Mark Jenner & Co Limited – Forensic Accounting 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.

Support Publishing is a recognised term used for businesses that manage the publication of a range of items such as desk diaries, wall planners, pamphlets, magazines and books. The items will be used to promote a particular good cause. For example a diary might be prepared on behalf of a police sports foundation or a booklet might be published in support of child safety on crossings outside schools.

The intention is for the publication to be circulated to schools and community centres in such a way as to raise public awareness of the messages contained within, such as child safety, safety at work or the good work a charity might be doing.

Of course the publishing company needs to be paid for supplying the publication and there are two ways of doing this. The first is for the charity or good cause to approach the publisher and commission the required item. They may order and pay for several thousand desk diaries to circulate around potential donnors. Details of the charity and the work it is doing will be contained within the diary. This is no different from the marketing products that may be commissioned by commercial companies to raise awareness of their brands.

The second method for funding the publication is for the publisher to include commercial advertisements. An advertser may be happy to fund an entry in a good cause booklet knowing that the public will associate their name withe the good cause and in doing so raise the commercial awareness of their brand. In theory it would be a good method of marketing.

There is nothing futrther to mention concerning the first method of funding. However, the second method is wide open to abuse by con merchants who see this as an easy way to solicit money from the millions of gernerally small businesses around the country who find it very difficult to say “no” when asked to support a good cause locally while at the same time gaining valuable marketing exposure.

To illustrate the support publishing practice that has grown up in the UK over recent years consider the case of McPherson Publishing Limited and Cavendish Publishing Limited. The names have been changed but represent very real companies that were trading fraudulently.  These support publishing companies have been well reported in the press following what was apparently the greatest number of complaints to Trading Standards offices around the UK ever received for one business. They were the same business, one simply setting up and taking over when the regulatory heat became too much for the other. Both companies have now been closed down by the authorities. In fact there were other forerunner companies and there are currently subsequent companies still operating! All were managed by the same people and utilised the same staff out of the same offices.

The business produced quarterly magazines aimed at off duty police, ambulance and fire service personnel. The publication included a few articles of general interest, recipes and puzzles together with around 200 advertisements for local businesses. Each magazine was produced on a regional basis, with the same content but with paid advertisements from businesses in each region.

200 advertsiements through 50 regions, four times a year at an average cost of £250 per entry gives a potential annual revenue of £10,000,000! When you consider that each advertiser received a copy of the magazine and a few hundred were distributed between a dozen or so police stations and ambulance centres – only about 50,000 magazines were printed each year.

Each magazine cost around £2 to print and post out. This leaves most of the £10 million to pay the dozen or so telesales staff around 40% commission and the rest, the lions share, going to the directors running the company.

The business worked because the sales team were self employed on commission, and used various devious means to hook the clients, whose names were simply extracted from phone directories and local papers. Most people don’t like to say no when asked to support good causes, partcicularly if names of charitable causes are used as a hook. The first telephone call would spin the tale of widely distributed publications… “100,000s in your area” and thereby solicit a real commercial interest. The second call, often only minutes after the first would be recorded and would exclude any detail of the false promises. It would simply confirm some of the victim’s details. The customer was often left somewhat bemused, thinking that they would make a final decision when they received their advertsiement copy for approval. However, what they would receive was an invoice with the only option for cancelling being the payment of a charge!

A large proportion of small businesses will pay such an invoice not wishing to enter into any dispute. Those that knew their consumer rights a little better were more likley to bin the first payment demand or return it with a letter saying they did not wish to go ahead with the advertisement. But the support publisher has a plan for increasing the proportion of targets who pay from the initial 40% or so to around 60% or even 70% by a sequence of demanding letters and phone calls robust enought to shake the resolve of even the most resolute victim. In the illustration, the business even passed the unpaid bills over to another debt collecting business that it had set up itself to give the illusion of escalating seriousness in the matter. They even resorted to “door-stop” collection techniques and a video of the threatening behaviour of one particularly nasty instance was caught on the victim’s mobile phone and aired on BBC’s Watchdog in 2006!

