Understand Your Rights. Solve Your Legal Problems
There have always been fraudsters and thieves, but Pensions Freedoms, which came into force April 2015, may have made it easier for scammers to prey on the unwary looking for higher rates of return on investments. This is according to Geoff Bouchier, Managing Director at Duff & Phelps, the global advisor that protects, restores and maximises value for clients.
The latest HM Revenue & Customs statistics on flexible payments from pensions show that £6.7 billion was withdrawn by 375,000 investors in the last 12 months and £17.5 billion has been withdrawn from pensions since the freedom changes were introduced April 2015.
Bouchier commented: “The pension freedoms are fundamentally beneficial for people, giving them welcome control and flexibility over their retirement savings. However, these reforms have also increased the risk of retirees being targeted by scammers.”
“According to The Telegraph some 222,000 pensioners have made half a million withdrawals in the first three months of this year alone – 20,000 more than the last quarter of 2017. The total withdrawn in 2017-18 was £6.7 billion, the highest figure since the reforms were introduced in 2015.”
“Some pensioners have chosen to invest without taking professional advice. This DIY approach of chasing higher returns could be exposing them to a high level of risk as many are unregulated, illiquid and based on high commission rates. At worst, they could be increasingly exposed to fraudsters,” he added.
In December 2016, the government sought consultation on pensions scams and highlighted the scale of the issue noting that:
In August 2017, the government published its response to the pensions scams consultation, in which it reported strong support for a ban on cold calling, a principal mechanism used by fraudsters. Now, under the Financial Guidance and Claims Bill, a prohibition on pensions cold calling could be in place by the end of June 2018.
Bouchier added: “What we are seeing in the market is more investment products coming to light, which were established a number of years ago to target very aggressive rates of return. In some instances, these are being revealed by retail investors anxious to see the return of their pension savings invested. However, we suspect that many remain unexposed as retail investors are concerned that by doing so would bring down the collapse of the scheme and likely result in them never seeing their money again.
The news that the Government is looking at a ban on pensions cold calling specifically will be welcomed and will give consumers the confidence to just ignore such calls.
We would urge retail investors to take advantage of the FCA’s ScamSmart webpages, which explains and provides advice on what to look for.”
“Retail investors should also get up to speed on their rights, specifically any contractual arrangement with the company or legal entity they have invested in. For example, where the investor has the right to be repaid capital and/or interest on a certain date and that has not happened, they should consider enforcing their rights and not merely rely on assurances of future payment from those running the schemes,” he added.
Bouchier concluded: “Pensioners have worked a lifetime to build a pension pot and they should ensure that they do all they can to protect it for enjoyment in retirement.”
(Source: Duff & Phelps)
Following previous news that Danske Bank has been reprimanded for weak AML controls by Danish regulators, this week’s featured analysis comes from global banking expert, Robert Lyddon. Below Robert compares the penalties imposed on major Western banks with the treatment of smaller, non-systemic banks, and suggest that the current regulatory environment is governed by an uneven application of the law through recourse to extra-judicial processes.
International efforts to combat money laundering – which latterly have been closely connected with frustrating tax evasion and aggressive tax avoidance – and to staunch the supply of money to terrorist organisations have been coordinated by the Financial Action Taskforce, and have resulted in various series of FATF Recommendations and Special Recommendations.
This body of knowledge as to how to run a regime for AML/CFT has firstly been converted into law, for example via the EU Anti-Money Laundering Directives and its subsequent transposition into EU Member State law, an example of the latter being the UK’s 2017 Money Laundering Regulations.
Secondly it has been used to set up national Financial Crime organisations to receive and investigate Suspicious Activity Reports (“SARs”), to monitor the compliance of those firms with responsibilities under AML/CFT – known as “obliged entities” – when measured against applicable law and regulation, and to impose sanctions on those that have failed to run a compliant regime.
Thirdly it has been used to create implementation guidance for “obliged entities” through international organisations like the Wolfsberg Group and national ones like the UK’s Joint Money Laundering Steering Group.
In the process a grey area has been created, however, that should not exist in a proper legal system: the enforcer of a law must be bound by it as much as the subject, and the same penalty must be imposed upon two different organisations committing the same offence.
Equally the subject of such a penalty must have rights of representation, of transparency, of appeal and of redress, enabling them to continue as if the authorities had not intervened if it should turn out that the actions of the authorities were unwarranted.
This is not the situation as it has emerged for “obliged entities” where breaches of the AML/CFT regime have been suspected.
