THE FIRST OF MANY?

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eBook
Edition 028 / January 2015
Serious Fraud, Regulatory and Complex Crime Lawyers
THE FIRST OF MANY?
The Serious Fraud Office (SFO) has secured its first convictions under
the Bribery Act; four years after the legislation came into effect. Is this
a sign of things to come?
It is doubtful whether the
champagne corks have been
popping at the SFO. Despite it
successfully prosecuting three
people for a £23 million fraud and,
in the process, achieving its first
convictions under the Bribery Act
2010, the SFO has yet to convince
many of its abilities when it comes
to this much-heralded piece of
legislation.
The Act, although passed in 2010,
could only be applied to conduct taking
place from July 2011 onwards. This
effectively meant that there would be no
swift rush to the courts by the SFO – or
any other agency – looking for Bribery
Act convictions. Factor in the amount of
investigation, evidence gathering and
pre-trial negotiation involved in bribery
cases and it would have been clear from
the start that it was likely to be some time
before Bribery Act prosecutions and
convictions became a reality. This,
however, did not prevent the occasional
criticism of either the SFO or the Act
when it came to the need to tackle
bribery. Now, at last, the SFO has its first
successful prosecutions under the Act.
The case involved the selling of
investment products linked to biofuel
operations a company ran in Cambodia
that were funded via self-invested
pension plans. The chief executive officer
(CEO) of the company and the chief
commercial officer (CCO) of a subsidiary
company were convicted of fraudulent
trading and conspiracy to commit fraud.
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The CCO was also convicted of accepting
bribes totalling £189,000 to approve
false invoices submitted by the director of
a sales agency involved in unregulated
pension and investment products. This
director was convicted of conspiracy to
furnish false information and two counts
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The Bribery Act has been with us a
number of years. Whether this first
conviction will be the first of many
remains to be seen. What is already
clear, however, is the need for
everyone in business to be aware of
the risk of prosecution under the Act
and the need to tackle those risks.
of bribery. The CEO, the subsidiary
company’s CCO and the sales agency
director were jailed for nine, 13 and six
years respectively. Each was disqualified
from being directors for at least 10 years.
The SFO is also set to bring assets
confiscation and compensation orders
against the trio.
The prosecution was based mainly
on the fraud offences but the trial judge
emphasised that the bribery was an
aggravating feature in a “thickening
quagmire of dishonesty” that took the life
savings and homes of 250 victims. The
judge highlighted the significance of the
bribery and there’s no doubt that these
convictions can be viewed as a red letter
day for the Bribery Act. Yet this case may
have greater significance.
If anything, this case indicates
clearly how the authorities can and will
use the Bribery Act wherever and
whenever they can to take on corruption.
The bribery was only one element of this
case but the SFO showed it was more
than willing to use the Act as one part of a
prosecution rather than the be all and
end all. At present, the authorities area
gearing up more than ever before to
tackle corruption. Bribery, like fraud,
money laundering and tax evasion, is
increasingly in the spotlight. The SFO,
National Crime Agency, the police, HM
Revenue and Customs and the Financial
Conduct Authority are all increasingly on
the look-out for any evidence of business
crime. They are working closer together
than ever before, have strengthened ties
with their foreign counterparts, can call
on more advanced technology to help
them obtain the necessary evidence and,
perhaps most crucially, have the benefit
of harder hitting legislation, such as the
Bribery Act, the Money Laundering
Regulations and the Proceeds of Crime
Act 2002.
It would be misleading to read too
much into this first Bribery Act success
for the SFO. The case did not hinge
entirely on the Act and it was a
prosecution of individuals rather than
one brought against a corporate
defendant. There was also little evidence
in this trial to help us fully understand
what the courts will accept as a defendant
having taken adequate procedures to
prevent bribery.
Guidance from the Ministry of
Justice states that “The question of
adequacy of bribery prevention
procedures will depend in the final
analysis on the facts of each case.’’ The
six principles outlined in the guidance –
proportionate procedures, top-level
commitment, risk assessment, due
diligence, communication and training,
monitoring and review – are useful
pointers to anyone wanting to ensure
they comply with the Act. Yet it will not
be until a good number of Bribery Act
cases have been through the courts that
we will know what can be viewed as the
real acid test of adequate
procedures.
What we can say, however, at
this early stage is that the Bribery Act
gives the authorities the potential for
successful prosecutions in instances
involving complex evidence and events in
a number of countries. The global reach
of the Act effectively means that any
company with a UK connection will find
it increasingly difficult to escape the law
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if it is involved in bribery anywhere in the
world. Ignorance of bribery, negligence
regarding it or the turning of a blind eye
towards it are simply not options any
more. Unless you want to run the risk of
unlimited fines, compensation and
confiscation orders and being barred
from bidding for public contracts – all of
which are provisions of the Act.
