Mark Jenner & Co Limited – Forensic Accounting Services

The Labour government has been criticised widely for the huge raft of legislation it has introduced in its 12 or so years of reign. Much of it has been lengthy and often arguably unnecessary. The burden of regulation on any business attempting to obtain business loans and trying to struggle through the current down turn has increased and is significant.

However, there must be credit in the attempts being made to improve the anti-fraud and white collar crime framework within the UK. The Proceeds of Crime Act 2002 introduced what some say are draconian powers of confiscation for the authorities to use. Draconian they may be but that is fair enough when they are used against the ones they were designed for – the organised criminals with the obvious trappings of unearned income. There can be some criticism when the letter of the law is used to attempt to obtain large sums from petty criminals with default sentences when they can’t be paid.

One bit of legislation that makes you wonder who is actually writing these laws is the Fraud Act 2006. I know that many of the regulatory authorities that I work with are a bit dubious about this Act. Those police officers and prosecuting lawyers tell me that they were happy with the Theft Acts and the Common Law offence of conspiracy to defraud. The Fraud Act was meant to codify these and other areas - and it may be that using it will require a few more years of testing through the courts.

I did note in the Fraud Act that some Companies Act style amendments were contained within it, whereby the prohibition on directors loans, quasi loans, credit transactions and related transactions had been abolished and replaced by a requirement for shareholder approval. Breaches are no longer criminal offences and the de minimis level for needing shareholder approval has increased from £5,000 to £10,000.

My first impression is that this will lead to a huge increase of petty frauds in the £5 to £10,000 range.

New legislation, Fraud Reporting Centres and Strategic Fraud Authorities are fine and to be admired. However, it is no substitute for investment at the sharp end. We need stronger regional police economic crime units who all have access to fraud investigation and experienced forensic accounting resources. This is really where a public and private sector liaison would work, and was one of the ideas behind the various regional fraud fora that have been established around the UK.

If a person is defrauded he or she must present a clear cut case to the authorities. It is no good shouting “fraud” – it needs investigating and presenting clearly. Of course this is a hurdle that many victims fall at and the fraudster escapes to ply his trade again somewhere else. Those that do investigate, even employ their own forensic accountants to build a financial case to present to the authorities, can be equally at a disadvantage if they get the investigation wrong.

Say for instance a company decides to investigate a £9,000 director loan that is thought to be defalcation by the director. The director is not committing a crime under the Fraud Act - the matter will likely be civil. Therefore the police will not be interested and it will be hard to recover such unauthorised borrowing. There are still difficulties with more substantial “borrowings”. Say £50,000 is missing and this time it is fraud. The culprit is not presenting a defence of taking the money as a loan – he is simply denying the matter. The Defendant may argue that he was simply seeking tax relief by exploiting timing differences in respect of any payments received, and that he was planning to pay the money back next fiscal year!

Any accusations made during an investigation will not help, the director may simply leave citing constructive dismissal and the business may end up paying out as much and more than it had already lost in compensation awarded by an employment tribunal.

The point is that if the police are to enlist the help of the private sector in the fight against fraud, funded by the victims, then they should have sufficient resources employed to monitor and assist with the private sector enquiries. This will enable them to be carried out properly and in a way that will result in a successful prosecution for the authorities, civil asset recovery for the victims and/or justified and successful confiscation proceedings that will help to fund both the authorities and the out of pocket victim.

Organised criminals such as fraudsters, drug dealers and people traffickers all deal in large amounts of criminal proceeds. They need some way to manage this money, so they can spend it without the authorities seeing that it is proceeds of crime. They need to clean the money – to launder it. Money laundering is the biggest financial crime there is, because it encompasses all the other crimes.

The money laundering of criminal proceeds is not easy, as most countries have enacted severe legislation (some say draconian) in an attempt to stop the proceeds of crime benefiting the criminals. In the UK the Proceeds of Crime Act 2002 was the beginning of the big thrust against the organsised criminal in an attempt to hit him where it hurst most – in the pocket. The Act and associated Money Laundering Regulations have brought in a raft of measures that include the appointment of professionals such as lawyers and accountants to act as gatekeepers between their potentially criminal clients and the law enforcement agencies.

Now professionals have a legal obligation to firstly ensure that their clients are legitimate individuals or organisations and secondly to report any suspicions they may have, that proceeds of crime may be being transferred. This means that they have to do detailed checks on their clients before accepting work from them, to make sure they are who they say they are, and also to educate all staff to know what to do if they should come across a suspicious transaction that might need reporting to the authorities.

Previously the criminals would recruit professionals in order to give them a veneer of respectability. Lawyers would be asked to set up corporations that would be used to layer the criminal proceeds in different cities or even countries. Accountants would prepare accounts that absorbed proceeds of crime within legitimate accounts. Bankers had already been targeted by the authorities in the fight against money laundering and have similar obligations to fulfil.

Professional negligence is now a major crime. A lawyer or accountant found to be assisting in the laundering of money can face up to 14 years in jail and would no doubt face swinging asset confiscation proceedings as a matter of course. It is not possible to claim client confidentiallity either. Even a lawyer, who is normally able to claim legal priviledge in communications with criminal clients, cannot turn a blind eye from reporting money laundering of the proceeds of crime to the appropriate authorities.

The Proceeds of Crime Act 2002 is often used as the relevant legislation in cases of professional negligence. It is difficult for an accountant to say that he thought criminal funds were legitimate, when as a financial expert he ought to have known something was amiss. The Fraud Act 2006 could also be used, as dealing with client’s ilegitimate funds could easily fulfil its definitions of fraud:

The professional must seek to protect himself and his staff by taking all appropriate measures, appointing a Money Laundering Reporting Officer (MLRO), ensuring Know Your Client Checks (KYC) are undertaken per the Anti Money Laundering Regulations, educating all staff and ensuring that appropriate action is taken when suspicious activities are discovered (SAR). There is now no excuse for inadvertant mistakes.

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.