In February 2018 Rabobank, a California unit of the Dutch cooperative bank, was reported to have agreed to pay over US$368 million for processing funds likely tied to drug trafficking and other illicit activity and it pleaded guilty in court to conspiring to obstruct regulatory oversight. It continued in business, however.
In May 2015 BNPP was sentenced to five years’ probation by a U.S. judge at the time the bank agreed to pay US$8.9 billion to settle claims that it violated sanctions against Sudan, Cuba and Iran. It continued in business and in June 2017 it was reported as having been fined EUR10 million by the French AML/CFT regulator ACPR for inadequate anti-money laundering controls.
In 2012 HSBC paid US$1.9bn to the US authorities to settle allegations that it allowed terrorists to move money around the financial system, and it signed a Deferred Prosecution Agreement, which involved agreeing to the Department of Justice delegating an official to monitor HSBC’s progress at a reported cost of US$20 million annum. Bizarrely HSBC later hired Jennifer Shasky Calvery as Head of Compliance to run their side of the monitoring process, the very official at the Department of Justice who had brought the suit against HSBC, and against the named position in the bank that she then came to occupy. In late 2017 the UK’s Financial Conduct Authority commissioned a so-called "166 report" into the HSBC after the Department of Justice official raised concerns about the degree of progress.
These are examples of the penalties imposed upon major banks in the Western world, two of them being Global Systemically Important Banks according to the Financial Stability Board, where the banks have continued in business.
By contrast the authorities have been very quick to act in cases where banks are small and non-systemic, and to stop them doing business.
On 21st March 2018 Malta’s regulators imposed a freeze on the business of Pilatus Bank after its chairman was arrested on charges of breaking U.S. sanctions.
ABLV in Latvia was closed down by the Latvian authorities immediately after it was served a notice 311 by FinCen – the financial crime arm of the US Treasury Department – on 13th February 2018 naming it as an institution of prime money laundering concern, and applying the fifth special measure to it: this forbids US banks from running a correspondent account for ABLV and from handling its payments on a pass-through basis.
Versobank in Estonia was closed down on 26th March by the Estonian authorities due to AML/CFT failings allegedly linked to the Russian elite and intelligence services.
The Estonian branch of Danske Bank – the major Danish and Nordic institution – was investigated by the Estonian Financial Supervision Authority around the same events as resulted in the closure of Versobank, but Danske’s Estonian branch remains open.
This has been the pattern when dealing with smaller banks, and the test case for this approach remains that of FBME, the small and foreign-owned bank branch in Cyprus which was “resolved” in 2014 by the Central Bank of Cyprus (“CBC”). FBME had had a 311 Notice issued against it by FinCen imposing the same fifth special measure. CBC used the 311 Notice as its trigger to stop FBME doing business and take it over. In the four years since this occurred, however, CBC has failed to corroborate the validity of any of the cases of alleged money laundering that gave rise to Fin Cen’s 311 Notice.
There were no court cases involved in these examples. Authorities took swift actions and closed banks, creating a fait accompli against which there could be no adequate redress for the owners of these banks, even had they had an adequate right to receive redress. The banks were taken over, their ability to do business nullified and their reputation destroyed.
The rights of the subject to proper representation during the legal process, to transparency of process, and to a right of appeal have been duly bypassed.
Then we have the report on 13th April 2018 that the US authorities considered taking action against China Construction Bank and Agricultural Bank of China for alleged violations of international sanctions against North Korea. In other words there was evidence to hand that these banks were routing payments to and from North Korea, although not necessarily in US$.
Given that the US authorities acted so quickly against FBME, ABLV and others, a 311 FinCen Notice imposing the fifth special measure would then have been expected. The US authorities must have had a body of evidence against these Chinese banks, but they apparently have significant latitude in deciding how to apply that evidence and, indeed, whether to use it at all.
It seems that the idea of taking any action was quickly shelved, primarily because of fears that punishing banks of that size might send shock waves through the global financial system. Indeed, both China Construction Bank and Agricultural Bank of China are amongst the 30 Global Systemically Important Banks.
So what we have here in the AML/CFT area is not an example of the law acting as it should – Blind Justice – but of laws that are applied or not applied, and of available penalties that are varied as regards severity and timing, in accordance with the offender and not the offence.
Instead the authorities make up their own mind – frequently behind closed doors - as to which banks to apply the law to and when, and which penalties to apply to a given situation.
