Mark Jenner & Co Limited – Forensic Accounting Services

These days confiscation cases seem to outnumber the predicate fraud cases that Mark Jenner & Co assists with.  They are self funding for the authorities who will not be cutting back on this area – even if they are forced to make financial cutbacks elsewhere.  According to the CPS, targets for confiscations will increase to some £1 billion – revenue which will be split between those with a vested interest – e.g. the police, CPS and the courts.

HOW CAN MARK JENNER & CO HELP?

To address the balance, the defence must be prepared for more POCA cases and high quality forensic accounting services should form a key part of the team.  More cases being brought may threaten the quality of the Crown’s financial statements and the defence must be ready to counter with their own financial expertise.

If the pressure on public funding continues to increase this will mean additional challenges for all parties of the defence team.  As forensic accountants specialising in fraud matters we are finding that confiscation and money laundering assignments seem to be filling much of our time.  In order to maintain the very high quality of response required and continue to be a valuable and readily available part of the defence team we are continuing to develop our approach to confiscations with funding constraints in mind.  Mark Jenner & Co was established to work within the increasing constraints of public funding while providing a very high proportion (sometimes all) of the work being undertaken by the expert – to provide defence responses that are robust and can be supported when it boils down to the inevitable negotiations between prosecution and criminal defence teams.

Our approach to confiscations

The recent legislation has never been crystal clear and its application seems to be evolving all the time. Such a dynamic framework means that a measured application of common sense very often prevails in many courts.  The prosecution seem to be getting more consistent with the preparation of their S16 statements latterly but even they admit they still adopt a rather “scattergun” approach.  This allows us to work through the underlying assumptions supporting the components of the benefit figure together with the amounts themselves with somewhat more finesse resulting in a critique that addresses a number of areas:

Arithmetical accuracy

Identifying arithmetic errors will result in the Crown making adjustments without much comment – but major blunders can result in cases being substantially watered down or dropped.

Double counting

As a result of the Crown’s rather blunt approach there is often substantial double and even triple counting that goes unnoticed in its financial cases resulting in benefit figures that are overstated.  This can result from a failure to identify inter-bank account transactions or reversals or, more alarmingly, failing to include all records that can be used to identify sources of funds and so eliminate unknown receipts within the benefit figure.

Legitimate sources of income

If the Crown is assuming a criminal lifestyle then the defence must prove the legitimacy of any funds that have been received.  This often requires tracing income through many different sets of bank account statements and recreating business activity from often incomplete accounting records.

False Assumptions

Every fraud is different introducing novel issues and different approaches are required. However, confiscations generally follow similar themes – components of benefit and realisable assets.  Our experience with generally recurring issues means we approach each case with a high level of efficiency that allows us to continue to undertake this work on a highly competitive basis.

For example we may question how much merit there was in our focusing on the defendant being a minor beneficiary in a fraud by directing our work to the business of others.  In R – v – May joint and several liability was decided for co-conspirators.  Instead, we might ask if it would be better if there was any way the financial activity of the defendant could be presented as simply being courier or custodian activities, as decided in R – v – Allpress?

Our view of these and other issues is that an application of common sense is required based on a general understanding of confiscation rulings.  We find counsel often appreciates our financial input early on to assist with his legal strategy.

We assisted in a confiscation following the case of a landlord who had built up a size-able property portfolio worth some £25 million.  He was caught assisting the illegal entry of asylum seekers into the UK and obtaining around £200,000 benefit on their behalf, which he kept towards their food and keep.  As a pillar of the local community, he immediately pleaded guilty and was sentenced to around 4 years in prison.

Then came the confiscation.  Of course the Crown wanted the whole £25 million for lifestyle offences.  Our report took the view that the defendant’s benefit was based on the £200,000 from particular criminal conduct and that the isolated illegality did not represent a criminal lifestyle. The Crown continued to press for lifestyle sanctions and began to introduce the idea of tax evasion – getting their own expert accountant to attempt to quantify how much tax had been evaded over some 30 years.

Eventually the lifestyle assumptions were quashed, but the prosecution argued that because illegal funds had been paid into the bank and mixed with several millions of other transactions – all funds had become tainted.  I recall the Judge’s response – “so you are saying if I stole £1 on Monday – then won £1 million on the lottery the next day and put both sums in the bank – I would lose the lot?” Prosecution counsel muttered “yes my lord” .   However, the Judge made a confiscation order equal to the sum we had proposed, commenting on our common sense approach in his summing up.  Following the recent decision in R – v – Waya the issues surrounding proportionality and the use of mixed funds have become much clearer.

