investment fraud – driven by dishonesty?

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www.rahmanravelli.co.uk

Fraud in business can take a number of forms and has a number of names. Bonds, boiler room scams, pyramid selling, Ponzi schemes, pension liberation and land banking. They’re all ways of parting people from their money by convincing them that they can earn more by putting it into the project that the salesman is offering.

That salesman may be completely honest, too over-enthusiastic in their belief in their scheme or completely dishonest. For example, he may be looking for investment in a company that he believes will be a huge success but everyone else thinks is bound to fail. In which case, the question has to be asked: is he dishonest or simply misguided?

We ask the question because dishonesty is at the heart of fraud prosecutions, whatever form the alleged fraud takes. At Rahman Ravelli, we represent all manner of professionals who have been accused of fraud. Chartered accountants, investment brokers, hedge fund managers, company

directors, mortgage brokers and fi nancial advisors. The cases may vary, the investments they oversaw may have failed to different degrees but the issue that has to be established in each one is whether they acted dishonestly. Did they have dishonest intent when they ran the scheme and encouraged others to join it?

Or did they simply exercise poor judgement?

Dishonesty relates to the defendant’s state of mind. In Ghosh (1982), the Court of Appeal ruled that the test was that “according to the ordinary standards of reasonable and honest people, what was done was dishonest’’ and that, if so, the

Edition 003 / September 2012eBookSerious Fraud, Regulatory and Complex Crime Lawyers

INVESTMENT FRAUD – DRIVEN BY DISHONESTY?

Dishonesty is a major issue in every investment fraud prosecution. This article examines what constitutes dishonesty, how such an allegation can be disproved…and whether that is enough to avoid conviction

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jury must be convinced that the defendant “must have realised that what he was doing was, by these standards, dishonest’’.

A defendant who has not acted dishonestly may have to explain the truth, however complex it may be. While the prosecution paints a picture of him as a crook wanting to get rich by conning others, the defendant has to convince a jury of his innocence. That jury may be immediately suspicious of any defendant and may not even understand the issues or the nature of the defendant’s work.

At this point, it is the job of the defendant’s legal team to make sure the jury is made aware of the defendant’s innocence. The defence must explain the nature of the defendant’s work, his motivations and pressures, his aims and the reasons for what he did and the way he did it. Using expert witnesses to testify that the defendant was not deviating from acceptable professional behaviour can assist a defence. As can citing examples of his work that are not under scrutiny. In this way, the defence can paint a fuller and more accurate picture than that created by the prosecution. Whether it is stocks and shares, real estate, wine or any commodity whatsoever, these defence principles apply. If carried out correctly, such an

approach can gain the jury’s empathy and convince its members that the case does not involve dishonesty.

The Attorney General’s Supplementary Guidelines in relation to the disclosure of digitally stored material and Lord Justice Gross’ review of disclosure both give the defence an opportunity to get involved with the prosecution in the disclosure process in large and complex fraud cases. This is important because it is in the disclosure of ‘unused’ material that the defence often fi nd their salvation. Even small fragments of material – such as, for example, an email chain, correspondence or handwritten notes – may help to build up a picture of an honest broker who is simply working under accepted industry standards. Such material can help demonstrate negatives. For example: “Nowhere in X transaction is there any indication of dishonesty or malpractice when, if the prosecution’s case were true, you would expect there to be.’’ To get the best out of the disclosure process requires a keen understanding of what is possible from deploying the Gross Review and the Attorney General’s Guidelines.

Such tactics can be vital in making sure the defendant has the most robust, pro-active defence from the very start.

Section 397 of the Financial Services

and Markets Act 2000 makes it a criminal offence to make a misleading statement, promise or forecast or dishonestly conceal facts from someone with the intention of inducing someone to do, or refrain from doing, something in relation to an investment. Under this law, a person can be guilty if they are not dishonest but merely reckless as to the statements they make to convince others to invest their money in a scheme. Therefore, in the same way that it is essential for a defendant’s legal team to prove there was no dishonesty, it can be equally important that they can prove that there was no recklessness. That normally requires a similar but more subtle approach. To be successful, any defence solicitor must prove that their client believed his actions would not create a false or misleading impression and that they acted in accordance with professional and market rules. To do this requires the aforementioned ability to convince a jury that the defendant acted honestly and with professional integrity.