There is significant recourse to extra-judicial processes like those that sit behind the Notices of FinCen, where the evidence is not made public and where the subject can only see it third-hand, by having a judge review the evidence in camera: neither the subject nor their legal representative can be present.
Since FATF itself acts as the ultimate court of arbitration by issuing – without contradiction - its Recommendations and Special Recommendations that lawmakers convert into laws and supervisory regimes, the entire edifice has gone outside democratic control. The edifice may claim to have been successful in reducing money laundering and blocking terrorist financing, but there is no factual evidence either in the form of a placebo test – what would have happened if FATF had never been established – or of a sanity test – what has actually been achieved and what could have been achieved by different means.
Instead we have the prima facie evidence that the crassest breaches by the largest banks can go unpunished, that other large banks are fined, supervised, fined again and the breaches continue, but that the roof is brought down on the smaller banks. That does not sound like an ecosystem in which money laundering and the financing of terrorism have been successfully eliminated, or one in which justice is blind to expedience and commercial prejudices.
Sources: https://uk.reuters.com/article/uk-rabobank-fraud-usa/rabobank-agrees-to-pay-368-million-over-processing-illicit-funds-idUKKBN1FR2YO https://uk.reuters.com/article/uk-bnp-paribas-moneylaundering/bnp-paribas-fined-over-weaknesses-in-anti-money-laundering-controls-idUKKBN18T2JE https://www.reuters.com/article/us-bnp-paribas-settlement-sentencing/bnp-paribas-sentenced-in-8-9-billion-accord-over-sanctions-violations-idUSKBN0NM41K20150501 https://www.theguardian.com/business/2012/dec/11/hsbc-bank-us-money-laundering https://www.justice.gov/sites/default/files/opa/legacy/2012/12/11/dpa-attachment-a.pdf https://www.telegraph.co.uk/business/2017/02/21/hsbc-profits-slump-volatile-year/ https://www.fincen.gov/news/news-releases/fincen-names-ablv-bank-latvia-institution-primary-money-laundering-concern-and https://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_031.htm https://www.occrp.org/en/investigations/7698-report-russia-laundered-billions-via-danske-bank-estonia https://news.postimees.ee/4452455/bank-suspected-of-money-laundering-was-closed-down-overnight https://www.occrp.org/en/daily/7654-latvia-detains-central-bank-chief-over-graft-allegations https://www.express.co.uk/news/world/938856/eurozone-money-laundering-scandals-ecb-versobank-ablv-us-financial-authorities https://uk.reuters.com/article/us-malta-banks/malta-freezes-pilatus-banks-operations-after-chairmans-arrest-idUKKBN1GY0Z9 https://www.bloomberg.com/news/articles/2018-04-13/china-banks-aiding-north-korea-are-said-too-big-to-punish
Below Neil Williams, of business crime solicitors Rahman Ravelli, considers the EU’s latest efforts to tackle fraud in its budget.
With quite a fanfare, the European Union has announced that is has found money to help member states tackle EU budget fraud. The new EU Anti-Fraud Programme will provide €181m to support the fight against fraud, corruption and financial irregularities in member states.
The programme intends to tackle fraud, corruption and other irregularities by providing what is called targeted training to law enforcement authorities in all member states. It will also, we are told, help facilitate the exchange of intelligence and best practice. And that is not all. It will also support investigation and prevention activities by helping to finance the purchasing of technical equipment used in detecting fraud and by developing secure information systems through which exchanges can be made.
It will be run by OLAF, the EU’s anti-fraud office, and will replace Hercule III; the programme that has been trying to tackle EU budget fraud in recent years. Hercule III was an acknowledgement that EU budget fraud is a problem. Do we take from its abandonment that it has been a failure? Possibly. And is this new programme likely to be a major improvement? It is hard to believe so.
The European Commissioner for Budget, Günther Oettinger, has said that this latest programme will make a “tangible contribution’’ to improving efforts to tackle fraud and corruption within the EU budget. That may well be the case. But the size of that tangible contribution has to be seen as the issue at stake here. Yes, it may well identify some fraud and lead to some convictions. But looking at the bigger picture, just how much of an impact can it have when it comes to tackling corruption that is geographically widespread, quite often sophisticated in its planning and execution and involves huge sums of money?
