in the United Kingdom are investigating cases in which "high
yield programmes," "enhancement programmes," placement programmes" or "roll
programmes" have been marketed by professional confidence tricksters. I am also
aware that there is a significant incidence of this type of fraud in the USA.
The Serious Fraud Office has worked in conjunction with the Federal Bureau of
Investigation and the US Department of Justice in dealing with a number of such
cases. During the course of the last ten years my department has brought a
number of cases involving this type of allegation to court. The cases are
difficult to investigate and prosecute because the perpetrators are aware that
their schemes are likely to fall under our scrutiny and they plan accordingly.
24. Typically, in such a case, the investor is told that very substantial
profits are available to individuals and companies involved in trading in bank
funds and bank instruments. The investor is told that the sums involved in the
business are very substantial but that trading is not open to ordinary members
of the public, access being restricted to a small number of highly skilled
traders to whom privileged access may be obtained. He is told that secrecy is
vital and it is often a term of the written investment agreement that the
investor should not disclose to any person their involvement in the investment
programme or the existence of it.
25. Victims are rarely told of the precise destination of the funds. Those who
introduce victims to a scheme do so in return for a commission (deducted in fact
from the principal investment). The intermediary passes the bulk of the funds to
a third party who again, typically, will pass them on to another in return for a
further commission. None of the money is ever invested in what could be
recognised as a legitimate investment capable of generating a profit. Some
victims may be treated as "loss leaders" in order to encourage others to invest
and some are often paid small amounts of money to allay their growing fears
about the safety of their investment. These sums are met either from the
principal or from funds provided by new investors. For the investor, trouble
begins when the trickster's cash runs short. He is then held at bay with stories
about trouble in the banking system, intervention by the IRS or the Federal
Reserve. More recently, by tales of how the programs have were disrupted by the
tragic events on 11th September 2001. It takes the investor a long time to
realise that he has been the subject of a fraud by which time the money has been
spent and the con man has moved on to other victims in a new scheme.
26. Those engaged in this business exchange detailed correspondence about the
course of investments and the inevitable delays in the payment of instalments
and the repayment of capital. In this way the perpetrators attempt to create an
opaque screen of apparently legitimate activity as a protection against
interference by regulatory authorities and those engaged in criminal
investigations. This type of fraud is always conducted across national
boundaries and from the point of view of those charged with the investigation of
these offences it is often very difficult to establish the guilt of
intermediaries who present themselves as innocent dupes.
27. High yield investment fraud is particularly prevalent at the moment probably
because of the low rates of interest payable to investors by financial
institutions. We will probably see further reductions in the future. When the
Bank Rate is as low as it presently is and falling a quarter or a half percent
every three months or so, there is every incentive for people who would
otherwise be extremely conservative in their investment strategies to seek
opportunities for their money to earn just a few percentage points more; and the
words "guaranteed return", and "impressive track record" do look very tempting.
Some of the less scrupulous people whose activities have been the subject of SFO
investigations, batten on to this temptation and offer seemingly irresistible
propositions: invest in ostriches – bonded alcohol – kruggerrands (that was some
time ago, but I am a very old prosecutor) and the sky is the limit. Indeed;
fresh air is all some investors saw for the money they had put in.
28. All have one thing in common. They are designed to separate the fool from
his money. The profit accrues to professional and often organised criminals who
commit their offences across national boundaries.
29. I have been Director of the SFO now for almost exactly five years. In that
time I have seen a variety of cases referred to the SFO for us to consider
taking on. Among those have been a large number of advance fee or high-yield
type investment frauds. Some we have accepted for investigation; some are
currently being investigated; some are in the trial process and others have
simply been turned away because of the impracticability of investigation and
prosecution. Apart from the apparent gullibility of the losers I have always
been struck by the involvement time after time of the same people. I have also
been struck by what appears to have been the phenomenon of con-men defrauding
other con-men. Perhaps most of all I have been struck by the reluctance of some
victims to accept that they have been duped - even to the point of complaining
when the authorities intervene to rescue and repatriate their investment.
30. What are the characteristics of these transactions that might lead you to
think that there is a fraud? Some of them - by no means all - are:
(a) Bank or other financial institution in some way provides funds or trading
(b) Very large amounts of money are involved in the funding/trading sometimes
billions of pounds or dollars
(c) Confidentiality and secrecy - perhaps slightly illegitimate involving high
Government officials or banking officials
(d) Usually risk free - guarantees by solicitor's client account, escrow
accounts and Solicitors' Indemnity Fund bandied about
(e) Use of jargon
(f) Complicated paperwork - often impressively produced on computer
(g) Use of faxes - easy to forge
(h) Transaction takes place in several jurisdictions
(i) Use of offshore bank accounts
(j) Use of intermediaries or brokers
(k) Rates of return unobtainable commercially without risk
(l) Rates of interest on loans unobtainable commercially
(m) Failure to complete the deal
(n) Perhaps I should have also said a complete disregard of the truth.