Getting the benefit as low as possible

The benefit order stays with a defendant for the rest of his life, yet we have seen defence teams more focused on doing a deal with the Crown in relation to the realisable assets figure.  We aim to reduce the benefit figure as far as possible and even where a bigger figure than the agreed settlement remains, try to leave areas of doubt or disagreement within our reports should there be further recoveries pursued in the future.

Applying a bigger proportion of expert time

We prefer to increase our efficiency through the utilisation of our extensive confiscation experience rather than reducing the amount of input by the expert delegating large proportions of any assignment to junior staff.

By Mark Jenner BSc MA CFE FCA– Mark has been a forensic accountant for over 16 years specialising in fraud and money laundering for most of that time. He heads up a dedicated fraud advisory service line focusing on expert witness assignments and fraud investigation. Regularly attending court to give oral evidence, his portfolio includes criminal fraud prosecutions, proceeds of crime and money laundering offences, corporate enquiries (including insolvency investigations) and asset tracing assignments.

Mark can be contacted at: mail@mark-jenner.com

Most fraud cases investigated by Mark Jenner & Co involve some interaction with a bank. It may be simply through the examination of bank statements for an account used to launder proceeds of crime or it might be an investment scam used to steal large sums of money from high value clients in a Ponzi scam involving the offshore banking system. The banks are very skeleton of the financial system worldwide and are seen as both prime tools and targets of the fraudster.

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. It is not that physical bank robberies do not happen, it is just that the robbers almost always get caught and fraud is increasingly seen as a much less risky option. Just about every fraud or money laundering activity will need interaction with a bank somewhere along the line. Stolen cash is very difficult to spend in large quantities but cheques and credit cards can 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 can, and often does occur by a third party bribing a member of staff to obtain information concerning customers’ accounts. Identity theft and identity fraud are key areas where losses can occur. But id theft and embezzlement is not the only 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. The bulk of the money never left the country, exchanging hands many times as the fraudsters conducted deals with each other. In one case where Mark Jenner & Co was involved, the only clue that a company was conducting fraudulent deals worth £millions on a regular basis was a single transaction in their UK based bank account showing a small payment of a modest sum settling a local expense in Curacao.  This was a slip by the crooks as legitimate looking accounting entries were normally recorded in the UK, France or Germany or wherever the management of 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 are conducted by worth of mouth. The word ‘Hawala’ means ‘trust’.

Hawala banking is traditionally used for ex patriot Asians residing in the West to send money back to their families, for example 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 organisation 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 realise that a leading bank such as Lloyds or Barclays might pay $100s and even $1000s to secure a new customer!

(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

The Ponzi fraud is a classic example of an investment fraud. It dates back to early last century when Charles Ponzi came up with the idea of conning investors by using their own funds to pay interest. 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. Then, somebody else coming into the branch 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).  The recent economic problems coming to light in 2008 with the crash of Lehman Brothers Bank has shown how illiquid the banks were becoming and survival of the whole Western banking industry became dependent on the massive bailouts by the taxpayers.

The principle used by the Ponzi investment scam is similar to basic banking, the only difference being is that a bank aims to make a profit with the money invested, by 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 (i.e. there is a “run”on the scheme) and the message of high returns peculate to the investors, there is a good chance that 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 – where we get the investment fund that operates 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 again 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 operating during the times of high credit availability 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 by far was the Madhoff affair involving billions of US dollars, pounds sterling and other currencies that had supposedly been invested for lucrative rates of return. If you check the news archives, fraud blogs and other reports you will see that there are dozens of these scams emerging every year. This is clearly a situation where greed gets the better of sense!

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 for the main perpetrator. Of course pleading guilty gave the UK perpetrators little chance of reprieve – 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 operators 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 there are court reporting restrictions – however we certainly have what looks like another Ponzi scheme. Effectively there is 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 recognized 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 glamorous 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.

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!

DEFENDING ALLEGATIONS OF OPERATING A FRAUDULENT INVESTMENT BUSINESS

Not all investment businesses are operated as frauds, yet given the authorities propensity for jumping to the wrong conclusion it is often possible for the unfortunate manager, sharp practitioner or even negligent (but not necessarily criminal) businessman to come under scrutiny.  In such a case – Mark Jenner & Co is able to unpick the complex network of investment transactions, clarify the reality of the investment scheme being operated and present its findings in such a way that any mistakes or business errors can be identified and viewed separately to a potentially viable business proposition.