Fraud Advisory Services

During a recession you would think that investors would be more careful with their money. Is it the lure of high interest rates when conventional financial services products offer such a low return that encourages otherwise astute people to invest their wealth with fraudsters – or is it possibly greed that blinkers them to the risks involved investing in off beat ventures?

Every week brings reports in the press of new scams, that are either coming to light, are being investigated or the villains are being prosecuted. For every big investment fraud that is reported, there are likely to be around 10 smaller ones that are not. And for every fraud that is discovered, there are 100s that continue unseen. It is a big problem, and as public spending is cut back, cash for fraud resources is dwindling from its already meagre level.

A smaller Ponzi style investment reported in the dying days of 2010 is the case of Mr Christian Orpin. This is a prime example of a somebody operating on a small enough scale to avoid too much attention from the authorities and which allows him to continue to develop and ply his quest for easy money even after being brought to book.

Orpin operated a business called PDS High Wycombe, offering an investment scheme called Premier Projects. This was an investment vehicle offering between £150 and £200 return per month for a £5,000 investment. This is at least an annual yield of about 36% – far more than the percent or two available from the banks and other mainstream institutions. You would think that the: ’…if its too good to be true…’ mantra would kick in. But no, Orpin was able to gather some £10 million from investors.

This is of course an illegal investment scheme and the Financial Services Authority has obtained orders from the High Court blocking this investment business. Of course the FSA were not prepared to carry out any real investigation, and it was left to Companies Investigation Branch of the Department for Business Innovation and Skills to carry out a probe that resulted in Orpin becoming bankrupt and being disqualified as a director until 2016. It is unlikely that Orpin’s bankruptcy trustee will recover more than 60% of the investors funds, probably much less.

Job done? No – now Orpin is trading as Phoenix Debt Solutions according to a Daily Mail report – with the consent of an Office of Fair Trading’s consumer credit licence! He does not need to trade in his own name to get this accreditation and therefore avoids the constraints of his bankrupcy. As his business is unincorporated, his director disqualification is meaningless.

It does appear incredulous that somebody can be investigated and banned by one regulator but approved by another. However, this as been a criticism of the UK fraud regulation industry for a long time. I have undertaken forensic investigations on behalf of Companies Investigation Branch myself, and apart from the main scam I have uncovered systematic tax avoidance by whole work forces.

Do you think that I was able to get HMRC to take an interest in the tax they were missing out on? It is a retoric question…and the business, though closed down by us, continues to trade from the same premises in a different name.

Banks have always been the target of criminals for their very nature is to hold large amounts of money. However, in the 21st century we are not as concerned about bank robbers or bullion heists as about the risk of fraud. Just about every fraud or money laundering activity will need interaction with a bank somewhere along the line. Cash is very difficult to spend in any large quantities but checks and debit/credit cards afford the lavish lifestyles the criminals seek.

Within the bank there is the problem of embezzlement by the staff. Key members of staff are in a position to know the inner workings of the accounting controls put in place to prevent fraud by corrupt members of staff. Corruption could occur by a third party enlisting a member of staff to obtain information of customers accounts. Identity theft and identity fraud are key areas where losses can occur. But id theft and embezzlement is not the prime area of concern in the area of bank fraud.

The need for interaction by the criminals with banks to facilitate their spending of their proceeds of crime gives rise to the issue of anti money laundering controls that every bank must have in place. The bank is effectively tasked with acting as a whistle blower for law enforcement, reporting any suspicious customers or transactions that take place.

Criminals, fraudsters and even terrorists are finding it ever harder to use banks to move their money around the globe. Anti Money Laundering Regulations place restrictions on the ease with which money once was moved. The criminals often turn to fringe banks away from the high street to transact their proceeds of crime in an attempt to escape the gaze of the authorities. Corruption in second tier banks is well reported in the press. For example the Bank of Curacao was closed down at one stage as most of its customers were found to be involved in VAT fraud activities. Companies based in Europe would trade with each other, but the financial transactions were conducted remotely in Curacao. Legitimate looking accounting entries were recorded in the UK, France or Germany or wherever the business was physically taking place.

Other fringe banking systems prone to the attention of the fraudster or money launderer are the money transfer systems that operate world wide. The Hawala banking system is notorious for not leaving any audit trail – transactions between countries at opposite ends of the world conducted by worth of mouth. The word ‘Hawala’ means ‘trust’.

Hawala banking is traditionally used for ex patriot Asians to send money back to their families in Pakistan and India. It uses the transfer of ‘value’ or exchange of debt as one means for moving wealth. Other more formal systems such as Western Union will transfer small sums of cash in the same way, for a price. Both Hawala Banking and some of the transfer businesses such as Western Union have been associated with fraud and money laundering in recent years.

However, a number of more respectable money exchange systems are operating legitimately and taking more and more trade from the large high street banks. PayPal and the Revolution Money Exchange have been carving a growing slice of financial activity in recent years. The allegations of a Revolution Money Exchange Scam reported in 2008 was unfounded and this major USA bank backed organization is probably less prone to bank fraud and corruption than most leading high street banks. Indeed it was probably because the Revolution Money Exchange was paying $25 to new clients opening an account and $10 for each referral brought in that cries of fraud and scam were made. Yet people do not realize that a leading bank such as Lloyds or Barclays might pay $100s and even $1000s to secure a new customer!