(o) Secrecy and exclusivity are vital. The victim believes he has been selected
because he is a very special person (he is!).
31. One or two colourful cases we have had include:
32. Burton and Andre
33. This was ruthless confidence trick where a bogus investment expert and her
associate put up a front of wealth and success to dupe private clients and
creditors out of around £3 million. They adopted a scheme they picked up in the
USA; a scheme that would appear attractive, if suitably packaged, to people of
some wealth. They set out to dazzle but the façade hid an empty operation built
on greed and self indulgence.
34. The Hertfordshire Police received complaints from anxious creditors about
two women who not paying their accounts. It seemed that the two Australian
women, Evelyn Burton and Lyla André, were walking out of expensive hotels after
running up considerable bills. At face value, such misdeeds would not attract
the attention of my Office, but as so often happens in criminal investigations,
one thing leads to another. Inquiries by the Police led them to uncover
incriminating documents left by the two women in a hotel room in St. Albans. The
discovery prompted the Police to refer the matter to the SFO, though the Police
continued to be involved in the investigation.
35. Burton and André were long-time business associates in a Melbourne brothel.
They arrived in the UK in September 1996 from the USA where they had spent some
time after leaving Australia to evade the interest of the authorities for
suspected crimes committed there. In the USA they met an American attorney
called Daniel Wright. He introduced them a scheme known as a high yield
investment programme. This was a way of attracting funds from individuals
attracted to select opportunities to achieve higher returns than, say normally
available on the stock market. The three of them set up a US registered company
called Westgate Development Corporation. The company however was simply a
vehicle for channelling money through a bank account in Maryland, USA.
36. Burton, supported by André, started in the high-living mode as soon as they
arrived in the UK. Collected by chauffeur-driven limousine from the airport they
proceeded to run up a substantial bill at the Berkeley Hotel in London, much of
which remains unrecovered. Whilst there, they made the acquaintance of the owner
of an employment agency. They were, they said, looking for staff for a country
home they were planning to buy. Through this route they were introduced to what
the Press have called the "horsey set". They soon set about net-working among
the affluent sector of society that attends equestrian events such as the
Windsor Horse Show.
37. Burton would give the impression that she was an experienced and successful
bond trader and could offer interested investors very attractive returns through
her finance business in the States. All this was done in an environment of
champagne receptions, arriving at events in expensive cars and having servants
in tow and generally demonstrating extravagance. Whatever they did and wherever
they went, it was all done with impressive aplomb. The façade clearly won over
many people as clients. Examples of victims include two Swedish businessmen who
trusted them with over £186,000, business partners from Belfast who invested
around £100,000 and an East Anglian land-owner who bought into the programme for
over £90,000. There were many more. Burton was long on promises but short on
delivery. As part of her way of getting into the right circles she commissioned
expensive bronze horse head busts for The Arab Horse Society (but failed to pay
them) and her promises to sponsor winning prize money for horse owners were not
honoured.
38. But the scheme began to unravel. Disgruntled creditors and investors were
asking questions. Sensing that it would be wise to disappear, Burton and André
left the UK, turning up in New Zealand in January the following year, after a
short stay in the Netherlands. Warrants for their arrest were issued and an
extradition order issued. They contested the extradition order but at the same
time became embroiled in criminal proceedings in New Zealand for a fraud
committed there. They were arrested by the New Zealand Police in February 1999
and held in custody. Burton was tried at Auckland Circuit Court ten months later
and received a six-month prison sentence but released on the basis of time
already spent in custody awaiting trial. Charges against André were dropped.
They both then agreed to return to the UK under Police escort to face the SFO
proceedings.
39. On 24 January 2000, the defendants were charged at St. Albans Magistrate
Court and the case later transferred to Wood Green Crown Court. The trial opened
a year later. Burton pleaded guilty to one count of conspiring with others to
defraud investors. André admitted she had dishonestly retained a wrongful credit
and had evades a liability by deception. They were sentenced on 9 February 2001
to prison terms of 5 years for Burton and 3 years 8 months for André.
40. Peter Maude
41. In a second case, a bogus scheme was promoted to investors at conferences on
luxurious Caribbean cruise ships and in expensive hotels in Mexico. The
conferences were organised by a Dutch businessman Rudolph Linschoten who used
the name 'Professor Van Lyn'. Investors paid to attend the week-long
conferences. They attended lectures on the stock market, banking and offshore
investment trusts but the culmination of the trip was a two hour lecture on high
yield investment programmes. The programmes were described as being part of a
secret investment world in which fabulous fortunes were being made by a few
brilliant traders, such as Peter Maude.