That this is a fraud there is no doubt. However, it is a problem that is very hard to deal with. The methods used by the support publishers make it harder and harder to close them down, with sanctions being fairly lenient to date (director disqualification etc). It is likley that the Fraud Act 2006 could be a better route if it was possible to get the police economic crime units to take an interest. The trouble is they are very often unwittingly caught supporting these very cons themselves by agreeing to take nominal quantities of the publications which they simply see as being “freebies”.

The telesales opperators in the business pay no tax. When investigating this particular support publisher I had a whistleblower contact me to say that all the staff used aliases and most were drawing supplementary benefit as well as earning £30 £50,000 per year!

So we have tax fraud, benefit fraud, Misrepresentation Act offences, Telecomunications Act offences, Data Protection Act offences and Fraud Act offences (plus the Company Act 1985 offences that I was investigating).

I tried to arrange a meeting with senior tax representitives from HMRC to inform them of the scale of the tax evasion, not only in the few companies that I investigated but concerning the industry as a whole, but the feedback was that theyconsidered the problem one that they could not deal with. The message was that they would have to wait until legislation changed.

Eventually a High Court Order was obtained to close the companies down. When the Official Receiver went in to the business the next day he found that the bank accounts had been stripped. Within a few days the business was back up running under a different name from the same (rented) premises.

Support publishing is a recognised problem for the authorities who continue to close these companies down only to have them reopen later under different names. Some open as partnerships or sole traders, having cottoned on to the fact that Companies Investigations Branch will not investigate them then. The police are unlikley to have the time and therefore if the perpetrators can make sure the complaints to Trading Standards are kept to a minimum by not pursuing debts too rigorously they will continue for the forseeable future to keep trading below the radar!

By Mark Jenner, forensic accountant and fraud investigation expert. You can keep up to date with his investigator’s diary blog.

In recent years before the “Credit Crunch” the relaxation of lending criteria for those persons wishing to become property landlords meant that the number of people buying houses purely to rent out to students and professionals for income and capital speculation increased exponentially.  No longer was there any  requirement for such mortgages to be limited to multiples of the borrowers verifiable income.  These loans were freely given on the simple basis that the anticipated rental income would cover the interest repayments by at least a specified margin.

Further protection for the lenders was supposedly obtained by the valuation of the property, and a willingness to lend only a proportion of this value to the prospective landlord.  The latter was therefore forced to stump up typically 15% of the purchase price as a deposit thus providing a margin of safety for the lender should there be a need for the loan to be called. Given that property values were always believed to be on the increase – the lenders risk was extremely low. This of course was a bubble that had to burst.

Consider the situation where a taxi driver from Glasgow, of little means but who had previously never owed a penny to anybody, was made bankrupt as a result of buying four properties between 2002 and 2007.  Her properties turned out to be worth substantially less than her mortgages and the rental income was insufficient to meet interest payments on the loans.  Furthermore, she had run up £100,000 in debt in the form of loans taken out to try and meet the mortgage bills and her maintenance obligations on the properties.

By “gifting” the deposit to the buyer, the property developers were discounting their prices but are able to sell houses to people without incomes and without cash deposits purely on the basis that the rental income potential would cover the interest payments on what was effectively a 100% loan being taken out.

Indeed in 2008 I met one lucky customer whose day job earned him £30,000 per annum and who was persuaded by another property company to purchase 20 properties over a period of 6 months.

Lucky?  All he had to do was wait 10 years and the property prices would have doubled making his portfolio worth around £10 million.  Then he could sell the lot and pay off the £5 million he held in mortgages, the rental income servicing the loans in the intervening years.

You can imagine his horror when he eventually discovered that his properties were only worth £3 million and the rental income on the poor quality student lets fell far short of the glossy promises he had been given.  He too is looking towards bankruptcy after struggling for 18 months or so trying to keep his head above water and hopefully obtain some redress from the developers.