The accusations can relate to complex issues and involve a wide variety of allegations. But the defence team must make the issues simple enough for juries to understand and then narrow everything down to one thing… their client’s integrity.


“Dishonesty relates to the defendant’s state of mind”

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Boiler room operations are on the up. In an area of fraud that relies on bogus fi gures there are some that stand out as being genuine. The Financial Services Authority (FSA) has reported that last year it received 5,401 reports of boiler room fraud – up from 4,527 in 2010. That is an increase of almost a fi fth. When you also bear in mind that the FSA knows of 770 people who paid out an average of £20,000 to alleged boiler rooms last year, the scale of the problem becomes apparent.

Boiler rooms usually involve people being telephoned and persuaded to buy shares the caller has no right to be selling: either real shares in a genuine company that the caller doesn’t possess, non-existent shares in a genuine company or “shares’’ in a completely fi ctional company. Fictional addresses, phone numbers and websites can give the appearance of UK respectability to an operation that is most likely run from abroad. The FSA reports that the number of boiler rooms using “cloned’’ versions of genuine fi rms almost tripled last year to 449, from the 2010 total of 161. Nothing is what it seems at face value in such operations – modern technology has helped boiler rooms prosper by creating an authentic-looking image.

At Rahman Ravelli, we have been involved in some of the biggest boiler room cases. As a result, we are ideally placed to advise those accused of working for a boiler room who maintain their innocence. The victims of boiler room fraud are very often not only those people who have handed over their money and received nothing. Many of those arrested when a boiler room is raided are equally innocent – and also face losing whatever

wealth they have. At Rahman Ravelli, we

have seen that many of those involved in the selling believed they were offering investors genuine stock. All too often, the boiler room is inhabited by dozens of poorly-paid people who saw it as their only chance to gain employment. They are taken on to do the cold calling for a meagre wage, with most of the proceeds going to the men at the top. All the effort that may go into making a boiler room operation look reputable to investors can be equally misleading to those who go and work for it.

On many occasions, boiler room raids by the authorities only result in them catching the little men in the room…leaving the big guys outside the room free to set up and start all over again. All too often, the people arrested need the right legal advice instantly if they are to ever gain justice.

The FSA is, of course, the regulator. That is why many of these operations are based overseas so they can practise away from the FSA’s authority. Spain, and principally Barcelona, was the favourite stomping ground of those involved but Rahman Ravelli has advised in cases where the operators were selling in the UK market from Korea and the Middle-East.

Jonathan Phelan, the FSA’s head of unauthorised business, said: “We will continue to fi ght all forms of unauthorised business but the strongest weapon against scams remains common sense and a little bit of homework: check

who you are dealing with.”Such advice is correct for any

would-be investor. But, before a raid, the regulators themselves are in no position to carry out the appropriate checks. They cannot, therefore, determine who is innocently working for a boiler room and who are the masterminds behind it.

As a result, Mr Phelan’s advice could equally apply to anyone who is about to become innocently entangled in the operation of a boiler room. And, just like the unlucky person who invests in a boiler room, the unfortunate person who ends up working for one will eventually need expert legal advice to help save their skin.


THE TEMPERATURE’S GETTING HOTTER…BOILER ROOMS ARE ON THE RISE

Aziz Rahman examines their increase and explains that, quite often, not everyone inside the boiler room is as guilty as they may appear

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For many, the fi rst they learn of their tax affairs being investigated is when they receive a letter. Quite often, the letter may say that a person’s tax payments are being investigated under Code of Practice 9 (COP9). For many people, such a letter raises more questions than it answers: What should they do now? Why are they being investigated? And what is a COP9?

The COP9 procedure can be stressful and drawn out. And for someone not familiar with the workings of HM Revenue and Customs (HMRC) it can

prove a daunting prospect. People need to know exactly what a COP9 is before they can do anything in response to it.