42. The investors were persuaded that they could benefit from Maude's skill by
pooling their money in a company called Sabre Asset Management Limited. The
company was called "Sabre" because of Maude's penchant for big game hunting
(another company was named "Jaguar Asset Management Limited" and Maude's house,
'Cornercroft', in Wilmslow was bought in the name of "Leopard Asset Management
Limited").
43. Some 195 victims each sent a minimum investment of US $25,000 to an Isle of
Man account, operated by Sabre, believing that the funds would be used to buy
bank instruments which would then be "traded" with very profitable results. In
fact almost as soon as it arrived in the account the money was used to pay for
Maude's house in Wilmslow and shooting equipment, including expensive shotguns
by Purdey and Holland and Holland and hand made rifles by T & T Proctor. Maude
also purchased a Range Rover for himself and cars for his wife and for his
children.
44. Sabre was controlled by a UK solicitor, Marshall Ronald, from his home in
Altrincham, Greater Manchester. Ronald was also prosecuted but acquitted by a
jury on 23 March 2001. He explained in a 7 week trial that he had been deceived
by Maude whose lies he had believed.
45. The second offence involved a conspiracy with a man from New York, Henry
Geier. Maude and Geier persuaded a Singapore businessman to invest US $1.2m in
Maude's investment programmes. The two conspirators then divided the money
between them. Maude spent his part of the proceeds on high living and luxuries
including an MG sports car for his girlfriend, a 26 year old Danish dancer.
46. Assets to the value of £3 million have been seized in the USA and the UK,
amongst them the house bought by Maude, his guns, shooting trophies and a number
of cars including a Morgan and the MG. The SFO intends to apply for a
confiscation order.
47. (In February 2000 the SFO discovered that Maude was still committing
offences on bail and applied for his bail to be revoked, he has been in prison
since then.
48. Rudolph Linschoten was prosecuted in Orange County, Los Angeles and was
sentenced to 5 years imprisonment for his part in the fraud. His girlfriend,
Freda Freitas, who had also been involved in the fraud, received a suspended
sentence. Geier was prosecuted in the USA and is facing a prison sentence.)
49. So these are the frauds we are dealing with. What can we do about them?
50. Disruption
51. Most of you here today are law enforcement officers and disruption of
fraudulent schemes is your stock in trade. The best method of disruption is to
tell the victim not to part with his money but in such circumstances what can
one do?
Firstly, I think there needs to be a concerted programme of education advising
people not to invest in these schemes. People need to be made aware of the
dishonest nature of these transactions and that their money is at risk if they
do.
Secondly, inform banks of suspicious transactions.
Thirdly, professionals involved - often solicitors and accountants - can be
warned that they are participating in schemes that are unlawful. The Law Society
has sent formal warninbgs to all solicitors and evidence can be given to that
effect. The Met are developing a pro forma which the person is asked to sign as
evidence of having received it which if nothing else puts them on notice that
what they are doing is, or what they are involved in, is likely to be dishonest.
Inform the Law Society.
Inform the regulators, FSA etc.
Inform overseas regulators and investigation agencies.
What about publicity in the press? Pretty difficult to do until there is a
conviction but some papers and some journalists are prepared to run with these
stories.
52. Investigation
53. At a time when police resources are fully stretched. At a time when the
demands on you are increasing all the time. At a time when detective resources
are in great demand (though sometimes I fear not highly valued); where
examination of the unused material may tie up resources for months on end it is,
perhaps not unsurprising, that senior officers query the need to investigate an
offender living and working in their area but where all the victims are outside
the United Kingdom let alone outside the County. Those of you from overseas
jurisdictions will have similar experiences I am sure. However, a failure to
investigate such crime will in the long run encourage not only fraudsters but
the other crime which is often interrelated with it to base it in the UK. It is
unacceptable that professional criminals should be able to steal and enjoy the
proceeds of their crimes at the expense of others.
54. How do we at the SFO investigate these complicated matters? Easier said than
done. Let me give you a few pointers – as we say over here, probably teaching my
grandmother to suck eggs.
55. Firstly, you are unlikely to successfully investigate in any reasonable
timescale unless adequate resources can be made available. Those do not have to
be police officers - or even the SFO. What is required, right at the start, is
an exercise to scope what the investigation is likely to require and then a
decision made on the resources that are to be made available and, I hope, kept
available. A plan carefully thought through, altered as circumstances change
will help keep the focus on what you are doing and why you are trying to do it.