These are extreme examples, but there are thousands of other hopeful landlords in similar situations around the UK.  How can this have been allowed to happen?  The starting point is the glitzy brochures offering the opportunity to become property millionaires.  They told how it was possible to use borrowings to gear up investments and take advantage of a rising property market.  This was common knowledge to the person with a shred of common sense.

However, the developers then packaged their properties, whether refurbished units, new build or even off plan investments, making the purchase extremely easy for the customer, who only has to sign the back of a mortgage application form.  The mortgages were arranged in-house and the services of a friendly solicitor were used to convey the transactions on behalf of the customer.  Thus for example a customer obtains a six bedroom property for £300,000.  Although the customer will have paid perhaps a £2,000 reservation fee, the £45,000 deposit was gifted to him.  He is left with a mortgage of £255,000 and the company has promised to manage the rental of the six bedrooms to local students.  More than that, the developers have guaranteed the rental income from the property for one year.

Where does it all go wrong?  The luckier customer will have 12 months of rental income flowing in.  The unlucky one will have to fight for the regular payments and supplement the “guaranteed” income themselves while waiting for the developers to stump up the promised revenue.  But even for the luckier ones, when the 12 months is over and the realisation of having to service a massive mortgage sets in, they begin to take an interest in the investment.  The property is visited, often for the first time, to be found empty, devoid of tennants and in a poor state of repair.  The customer will generally wonder what he has spent £300,000 on and will have his property valued by an independent surveyor.  Now he will see that his property will be worth say between £150,000 and £200,000.  He can’t sell it to cover the mortgage and he can’t keep it because the rental income is insufficient.

The developer has valued the property as a “business” estimating rental income of £65 per room per week and assigning a rate of return of say 6.5%.  The rate of return is too low perhaps but who is to say what should be used.  The room rate is high for a property in poor state situated too far from the university, but is a rate that some students will be paying elsewhere therefore seemed “feasible” at the time.  One of the bedrooms in the property is a box room that can fit a single bed and nothing else.  As a consequence it is impossible to let, but was one of the 6 bedrooms used to initially value the property none the less.  In fact, the bricks and mortar valuation taken subsequently usually reflects the letting potential of the property much more accurately in practice.

So how can such a large mortgage be obtained?  The mortgage lenders rely on the valuation being realistic and presume that the customer has shown his commitment by paying the 15% deposit.  The mortgage form simply shows that £45,000 has been provided “from the applicant’s own funds”.  Therefore in not disclosing the gifted deposit, the customer has committed a fraud on the lender.

But surely the customer’s solicitor would point this out?  After all, they handle the deposit and lender’s principal on behalf of the customer for payment to the developer.  Not at all, the solicitor is hardly independent, receiving hundreds of similar instructions each year referred to them by the developer.  Indeed, they even take receipt of the gifted deposit from the developer, returning it to them with the balance of the transaction received from the lender, ostensibly to give the impression that the customer did own the deposit funds.  The solicitor will say that they are receiving the deposit funds from the developer “who was holding them on behalf of the customer”, but in reality the customer is obtaining property that is overvalued even after being discounted by the deposit sum by obtaining a 100% mortgage from an apparently unsuspecting lender.

The response of the lenders is to sue the surveyors and solicitors for professional negligence and to repossess the undervalued properties from the defaulting customers.  Many of these property developers come in similar variants of the same theme, and then they go leaving bankrupted individuals in their wake.  Some are closed down by the Department of Trade and Industry (now the Department for Business Innovation and Skills) but some are the major construction companies – sailing close to the wind with their “buy to let” operation.

What was needed was tighter control over the ease with which individuals were able to obtain massive amounts of credit, a reflection perhaps of the credit mad society at the time.  This has come too late for many with the squeeze of the “Credit Crunch”.  Now a tangible deposit is required for such investment, with closer scrutiny by the lenders – sometimes as much as 45% or more! What amazes me is that the lenders are now being criticised for being too tight with their money.