Let’s take a simple look at the figures. The European Commission intends to make the €181M available for the next long-term EU budget, 2021-2027. While €181m may, at first glance, appear impressive, a close inspection will indicate that it is a far from overwhelming financial attack on fraud. When divided between each of the current member states, it equates to just under 6.5m euros per member. We have a current case ongoing, involving allegations of EU budgetary fraud through applications to the Welsh Government. This has been investigated for the past four years. The costings have yet to be determined as the case has not been finalised. But it would be astonishing if that case alone did not cost somewhere in the region of what each member state will receive under this programme. It is important, therefore, not to be dazzled by the figures.
What should also be considered here is that the EU budget is particularly vulnerable to fraud. There doesn’t appear to be sufficient checks and safeguards to ensure that applications made for EU monies are legitimate or that the funds are then utilised for the proper purpose for which they were intended. This, of course, certainly does not relate to every application made for funding. But it almost goes without saying that unscrupulous individuals and corporations may well use failings in the safeguarding systems to their advantage. This then means that the EU is left with a problem – it has to play an almost impossible game of catch-up. If an abuse of the system is identified after it has happened, the time lag between the abuse and its coming to light can make it hugely difficult in many cases to identify the exact nature of the fraud. In such circumstances, it can be a massive challenge to apprehend the perpetrators and almost impossible to recoup any of the funds that were obtained fraudulently.
While any money to combat EU fraud is always welcome, it does seem that strengthening the safeguarding and vetting procedure for the application processes may be a better use of funds. Chasing suspected cases of abuse after they have happened is the legal equivalent of bolting the stable door long after the horse has run away.
Another complicating factor here is that EU budgetary control passes in part to the member states, and they then use their own procedures to test the veracity of the applications made to them. This has the benefit of localised control over the application process. But cynics may suggest that this has the unintended consequence of such control being relaxed - especially when future budgets are under consideration and annual budgetary allocations aren’t being utilised. The temptation can be there to allocate funds to an application regardless of its quality. It is the old argument: if it doesn’t get spent this year, you won’t be given it to spend next year.
So while the headline figure for this latest initiative is eye catching, it is at best a limited response. EU budget fraud is a large problem. It needs to be approached in a more systematic manner than simply throwing a relatively modest amount of money at it.
There is an old saying which may, unfortunately, be relevant to this latest proposal – cheap is more expensive.
FIFA, soccer's ruling body, is trying to shake off an image of corruption, but the investigations continue thanks in large measure to a now-deceased American whistle-blower. Bloomberg QuickTake explains how it happened.
Many of the Serious Fraud Office’s ongoing cases seem to see no end and the future of the organization as a whole is still in debate. With recent upheaval at the SFO in both the directorship and their funding arrangement, Dominic Carman, noted legal commentator, discusses the current situation and the overall effectiveness of the organisation.
A dynamic new Director and a 50% uplift in funding should provide a much needed boost to the Serious Fraud Office. Those were the conclusions drawn by recent media headlines. But not everything is as it seems. Against a background of increasing fraud and decreasing prosecutions, new research form Pinsent Masons shows that the SFO faces a future that seems set to be defined by more heavy fines for some errant companies with interminable investigations for others with no resolution in sight.
True, the new SFO Director, Lisa Osofsky, is set to take over on September 3rd - after a five-month period of limbo during which the interim Director Mark Thompson will keep things ticking over, although he cannot make binding decisions. Meanwhile Osofsky’s public pronouncements have undergone a complete volte face since last year when she endorsed Theresa May’s long-held ambition to merge the SFO with the National Crime Agency (NCA). She told the Telegraph that this would give the prime minister “the biggest bang for her buck”.
Following the announcement of her appointment as Director in June, Osofsky argued the diametric opposite: “I’ve always supported an independent SFO and I still support an independent SFO,” she said. “I’m assured by the attorney-general he’s right by my side on this one. I didn’t take this job to report to the NCA. Do I see myself having a role where I’m here to diminish the very agency I’m getting hired to represent? Absolutely not.” Quite how this change of heart will affect what Osofsky does in practice remains to be seen.
The other headline grabber - the much heralded new funding arrangements for the SFO - are entirely cosmetic. What was a hybrid of core funding and blockbuster funding (sizeable top ups for specific cases that require large scale additional resources) has been fully combined to become just core funding. As the SFO itself points out on its website, “the changes (announced in April) are cost-neutral.” Overall expenditure will remain exactly the same next year at £52.7m.