The chances are that HMRC has started to investigate a person’s tax aftfairs because they have a strong suspicion or belief that they are not paying what they should. If such a person is being investigated then the best thing they can do is seek legal advice immediately. In such circumstances, anyone under investigation needs the help of someone who can expertly present the facts to the investigators. Just as importantly, however, any solicitor

hired has to be familiar with the workings of the HMRC – how it works, its approach to different types of cases and the tools it has at its disposal.

COP9 is such a tool. It is used by HMRC when investigating avoidance of any type of tax – income tax, VAT, inheritance tax, corporation tax, capital gains tax, national insurance and customs duties.

HMRC will initially write to a taxpayer to advise them that they are suspected of serious tax fraud and enclose the COP9 explanatory booklet. This will be accompanied by paperwork


COP9. HMRC’S WEAPON FOR WAGING WAR ON TAX FRAUD

Aziz Rahman of Rahman Ravelli talks through the options available to those facing a COP9 and and explains why expert advice must be used when choosing the right one

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by which the person can make a full disclosure of their tax affairs under the Contractual Disclosure Facility. HMRC will not tell the person what evidence it has of a person’s alleged tax fraud. It sends the letter and gives the person three clear options:

Disclosure: A person can accept they have committed serious tax fraud and can state their wish to co-operate by entering into a Contractual Disclosure Facility (CDF) contractual arrangement with HMRC. Under a CDF, the person will disclose the full extent of their tax fraud.

Denial: A person can deny they have committed tax fraud but state that they will co-operate with the HMRC investigation.

Non co-operation: This person denies committing tax fraud and will not co-operate with HMRC’s COP9 investigation.

The taxpayer under COP9 investigation has 60 days to decide whether to enter into a CDF contractual arrangement with HMRC to disclose any tax fraud they have been involved in. If they agree to do so, HMRC will give an undertaking that it will not pursue a criminal tax investigation with a view to potential prosecution of the tax frauds disclosed. Instead, HMRC will devise a civil monetary settlement that will cover the tax owed plus interest plus a fi nancial penalty.

If a taxpayer chooses this option they must make an ‘outline disclosure’ of the

tax frauds. They will also have to provide a certifi ed statement that they have made a full, complete and accurate disclosure of all tax irregularities. This statement must be backed up with fi nancial statements and other supporting evidence so HMRC has a full and complete picture of the tax irregularities that have been carried out

The outline disclosure needs to be an honest description of the tax fraud. It has to set out the series of events, the amounts involved and the records available. At this stage, the HMRC will only agree not to carry out a criminal investigation into the amounts and events mentioned in the outline disclosure – it may still start criminal investigations into any other tax irregularities it uncovers that were not mentioned in the outline disclosure. This is just one reason why anyone in such a situation must seek expert legal help immediately. Making the right decisions at this stage is vital. If a person chooses the denial option, HMRC retains the right to criminally investigate the taxpayer’s affairs with a view to prosecution. HMRC is not even obliged to tell a person if they have started a criminal tax investigation - a taxpayer’s denial letter can even be used as evidence against them. Whatever option is chosen it has to be a decision based on careful consideration and expert legal advice.

If a taxpayer decides on non-co-operation, the HMRC begin a criminal investigation into the person, obtain

information about a taxpayer’s fi nancial affairs direct from third parties, raise tax assessments and charge much higher penalties than would have been imposed under the CDF option. Legal proceedings could even be brought to secure a charge over the person’s assets.

If a case is particularly complex, HMRC may state that it wants to meet the person under investigation to discuss the scope of the outline disclosure report and the frauds involved. However, it may be suffi cient for HMRC just to meet your specialist adviser. COP9 investigations are usually carried out by HMRC specialist investigations staff, which is an indication that it believes signifi cant amounts of tax may have gone unpaid. Putting it bluntly, the stakes in such investigations are high and for this reason alone expert legal advice is essential. Even HMRC’s COP9 booklet states “You are strongly recommended to seek specialist independent professional advice… many people fi nd it helpful to appoint a specialist adviser who is familiar with this Code, in addition to their regular adviser.”