The Ponzi fraud is a classic example of an investment fraud. It dates back to early last century when Charles Ponzi made the idea of camming investors by using their own funds to pay interest, famous. I am willing to bet that he was not the first to see the potential in dishonestly circulating capital funds to increase income in an investment fraud.

The trouble is, the very principle underling the Ponzi investment fraud also underpins the fundamental concept of banking. If you go into you local branch of Barclays you can pay £500 into your savings account. The, somebody else in the que behind you might ask to make a £500 withdrawal. Your £500 is given to this other person. Don’t worry, your account shows another £500 has been added whereas the other person’s will show a withdrawal. But the point is that a bank does not have enough funds to cover everything invested. Typically it will lend out a multiple of the liquid funds its holds in the expectation that it will never be called upon to repay all its investors at one time (i.e. a run on the bank).

This is the same principle used by the Ponzi investment scam, the only difference being is that a bank aims to make a profit with the money invested by, in turn, investing the money itself at a higher rate than it is paying out to its customers. It is effectively making a margin between the rate it borrows at and the rate it lends. It is supposedly a commercial proposition. The true Ponzi scheme will not be interested in making a profit from such “buying and selling” of funds. It will be simply looking for as many people to invest as it can, and keeping those investors happy by returning some of their capital to them every now and again as “interest”. So long as too many people do not want to make withdrawals and the message of high returns perculates to the investor population, more funds will come in than are going out – yet no real investment activity will be going on.

There are shades of grey of course – wher we get the investment fund that opperates like a Ponzi but tries to invest the funds. Perhaps it is investing in a bigger Ponzi scam itself, expecting a return on its own investment. Perhaps it is simply making poor investment decisions (shades of the Credit Crunch!) and is having to repay its own investors out of capital. There are so many similarities between the way the mainstream banking sector was opperating during the times of high credit availablity and Ponzi scams that the general public have a right to be angry at the scale of the banking sector’s bonuses.

Every year we hear of new Ponzi scams that have come to light, perhaps when the schemes begin to crumble when more than just a few investors want their capital back. The biggest recently was the Madhoff affair involving billions of dollars and pounds that had supposedly been invested for lucrative rates of return. But is you check the news archives, fraud blogs and other reports you will see that there are dozens of these scams emerging every year.

Last year I worked on a reasonably large case that had been brought by the Serious Fraud Office in the UK against a couple of businessmen based in the Midlands. This case has been reported in the press and involves around $200 million of investors funds that the authorities say were invested by UK victims who, once the scheme folded, lost their money.

The UK arm of the alleged Ponzi fraud was part of a much larger investment scheme being headed by somebody in the USA – which had already led to a plea bargain situation. Of course pleading guilty gave the UK perpetrators little chance of repreive – yet they had believed that the USA arm was going to repay them with interest. Gullible perhaps, criminal…maybe.  At the time I remember doing a bit of research on Ponzi frauds and being amazed about the number of current cases that were being investigated or being dealt with by the courts!

Now I am faced with yet another case this week where I am asked to look at the professional conduct of an accountant recruited by the opperators of an investment fund. If the fund was a Ponzi, should the professional have known about it and reported under Money Laundering Regulations to the Serious and Organised Crime Agency in the UK? Should he have known that funds he was holding were proceeds of crime?

I am not in a position to report about this at present as it is sub-judicae - however we have what looks like another Ponzi scheme. Effectively we have a large number of ostensibly rich investors looking for a larger return than expected from a bank or other mainstream investment opportunity. Why do people keep on investing in such a way. Promises of several % interest each month abound and it is not easy to see why people do not approach these investment opportunities with more caution. Do people never learn?

The problem is of course, these High Yield Investment opportunities are indeed based on a shred of truth. There is a backbone of legitimacy behind the very idea that you can find investment opportunities offering higher returns than other more recognised sources such as the banks. It is this very element of secrecy and intrigue I believe that encourages the unwary to fall for the scams! Whereas there might have been, and some say still are, high yielding returns to be made for massive investments used effectively as global hedge funds by a number of altruistic and very rich organisations and individuals – these are likely to spawn glamourous tales of rich pickings to be had even when they do not exist anymore.

Remember, the UK and USA have injected trillions into the economy over the last year or so – have you ever wondered how much back room/under the table dealing has gone on around these incomprehensible figures?

The trouble is that if the climate is ripe for such massive movements of money then the fraudsters see the opportunity to start weaving their spells again! It is a setting for even more Ponzi scams to be generated.

There is a lot of ground to cover with the subject of investment fraud, so in order to provide an informative guide to such schemes and what to watch out for I am splitting the subject into the following:

• Ponzi schemes – any basis for the hysteria?
• How a Ponzi scheme works
• Characteristics of a Ponzi schem to look out for
• How great is the Investment Scam market?

As a forensic accountant and fraud investigator, a scam such as a Ponzi fraud is a classic example to me of the reason why fraud flourishes. Ask yourself if greed might have something to do with it – of the fraudsters and the victims alike!

For those of you that read my fraud investigators diary blog I will be announcing these articles over the next week – otherwise please leave a comment or trackback if you would like to receive notification of this research (no repeat email spam will be sent).