Mark Jenner & Co Limited – Forensic Accounting Services

(This newsletter is circulated in hard copy format around solicitors and baristers throughout the UK)

Welcome to the second edition of “Fraud Briefing” this year.  Following positive feedback gratefully received from many of you, I am now planning to publish this newsletter every two or three months. Given the vagrancies of the postal system and a recent flurry of new cases I have decided to send this one out in good time and apologise if this festive edition reaches you before the season begins.

New cases picked up recently include old favourites of criminal defence frauds, money laundering indictments and Proceeds of Crime confiscations, but I was glad to get the opportunity to work on another Ponzi based scam. This time my interesting task is to look at the professional involvement of an accountant providing services to the investment fraudsters. I also seem to be receiving a few enquiries with an international flavour, possibly because I have put in more commitment to my Internet marketing through technical article writing?

Insolvency cases – when will the floodgates open?

One recent approach from an individual residing in the Far East has now turned into an investigation into a “pre-pack” administration in the UK. Pre-packs have been the subject of much criticism, being a process with little regulation and making it far too easy to establish a “phoenix” company when businesses fall on hard times. I understand that such has been the public complaint that the Insolvency Service carried out a review of the 572 pre-packs that took place in the first six months of 2009. It is astonishing to learn that 35% of these did not comply with government legislation and that 17 were deemed serious enough to be referred for full investigation.

My source in the Insolvency Service tells me that  the typical problems being seen are when a company diverts its trade and debtors elsewhere in order to demonstrate insolvency. Then the administrator is astonished to find that the company that he sold the business assets to is suddenly being managed by the same directors as before.

It is still asset stripping…the diversion of trade prior to a pre-pack seems to continue the theme that I discussed in my previous newsletter. Is there no end to the methods devised by the fraudsters for obtaining value from a business and then leaving the creditors to pick up the pieces?

The future of criminal defence under threat?

I don’t want to be alarmist or jump the gun, but the intention of the Legal Services Commission to reduce expert fees in criminal defence cases by 20% has given me a number of sleepless nights over the past two months.  I have always prided myself on managing a broad portfolio of fraud related assignments, from investigating fraud, asset recovery and assisting the regulators to providing expert accounting witness services to the defence team in criminal fraud and proceeds of crime cases.

In most areas of my work each new assignment brings different issues and varied circumstances in which fraud has occurred.  However in criminal defence work a pattern really does emerge and “practice” definitely does make perfect.  Having worked as an expert in criminal defence matters for many years now I like to think that my approach has become efficient and most certainly cost effective as far as LSC funding is concerned.  It does seem rather a shame that they are now threatening to make good on their proposals originally aired in a consultation five years ago and currently being discussed again – that defence experts are paid at rates commensurate with  prosecution costs or more aptly…public sector pay scales.  This is a ridiculous hypothesis and a couple of objections (I know there are many more) spring to mind:

• The Government fraud regulators, prosecutors and the LSC have all seen fit to waste astonishing sums of money on pursuing certain headline causes when the political will has been there and then complain that they do not have enough to manage their day to day business – think of the £15 million Rover investigation, £60 million for the London Underground fiasco…; and
• The rates they are proposing are more likely to be in line with public sector remuneration levels, yet we do not have a guaranteed pension, secure job and flexible hours that might make the low rates more bearable.

I am sure we will all muddle through.  It may be that the poorer criminals will not have the access to justice that they have enjoyed in the past.  It may be that sophisticated fraudsters will be able to fund their high quality defence and the less successful criminals take what they are given. 

What will the New Year hold?

We wait to see what will happen with expert funding as we do with all the other areas of public sector funding cuts.  In the meantime it has to be business as usual.  I believe that I am in a position to continue to give personal and efficient attention to criminal defence cases, small and large, with an experienced team of criminal defence forensic accountants behind me.  I will also be looking to that area of expertise that gives me much satisfaction – recovering assets in insolvencies.  This I feel will become  hot topic soon as I do get the feeling that there is a huge volume of businesses teetering on the brink – despite the ever hopeful claims of being out of the depression/recession. 

Corporate asset stripping will continue to keep me occupied it seems, and as the world shrinks and the Internet grows I am alert to the possibility that more and more of my work will involve telephone calls in the middle of the night from different time zones.  Fortunately there is less likelihood of foreign travel now given the ease with which we can communicate – but I am having to brush up on my “KYC” due diligence procedures!