Almost always you will need to involve the prosecutor at an early stage. If you
have any hope of getting the case home you will need to ensure that what you do
obtain can be and will be going to be used in Court. Wherever possible try not
to execute warrants, hoover up vast quantities of material which you spend the
next nine months pouring over. The mechanics of your document control systems
need to be fully understood by all involved.
56. What evidence will you need?
57. All cases depend on their own particular circumstances but I would suggest:
58. Identify the victims.
59. Try and obtain their stories - you may have to go abroad to do so.
60. Follow the money - almost certainly you will have to go abroad to do so
using Letters of Request. To do that you will need to involve the CPS/SFO. In
some cases where there are multiple victims, witnesses, money trails you may
have to arrange to issue large numbers of Letters.
61. One of the most difficult things to overcome in these types of cases is
proving that the intermediary was complicit and had knowledge of the fraud.
There is great scope for each to blame the other.
62. Another difficulty is in obtaining negative evidence to show that the
commercial transaction underlying the fraud is a sham. Though, as I have said,
prime bank instruments do not exist; they have no meaning as far as I am aware
in banking law or banking practice and are used as a moveable feast – it is
difficult finding witnesses who are prepared to say so. I know of no simple way
of disproving a particular class of transaction. Each must be examined and it
may be possible to obtain expert evidence that this transaction is commercially
unviable.
63. Prosecution
64. As long as we do not have a substantive offence of "fraud" the available
charges have to be picked from the wide selection of statutory theft and
deception offences still in force; they may or may not fit the facts of the case
–
Conspiracy to defraud
Fraudulent trading
Section 47 Financial Services Act 1986 (fraudulently inducing an investment)
Illegal deposit taking under the Banking Act
Money laundering under the Criminal Justice Act
Theft
Obtaining by deception
65. Common methodology in high yield investment frauds
66. Points or pyramid selling methods are often employed, with hierarchical
layers of introducers or sales managers who recruit others and retain their
commissions, fees or expenses from funds collected. The involvement of so many
in the passing on of promises, progress reports and inducements to invest makes
prosecutions difficult – lower level introducers are often reckless rather than
deliberately dishonest and many invest and lose their own savings or recruit
family, church or mosque members. Some disappear, often to jurisdictions from
where they can't be extradited, enabling others to blame them at trial.
67. Funds are removed from the client accounts or so called 'blocked' accounts
into a sophisticated web of offshore companies and accounts in FATF non
compliant jurisdictions. Funds are also dissipated in commissions and
intermediaries fees including legal and accountancy fees. Effective restraint
and confiscation in these circumstances is impossible.
68. Enormous sums can be generated in a short time by an efficient pyramid
organisation. US$ 10-50m schemes are not uncommon and victim lists (when found)
can contain thousands of names from all over the world. English law no longer
allows specimen charges to be brought and proving the true scale of these frauds
before the court can be a nightmare.
69. Equally enormous, and patently unrealistic rates of interest or 'trading
profits' are promised to victims, usually 'tax free'. Victims who invest cash
are often unwilling to testify to their losses for tax reasons or are
embarrassed by their own greed.
70. Schemes and programmes are often promoted for short periods (1-3 months) at
very high rates of return (10-30% per month not uncommon), but invariably most
victims are persuaded when the term is up to re-invest or 'roll over' their
capital and profits in another scheme.
71. Short term schemes are used to promote urgency and excitement and give
victims minimal time to think carefully. Dire penalties are threatened for
breach of confidentiality and sham legal undertakings are used to dissuade
complaints.
72. Investors who demand repayment or interest are of course paid, at least in
the early stages of a scheme's life. Incoming funds are usually sufficient and
satisfied investors are encourage to recruit others.
73. Great play is made of the low risk or risk free nature of the Investment or
trading. Law Society, ICAEW or AA professional insurance is claimed for funds
deposited in client accounts. We have encountered commercial insurance policies
too. Such policies are usually avoided when the fraud is discovered.
74. It is often extremely difficult to identify the organisers of these schemes.
Brass plate companies directed, by tax haven lawyers are favoured; but
investment patterns can be deliberately circular to confuse the identities of
promoters, introducers and victims.
75. Finally, and perhaps inevitably, the multi-national nature of these schemes
(aided by internet promotion from sites in obscure jurisdictions, frequently
changed to other locations and ISPs) creates obvious prosecution difficulties.
Until would be investors (and their bankers and professional advisers) learn to
be more sceptical; law enforcement agencies will continues to be overwhelmed.
This is a battle that can only be won by victims themselves. It may be
predominantly a scourge of a modern, leisured and moneyed society but sadly the
poorer countries are not immune.