Arguably more significant is how successful the SFO has been in its fulfilling core mandate, namely prosecuting serious fraud, bribery and corruption. The wider picture is calamitous: the number of white-collar crime prosecutions has declined by almost a third in six years according to research by Pinsent Masons. The 2017 Annual Fraud Indicators shows that fraud costs the UK economy £190bn per year (roughly 10% of total GDP), with the private sector bearing an estimated £140bn of that cost. Official figures also reveal that the number of prosecutions for white-collar crime - fraud, money laundering, cybercrime, bribery and insider trading - fell from 11,261 in 2011 to 7,786 last year, a 31% decrease.
Simultaneously, the number of fraud incidents has grown dramatically, primarily because of the surge in cybercrime. Between 2012 and 2017, Action Fraud, the national fraud and cybercrime reporting centre supervised by the City of London Police, experienced a 35% increase in reported cases from 202,200 to 273,600. These figures reflect only part of the problem. The NCA estimates that less than 20% of all fraud incidents are ever reported to the police.
The SFO focusses on the biggest fish: large, complex cases involving multinationals and their employees, or scandals such as LIBOR rigging. No published data is available for this category of fraud, but in terms of value and volume the 40 investigations currently being undertaken by the SFO are thought to comprise less than 10% of the overall total in that category. Big fraudsters are generally smarter and SFO resources of just over £50m a year can only begin to scratch the surface of a multi-billion-pound annual problem.
Their pragmatic solution has been deferred prosecution agreements, commonly known as DPAs, whereby a large fine is paid by a company instead of it being prosecuted and convicted in a criminal trial. To date, there have been four DPAs, of which Rolls-Royce (£497.25m) and Tesco (£129m) have paid by far the largest fines. These big numbers have created some relief for the SFO, although it cannot adequately counter the criticism it has received from senior judges in the courts and from informed commentators for its poor judgment and inept procedures.
Osofsky is keen on DPAs so we might expect more of the current caseload of investigations, a number of which stretch back more than five years, to result in a slew of DPAs over the next 18 months. Osofsky recently described the decision to charge as “a death sentence” on the company concerned. But a glut of corporate heavyweights has effectively been sitting on death row awaiting sentence without any recourse to the damage done to their reputation.
Sir Cliff Richard is currently seeking more than £600,000 in damages from the BBC over its coverage of a search of his home that was undertaken by the police on August 2014. No charges were brought against him and the investigation was dropped by the CPS in June 2016. Companies subject to an SFO investigation that is dropped have no such recourse. For several of them, the damage has been even more sustained and more enduring with the reputational damage already running into tens, or even hundreds of millions of pounds.
The SFO therefore needs to speed up its procedures, dramatically, by introducing sensible time limits. If the agency cannot find sufficient evidence to charge a company within three years of commencing an investigation, then it should be dropped. As SFO Director, perhaps Osofsky might bring some American efficiency with her and do just that. Continuing to allow SFO investigations to fester and bleed scarce resources does not deliver justice to anyone.
Media is rife that Nirav Modi, an Indian billionaire jeweller, has fled India and is now seeking political asylum in the UK, following allegations of a gigantic fraud. Below Rahul Batra of Hudson McKenzie explains how this has led to a chain of similar cases and developed a form of ‘Quit India Movement’ with a whole new meaning.
The Indian jeweller went missing in February earlier this year after allegations emerged that he defrauded Punjab National Bank, India’s second-largest state-run bank of $2 billion. Mr. Modi is now in London fearing ‘political persecution’.
Based upon the extradition treaty between India and the UK, the Indian government is now pushing for his extradition, which thus far has not happened.
As we know, India is already seeking extradition of Vijay Mallya, a liquor and aviation tycoon, over unpaid loans to his defunct Kingfisher Airlines after the businessman and co-owner of the Formula One Force India team moved to Britain in March last year.
With Mallya and Lalit Modi (another rich Indian businessman and former Chairman of the Indian Premier League), fleeing to the UK in the past fearing political persecution, we are now witnessing another rich insolent ‘joining the bandwagon’.
Therefore, it may be questioned; is the UK progressively becoming a playground for the ‘rich and famous’, who can come here and live happily ever after, once they’ve been pulled up for their ill deeds in their own countries?
The fact that Nirav Modi allegedly holds dual-citizenship doesn’t make things any easier for the Indian Government. Whilst the government is making frantic efforts to extradite him back to India, he is seen prancing around in Switzerland and reportedly ‘holed up’ in a hotel in New York.
