This training session considers some case studies concerning financial fraud. It is a reminder that financial frauds can occur, on a daily basis, in the most unexpected way.
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1. THE PRIVATE EQUITY FUND
An Italian lawyer with whom you have worked in the past calls you one day. He asks whether he can refer to you a client of his who is looking to establish a private equity fund in the UK.
You arrange a meeting with the client. The client is fairly pleasant and professional. He explains to you that he has been working as a financial advisor in Italy for a number of years mainly investing the money of a well-known high-net worth family into listed shares and bonds. He adds that he now wishes to invest approximately Euro 20m of the family’s money into private equity assets in order to diversify the family’s investment portfolio.
You perform a due diligence on the client. It is unclear whether he holds any licence to operate as a financial advisor in Italy. You ask him the question and he tells you that he does not hold any licence because effectively he only has one client (i.e. the family). This is of course not ideal but is by no means unusual. When you tell the client that he may need to obtain a licence in order to operate a private equity fund from the UK, he tells you that he does not envisage any issues in obtaining that licence if needed.
The client is later arrested for fraud. The Italian authorities claim that he has stolen the family’s money pretending that it had been invested in UK listed shares and bonds.
Question: Why did this client wish to establish a private equity fund?
2. THE SHIPPING CONTAINERS
You are contacted by a Hong Kong lawyer who would like you to advise on the regulatory aspects of marketing in the UK an investment product which has been marketed in Hong Kong and other South-Asian countries for some time.
The lawyer explains that his client operates an investment scheme whereby retail investors provide an amount of money which is used by the scheme promoter to buy one or more shipping containers which are then leased to shipping companies. The lease instalments (less a commission) are then paid to the investors and typically generate a return of between 5% and 7% per annum.
The lawyer tells you that the client does not require a financial services licence to operate in Hong Kong given that the money paid by the investors is not pooled into a vehicle and each investor becomes instead the individual owner of the ship container, as evidenced by an ownership certificate that is provided to each investor after the investment has been made.
The lawyer adds that he has been advising this client for a number of years and, to the best of his knowledge, investors have always received their money back and he has no reason to suspect that the scheme might be fraudulent.
The Hong Kong lawyer seems diligent enough and works for what appears to be a well-established Hong Kong law firm.
Question: What questions can you ask to determine whether this scheme is legitimate?
3. FCA AUTHORISATION
A colleague of yours calls you one day to say that he has been contacted by a potential client that wishes to become authorised by the Financial Conduct Authority (FCA) and, given that this is not his area of expertise, he would like to refer the client to you.
You accept the referral and, after a brief introductory call, arrange to meet the client at his offices. The client explains that he is from Latvia but has been a long-time UK resident. He tells you that he is an entrepreneur who runs two small businesses. The first is a professional consultancy that supports UK investor VISA applications. The second is a property finder and relocation business.
Both businesses have their own fairly decent websites, are run from good quality serviced offices in central London and the client and his assistant appear competent and professional.
You ask the client why he wishes to become FCA authorised. He says it is in order to give his business the ability to market to UK investors a new USD 700m oil & gas extraction project in Kyrgyzstan which his company has just signed up to.
He shows you a very nice-looking brochure describing the project and explains that the project is a 50:50 joint venture between the government of Kyrgyzstan and his company.
You explain that the process of becoming FCA authorised is rather demanding and would require him to provide to the FCA a substantial amount of information and supporting evidence. He says that he is aware of that and it would not be a problem for him to do so.
Question 1: What steps can you take to verify the client’s story?
Question 2: If the client is not legitimate, why would they want to apply to the FCA to become authorised? Surely the FCA would find out that something is not quite right as part of its review of the application.
4. THE CLEAN ENERGY FUND
A contact of yours who runs a small asset management consultancy calls you one day. He tells you that he has been contacted by the manager of an investment fund based in France who would like to engage his firm to market the fund to UK based investors and/or establish in the UK a fund having the same characteristics as the French fund.
He explains that, in summary, the fund managed by this manager issues to professional, sophisticated and accredited investors units having debt-like features which, depending on the chosen maturity, provide to the investors a target return of between 3% (for a 12 months’ maturity) and 6% (for a 3 years’ maturity) per annum. The money raised is then invested to provide equity capital to global start-ups operating in the clean energy R&D sector.
He tells you that, even though he has not heard of this manager before, he has no reason to suspect that something might not be right. This is because his due diligence has shown that:
(1) the fund is operated by a third party manager duly authorised in France;
(2) the fund has been running for almost two years and its marketing documentation states that during such period it has raised more than EUR 25 million, has experienced an investor redemption rate of less than 10%, and has never defaulted to investors;
(3) there are plenty of positive online reviews and testimonials from individuals who have invested in the fund confirming that the fund has never defaulted, praising the fund manager for the excellent customer service and stating that the rate of return offered by the fund is much better than the rate of return offered by equivalent fixed-term deposits offered by banks.
Question: Are there any red flags that you should raise to your contact?
5. THE CRYPTOCURRENCY LAUNCH
At a cryptocurrency event, you meet a US-based cryptocurrency trader who asks you whether you would be able to assist him to launch a new token which he wishes to market internationally to property developers.
The trader tells you that there are already two initial investors in the scheme, a Brazilian property developer and a Bulgarian property developer who would each be given the option to purchase the tokens for cash or in exchange for shares in their respective property development companies.
He asks you whether you would be able to document the proposed token issuance and sends you the following structure chart: Cryptocurrency Launch – Draft Structure Chart.
He explains that the initial investors have agreed to use English law to govern the transaction given that they are based in different jurisdictions and there is also potentially a third investor who is a UK-based property developer.
It is not unusual for cryptocurrencies to be issued by companies established in offshore jurisdictions. For that reason, you do not consider that the use of offshore vehicles in this case constitutes a red flag from a financial crime perspective.
Your online due diligence searches show however that the trader and the proposed initial investors all have rudimentary template-based websites which provide vague and confusing information about their business activities.
There are also a few third party websites which refer to the Brazilian and Bulgarian property developers and, unusually for private companies, indicate the value of their shares as being USD 5m and EUR 10m respectively.
You therefore decide to decline the instructions.
Question: If this was not a legitimate cryptocurrency transaction, what purpose could this transaction have been intended to achieve?
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