Fraud Advice

The Ponzi fraud dates back to early last century when Charles Ponzi first brought the idea of using an investors funds to repay investors their interest, thereby seeming to be a successeful business and encouraging new investors, into public knowledge. I am willing to bet that he was not the first to see the potential in dishonestly circulating others’ funds to increase income in an investment fraud that is designed to enrich the perputrators.

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.  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 the recognised sources. 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 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! What a setting for even more Ponzi scams to be generated.

My work as a fraud investigator and expert accounting witness will undoubtably involve more Ponzi frauds over the coming years and months. In the meantime I will report my current findings on my scambusting business opportunity blog site as soon as I am able to name and shame!

The term Long Firm Fraud is popular with law enforcement investigators who coined the phrase several years ago when this method of fraudulent trading was at its height.

Typically based in the Midlands organised crime gangs would set up apparently bone fide companies, sometimes hijacking the identity of an existing company to obtain a legitimate trading history and therefore good credit reference – then commence trading with suppliers. 

They would build up trust with the suppliers by initially paying for deliveries but gradually ordering more and more and paying later and later.  Very often a large amount of stock builds up with very little initial trading occurring.

Eventualy the fraudsters would abandon the company.  The stock, well this was sold off cheaply at pound shops, market stalls and the like to quickly liquidate the capital.  The creditors of the abandoned company would of course be left high and dry.

This is a fraud fraught with difficulties for the investigator.  Typically run by Asian gangs based in Birmingham and nearby, the purpetrators opperated with aliases and phoenix companies.  Often tracing the activities that would spring up and dissappear overnight it seemed.

You would think that recently as credit becomes harder to obtain that this type of fraud would not be so popular.  However Long Firm Fraud and fraudulent trading in general is likely to become even more of a problem as we head for the (hopefully) recovery years of this current massive downturn in the economy.

This is because businesses will be eager to build up their trade, offering good terms and even extended credit in an attempt to expand out of the downturn.  If one thing is certain in the field of fraud it is the fact that lessons do not seem to be learned!  Unfortunately people are too trusting, too eager to believe that a deal is going to be beneficial. 

What can be done?  It is the same answer for all frauds.  The regulation of the fraudster by the police, other agencies and private enterprise must receive adequate resources and be seen to be dealing with fraud as it arises.  Too often we read of the likes of the Serious Fraud Office bringing a case to trial after years of investigation.  This is not a criticism of the SFO per se, but the burdensome judicial system within it is forced to work.  The Serious Fraud Office has had to deal with several Long Firm Frauds in the past and has had some excellent results.  However, obtaining credit without the intention of paying, i.e. fraudulent trading, is an offence that will happen time and time again in coming years.