India, as we know, tops the list among countries whose citizens acquire foreign nationality, and with several nations liked Cyprus, Malta, Austria, St Kitts & Nevis offering citizenship programmes in lieu of making investments/buying properties in these countries, is making their lives easier.
Whilst, the countries offering citizenship and residence programmes are doing so, for a bona fide reason, that is to attract investment in their respective countries for economic growth, such delinquent individuals are literally abusing the process and making amusement of the system.
Is the international law so weak? Is our judicial system so flawed so to favour asylum seekers based upon their net-worth rather than the situation? In my opinion, it deteriorates the importance of asylum seeking status for those in actual danger (like fleeing war in Syria) especially as such people have much less money, or for that matter, no money compared to political asylum seekers who could be billionaires like Modi.
It seems these people misunderstood their history lessons and have taken ‘Quit India movement’ in the wrong sense, and to another level.
Following the London High Court Judgment in the fraud case of Kazakhstan Kagazy Group v Zhunus, Arip and Dikhanbayeva which awarded $300m to Kazakhstan Kagazy, Hugh McGregor, the General Counsel of Kazakhstan Kagazy PLC, outlines the process that his firm followed to uncover and litigate what Lord Justice Longmore described as almost the 'perfect' fraud.
The High Court recently ruled that Kazakhstan Kagazy Group (KKG) had been subjected to a huge fraud by its former CEO, Maksat Arip. The claimants, advised by Robert Howe QC and Allen & Overy (A&O), successfully demonstrated that Arip and former finance director Shynar Dikhanbayeva had used sham contracts with ‘money funnel’ companies to misappropriate funds, including those raised in KKG’s London IPO. Having “won on trial on almost every point of substance in lengthy and fully contested action” KKG obtained judgment for $300m backed up with a freezing order.
The defendants both denied the frauds and simultaneously relied on Kazakhstan’s three-year limitation period: insisting that the claimants knew, or should have known, about the frauds earlier than claimed. Using this defence, two unsuccessful attempts were made to discharge the freezing order, one of which reached the Court of Appeal in 2014.
In rejecting this application, Longmore LJ stated: “This whole litigation leaves me uneasy. The essence of the limitation defence is that the Defendants’ fraud was so obvious that KK ought to have discovered it and issued proceedings before 2013. If the Defendants ultimately succeed on that defence, they might then have achieved the ‘perfect’ fraud. The money which has been stolen (over $100m) will become irrecoverable as a consequence of the judgment of the English court.”
The ‘Perfect Fraud’
The ‘perfect fraud’ is then one that is so well-concealed that it will not be uncovered before the limitation period elapses but, if discovered, seems so obvious that it appears the claim should have commenced much earlier. The defendants relied on expert opinion that Kazakhstan’s limitation period could commence once a potential claimant was aware of having suffered wrongdoing, without knowing the wrongdoer’s identity.
This was rejected following trial. Current management assumed control in 2009, but it was not until 2013 that sufficient evidence emerged to commence proceedings. So how did the defendants hide their misappropriation?
Kazakhstan’s buoyant economy in the 2000s and the subsequent financial crisis were pivotal. It has been a common feature of the Kazakh litigation reaching the English courts that many banks were lending without proper scrutiny prior to the global financial crisis. KKG’s former directors were closely connected to local banks, and it was easy for them to borrow heavily against development plans without worrying about project completion.
The financial crisis then helped to cover the defendants’ tracks, since given the global reduction in asset values IPO investors understood that they had bought at the top of the market. It was therefore expected that the business’s assets would be significantly marked down.
The defendants also took concerted steps to conceal the frauds, doing just enough work on the construction sites to convince investors that work was taking place, while putting down a paper-trail to justify payments to the related party entities. They did this with the complicity of KKG’s employees, who helped to manage the money funnel entities and produce the documentation required to move the funds out of KKG. Long after the defendants had left the business (and Kazakhstan), they continued to give instructions to KKG employees as to how to assuage any concerns raised by KKG’s auditors and the new management team.
Uncovering the fraud
Ultimately, the trail of sham documentation was crucial in proving the fraud. On joining KKG, I immediately had to deal with my predecessor’s dismissal: they were suspected of leaking information and assisting the defendants. The legal archives were left in disarray. As I started working through them, I found original documents signed by the defendants relating to the money funnel entities, even though the defendants ostensibly had no connection to these entities and therefore no reason to be approving contracts on their behalf.