I wish you a Merry Christmas and a Happy New Year.

Mark Jenner

Consider the situation where a company begins to struggle in a harsh economic climate. It finds it harder and harder to pay its suppliers as promptly as usual. However, the suppliers are struggling themselves, and allow the additional credit that is being taken as they are desperate for sales. Eventually after a few months, with huge debts mounting up, the directors of the company decide to fold. They transfer the business to another with a similar name and inform all its customers of the changes. A “phoenix” company arises out of the ashes without the burden of its previous debts and continues to trade successfully. This is the basis for many a fraud that has been investigated over the years but it is astonishing to discover that there is also a completely legal process that, if carefully followed, can allow this very course of action!

Around fifteen years ago a colleague and friend of mine started his own business growing mussels in the west coast of Scotland. The early years of such a business venture can be more fraught with problems than others. Dealing with livestock and the vagrancies of the Scottish climate meant that he faced one major problem after another. He had to deal with difficulties in obtaining the young mussels to grow on, attacks by predators wanting to eat his crop, solving design problems with his equipment, problems with security and trouble with harvesting the final product. Solving each of these problems in turn cost a great deal of money, which he borrowed from various sources including the bank, from his family and from the government. He managed to find solutions to all his problems and eventually after two or three years had a healthy core business up and running. However, by this time his debts had grown to such a level that the business was no longer viable. He sought insolvency advice and ended up having a receiver appointed over his business. He was then able to buy back his business assets from the insolvent estate and continue his business debt free. He currently runs a successful business, yet the original unsecured creditors were never paid.

This was well over a decade ago, and was always an area of the insolvency process that raised criticism with its commentators. However, the Enterprise Act 2002 introduced an even faster process known as “administration” that was easier and cheaper to implement. Unlike the process used by my friend, it did not need the approval of the courts to ensure any deal being done was fair. The process has been termed a “pre-pack” and allows a phoenix company to arise using the assets of a failing company and trade, often using the same or similar name as before and the same directors to run it.

The way in which a pre-pack works in practice involves a secured creditor, the directors or owners of the company arranging with an insolvency practitioner to sell the assets of the business before it is placed into administration. Then, when the administrator is officially appointed, the sale of the business is a “done deal”. There is no requirement for the business to be marketed externally and only a reasonable expectation that a fair price is received. The unsecured creditors may receive nothing after those having security are paid.

There is a great deal of criticism surrounding pre-packs because they allow an administrator to wipe the debts of a distressed business and sell it on quickly to the previous owners. The Insolvency Service, the government agency that is supposed to ensure that administration procedures  operate within the legislative framework of the Insolvency Act 1986 and Enterprise Act 2002, has recognised the vulnerability of the system to abuse and introduced additional guidelines in January 2009 by way of Statement of Insolvency Practice 16 to force insolvency practitioners to disclose more information to all creditors. Even so, figures they released recently show that in the first 6 months of 2009 some 35% of the 572 pre-pack processes commenced showed compliance failures and of these 17 cases are currently being investigated for serious anomalies.

Clothing retailer USC was bought back by its owner Sir Tom Hunter out of administration, by purchasing 43 of the 58 outlets. Chief executive of the Officers Club David Charlton bought 118 of the 150 failing menswear stores. The coffee dealership chain Wittard and furniture retailer MFI were also both recent subjects of pre-pack buy backs. It is true to say that the previous owners or directors are allowed to cherry pick the best bits and start again debt free. However, in support of the process the object of finding the best way of realising the value of an insolvent and failed business without negative publicity is often achieved. The goodwill and jobs of the workers are preserved and the whole process of the insolvency is usually quick and efficient.

The insolvency arena will always be a rich picking ground for the fraud investigator. In many cases it is simply because that is the time when the inner workings of a company y are laid bare for external scrutiny. However, in the case of the pre-pack process there may be a fine line between it being the best rescue package for a failing business and fraudulent trading to remove the full value of business assets from the hands of the disadvantaged creditors. It is likely that this process will throw up a number of incidents of fraudulent behaviour for the investigators over the coming months and years.

Mark Jenner writes a fraud and forensic accounting related blog that looks at the nuts and bolts of some of the investigation areas and fraud issues that he covers from day to day.