However innocent a person under a COP9 investigation is and whichever course of action they choose to take, they have to act after taking the best legal advice available. As mentioned earlier, the three options each carry their own consequences. And only the right legal advice can ensure a person is fully aware of the consequences of their actions when they are involved in a COP9 investigation.


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Tax rules regarding charities may vary from country to country. But the general principle exists that charitable organisations in most countries are given a favourable tax status to help them in their noble work. And that seems to be attracting people who have anything but charitable intentions.

At Rahman Ravelli, we are currently handling a £100m-plus tax fraud case involving 17 defendants and the involvement of a charitable trust to allegedly help funnel money around the world. Like many of the fraud cases we handle, this one is complex, international, involves huge amounts of money – and a charity. To the uninitiated, reading about a charitable trust’s involvement in a major international criminal operation may seem perverse. But there are a number of reasons why involvement in an existing, legitimate charitable organisation or the creation of one for completely criminal reasons would be attractive to a fraudster.

Perhaps most importantly, the tax status of a charity is appealing to the criminal. In the UK, a charity is exempt from tax on many of its sources of income, providing that income is used for charitable purposes. Tax relief is available on donations from individual and corporate donors and while a charity’s accounts are public documents, the tax affairs of charities and donors are not publicly available. And, arguably most importantly, charitable donations can be made in cash without any banking record being available.

Such a situation is clearly attractive to someone who wants to avoid tax or hide the proceeds of their ill-gotten gains. Of course, in Britain HMRC reviews the activities of charities and looks for

unusual patterns of donations in its accounts and tax returns. Sudden large donations from individuals or corporations may raise suspicion, as may a donor who seems to be giving a charity an especially high proportion of their income. But HMRC has only limited manpower and will always struggle to sift through the activities of every charity in pursuit of fraud. With electronic submitting of tax returns, the task can be more demanding for even the most vigilant tax man. With the evidence seeming to show that the use of charities for tax fraud is becoming more organised and more sophisticated, HMRC will struggle to keep pace with the fraudsters.

“A Report on Abuse of Charities for Money Laundering and Tax Evasion’’ by the Organisation for Economic Co-operation and Development found that while tax rules vary around the world for charities, most nations give them a preferential tax status that helps them operate within their budgets. But this attracts those who see the tax breaks as a chance to take illicit advantage.

The report says that organisations can be created as charities – even though they carry out no charitable functions – simply to be used a vehicle for tax evasion and money laundering. This can take the form of straightforward avoidance of VAT payments through to the laundering of the proceeds of crime and the channelling of money abroad for criminals or even to fund terrorism. In the UK, according to the report, such charities are being used as a vehicle for suspect tax-free loans and investments, with money being transferred overseas – often back to the original “donor’’, who then escapes paying what he should to the Inland Revenue. In other cases, the

value of donations to genuine charities is manipulated in a way that gives huge tax repayment benefits to the “donor’’ and yet little or no value to the recipient of the donation.

There are cases where charities are bona fide organisations that fall prey to the criminal intentions of those working for them. But the larger scale of charity fraud is to be seen in the creation of bogus charities as vehicles for evading tax and money laundering or the manipulation of donations to genuine charities. HMRC has not put an accurate figure on what amounts are involved in such frauds. But tens, if not hundreds, of millions of pounds a year could be channelled illegally through charities.

The OECD report explains that the authorities try to maintain registers of suspicious activities and reconcile and cross-check information from different sources. Greater exchange of information and closer cooperation between tax and law enforcement agencies is also advised. But for now, the genuine charities have to look out for themselves if they are to remain free from the fraudsters.

WHEN CHARITY IS NOT ALL IT SEEMS

Charity, as the saying goes, begins at home. But for many charities, criminal elements are coming a little too close for comfort for all the wrong reasons


“…such charities are being used as a vehicle for suspect tax-free loans and investments, with money being transferred overseas”

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investment fraud – driven by dishonesty?

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