These documents contradicted the defendants’ denials in cross-examination, as they provided what the judge held were “highly improbable and plainly invented explanations for the documents which contradicted [their] evidence.” When contemporaneous documentation contradicts a party’s evidence, English courts generally prefer the documents. A perfect fraud is difficult since fraudsters invariably have to rely on accomplices. With a lazy or incompetent accomplice, the fraud soon unravels.
In KKG’s case, some financial databases for the money funnel entities had been left on our IT systems. Grant Thornton’s forensic analysis revealed huge net cashflows out of KKG. The defendants had attempted to obscure these by continually shuffling balances between the money funnels and KKG entities. This was done via a web of generic contracts for the supply of materials, hard to verify construction works, and the assignment of fictitious debts.
Uncovering the frauds would have been futile had the limitation defence prevailed. The claimants had to demonstrate why they were not, and should not have been, aware of the frauds much earlier. Evidence of concealment played a considerable role in proving this. The misappropriation had also caused KKG to default on loans drawn-down (and misappropriated) by the defendants, meaning that the new management had initially been distracted by restructuring negotiations.
A level playing field
KKG was supported by Harbour Litigation. Ellora MacPherson, Harbour’s CIO, stated: “This is a prime example of the value that Harbour’s funding provides in supporting the claimant and securing a good result, particularly in a complex and fiercely fought claim such as this”.
Litigation funding can be invaluable for victims of fraud. Wealthy fraudsters routinely outspend their adversaries by dragging out legal proceedings, with expert defence lawyers burying claimants in security for costs and disclosure applications. In KKG’s case, access to third party funding matched the defendants’ legal firepower and we secured the right result.
Our case also underscores London’s position as a global centre of litigation. Ironically, the rule of law often attracts those who have benefited from corruption in their home countries, and who then seek to place their wealth in jurisdictions where property rights are protected by independent courts. As KKG’s case shows however, such individuals may then be vulnerable to claims in their adopted jurisdiction.
Alison Horner, VAT partner at MHA MacIntyre Hudson, explains the implications of the new HMRC Fulfilment House Due Diligence Scheme (FHDDS), launched on 1 April 2018.
“This is a crackdown on certain non-EU businesses which are avoiding VAT regulations and flooding the UK market with cheap, often fraudulent, online goods. This avoidance of the rules enables unscrupulous companies to undercut those playing by the rules, and represents a significant threat to UK domestic businesses.
“Fulfilment houses, warehouses and distribution companies dealing with goods imported from a non-EU business for sale in the UK must register for the scheme and also ensure their clients are VAT registered.
“Existing fulfilment businesses need to apply by 30 June 2018, and any company starting to trade after 1 April 2018 has until 30 September 2018 to register. The penalties for non-compliance can quickly add up as there’s a £500 charge for every non-compliant month. Furthermore, from April 2019, non-compliance means a £10,000 penalty, criminal conviction and the right to trade in the UK will be revoked.
“Big players have their due diligence well underway but many businesses are falling behind. To demonstrate compliance businesses need to put the right checks in place and collate information and VAT numbers on all the customers they trade with. HMRC means business with enforcement of these rules and it’s important to be ready.
“The new scheme may be another administrative burden, especially so for smaller companies, but the government has got to take decisive action to clampdown on non-compliant goods. There are fears that leaving the EU will exacerbate this problem, as neighbouring regions may be tempted to use loopholes currently exploited by non-EU traders, so now is the right time to act.”
(Source: MHA MacIntyre Hudson)
Cybercrime is a growing concern. Hackers and criminals have taken opportunity to use technological advances to gather sensitive information on you, me and anybody. And over time we have seen big companies fall victim to such attacks; Uber, T-Mobile, Equifax and even Pizza Hut, have been victims of vicious cyberattacks, causing an uproar and individuals feeling greatly at risk, because let’s face it, we never really know who has our data and information.
With GDPR coming into effect in May 2018, we are long anticipating whether the new regulations will help tackle cybercrime, or at least the after effects of such an event. This month we speak with Andre Pienaar, who is the founder of C5 Capital and a lawyer, as well as an expert on cyber law and cybercrime. He explains how when a prominent company such as Uber have been breached, the legal counsel will be at hand to deal with such an issue. Nonetheless, bounty programmes are fraught with compliance and fraud risks
Therefore, Andre speaks on the first course of action any company should take when faced with a cyber risk and if GDPR addresses all issues cybersecurity presents.
What would you say is the first course of action any company should take when under a cyber-attack?
Don’t panic. Understand what is at risk, consult the incident/crisis response plans that every company should have on file (and should be tested regularly) and determine what the appropriate action is. Engage experts for specialist incident response and forensic skills, or when an independent investigation is required.
What is the most complex form of a cyberattack and how would you say a company should work around it?
A regular complex form of cyber-attack is the insider threat. It is often said that employees are a company’s most valuable asset. This is of course true. They have access to the most sensitive information and we rely on some of them to maintain the security and functionality of our systems.
From file hijacking, keylogging and taking screenshots, which poses the most complexity when trying to overcome the damages?
Ransomware regularly makes headlines when it cripples a business by denying them access to their own information and systems. But the most complex and dangerous attack to overcome is a sophisticated targeted cyber-attack aimed specifically at your company. Defending against such targeted attacks is a challenge most businesses cannot muster and even more cannot even detect that they have been breached; thus, allowing an unknown unauthorised attacker to access sensitive company secrets, without the knowledge of the business. We have seen this result in valuable intellectual property and research being stolen, or competitors getting inside information about deals or strategy.
Do you believe the GDPR Act addresses all cybersecurity issues? If not, what else do you think should be addressed?
The European Union General Data Protection Regulation focuses on protecting European citizens and, more specifically, their personal identifiable information. Many of the principles GDPR introduces (such as Privacy by Design, which ensures that security is properly considered from the outset of any project that will handle personal data) are founded on cyber security best practices. But there are other areas of cyber security, such as the availability of systems or security controls on areas that do not pertain to personal information, that go beyond GDPR.
Data controllers will be required to report data breaches to their data protection authority unless it is unlikely to represent a risk; what classes as a risk?
Under GDPR it will become mandatory to report a breach involving personal data, unless the data breach is unlikely to result in a risk to the individual’s “rights and freedoms”. These rights and freedoms are detailed in Recital 75 of the GDPR and include any personal attributes or personal data being revealed. Regardless of the type of data, there is also a provision that breaches involving a large amount of data or affecting a large number of individuals, must be reported.
Moreover, do you think paying ransom is the best option? What other options are there?
Paying any ransom does not guarantee the return of one’s data or service and it incentivises financial crime in the future. Additionally, it does not absolve the company of any regulatory disclosure responsibilities either.
As you have worked in a variety of jurisdictions, do you think cybersecurity needs to be better addressed in some countries more than others?
The cyber security threat is global and in our interconnected world, attacks from anywhere could reach you wherever you are in the world. We need to do more to share information within sectors and between governments to establish collective security defences.
Managing Partner and Founder, C5
www.c5capital.com
Andre is a Managing Partner and the Founder of C5, a specialist technology investment group focused on cybersecurity, cloud computing and big data analytics with offices in Washington, London, Luxembourg and Bahrain. Andre serves on the boards of several cybersecurity companies including the Haven Group in Luxembourg, ITC Security in London and Omada in Copenhagen.
Mr Pienaar started his career in Kroll Inc where he became the youngest managing director until the successful sale of the company to Marsh Mclennan. In 2004 Andre founded G3, an international consulting firm that advises global companies and international law firms on cybersecurity. He sold G3 in 2011 to Europe’s leading technology investment holding company.
Andre advised the 6th Duke of Westminster on the establishment of the new Defence and National Rehabilitation Centre (DNRC) in the United Kingdom as a state of the art centre for the rehabilitation of British military veterans.
Mr Pienaar is a member of the U.S. Government’s Institute of Peace (USIP) International Advisory Council and a Director of the PeaceTech Lab in Washington DC. He is a member of the National Council on White House History, an US not for profit that is the custodian of the White House, its art and history, as well as being a Director of the International Centre for Missing and Exploited Children (ICMEC) and a trustee of the David Shepherd Wildlife Foundation, a British charity focused on wildlife conservation.
A family capital-backed investment firm, C5 Capital build long-term relationships with committed investors, innovative founder teams and global companies keen to maintain their edge. Operating out of London, Luxembourg, Cape Town, Washington D.C. and Manama, they identify, nurture and support partners, whether they’re just starting out, or embarking on the next phase of their growth.
Given their specialist industry knowledge and execution capability throughout EMEA, they are able to offer a powerful combination of expertise, funding and growth opportunities, all the while ensuring that we are contributing to the public good.
Last Wednesday, the SEC charges Elizabeth Holmes with fraud. Holmes is the CEO of Theranos, a medical company that misrepresented its technology while raising money from investors.