As solicitors who specialise in
business crime cases, we help companies
of all sizes to assess how they can remove
their possible exposure to bribery. It may
be early days for the Bribery Act in terms
of prosecutions and precedents but it is
already clear that not adhering to the Act
can lead to prosecution – and that merely
paying lip service to it will not be enough
to prevent a company or individual being
prosecuted. Anyone wishing to reduce –
or, ideally, remove – their potential risk
of prosecution under the Act has to
conduct a thorough risk assessment of
just how they, their staff or other
representatives could be exposed to
bribery. Only then can they devise and
implement thorough and appropriate
anti-bribery policies. Such policies have
to be backed up with the right training,
monitored and regularly reviewed and be
embedded in the company’s culture, from
the top down.
The Bribery Act has been with us a
number of years. Whether this first
conviction will be the first of many
remains to be seen. What is already clear,
however, is the need for everyone in
business to
be aware of
the risk of prosecution under the Act
and the need to tackle those risks. It may
well have taken a while for the SFO to
achieve their first Bribery Act
convictions. It may even take a fair
amount of time before the SFO can
celebrate their next ones. But it will find
it increasingly easy to secure future
convictions if those who come under
investigation have not taken the time and
effort to comply with the Act.
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DOES IT DO WHAT IT SAYS?
The dangers of being lured into tax avoidance
schemes. Aziz Rahman examines the legal pitfalls
that can accompany attempts to minimise the tax
that individuals and companies pay.
Twenty one years ago, a certain
brand of wood stain started
advertising itself with the slogan “It
does exactly what it says in the tin.’’
Not the most exciting catchphrase,
admittedly, but it worked. It caught on
with the public and became a commonly
used phrase to indicate something that
was straightforward, dependable and
worth spending money on.
The product is still strong, people
still use the phrase and it is still a signal
that something is reliable if not especially
exciting. Unsurprisingly, however, it is
not a phrase that is used very often in
financial circles. There may be many
reasons for this. I would suggest that one
is that financial products are usually a
more complex package than a tin of wood
stain. Another might be that financial
schemes by their very nature don’t lend
themselves to glib slogans and phrases;
as the potential outcomes are likely to be
more varied than those involved in
treating your garden fence. And a third
reason, unfortunately, is that a number of
financial schemes that have come to light
in recent years have done so because they
are doing the complete opposite of what
they are supposed to be doing.
As a result, HM Revenue and
Customs and other state bodies are
taking an especially close look at
anything that does not seem to be what
the tin might indicate. Cases are working
their way through the courts involving
hundreds of millions of pounds while
investigations continue into many other
investment projects that have aroused
suspicion. Investigators are putting the
schemes, their creators, promoters and
investors under the microscope.
At Rahman Ravelli, we have
accumulated many years of experience
and chalked up an impressive record of
success in the full range of tax fraud
cases. Whether it has been cases
involving hundreds of millions of pounds
or the most high-profile prosecutions, we
have approached them in the same
methodical, proactive manner in order to
build the strongest possible defence for
our clients.
We are fully aware that financial
advisors who persuade people to invest in
tax schemes increasingly have to justify
their judgement to the authorities. For
some, the mistakes of the past are
catching up with them. But those working
in the financial advisory sector that wish
to avoid the fate of some of their
unfortunate colleagues must start doing
their homework before they recommend
any schemes to any potential investors:
Does the scheme under discussion
make sense?
Is it genuinely doing what it says on
the tin?
Is there proof of real investment in
the scheme? If so, is that investment
actually being used for what it is
supposed to be used for?
Can anyone produce evidence of how
the investment is being used? Or is it all a
paper exercise designed to reduce
people’s tax liabilities?
To some financial advisors, such
questions may seem unnecessary. They
will argue that they have invested in
schemes that have provided steady
rewards for years and they will see no
need to start making enquiries so late in
the day. It is an understandable
argument but, as recent court cases have
shown, many schemes that have
functioned for years without any
problems have been judged illegal.
Just last month, MP Margaret
Hodge, chair of Parliament’s spending
watchdog, the Commons public accounts
committee, fired a warning shot against
such schemes.
“It is crazy that only those who put
their money into tax avoidance schemes
are properly punished, and not those who
design, promote and sell them,’’ she said.
–3–
“It is a whole grubby industry from which
shameless tax advisers and promoters are
making big bucks.’’
The MP called for the government to
punish those who create and advise on
tax avoidance schemes, adding that there
needs to be “a powerful deterrent that
says if you are involved in designing or
selling these products you will face
criminal prosecution.’’
The veteran Labour MP’s call is not
an isolated one. The 2015 Finance Bill
includes tougher civil sanctions for those
with taxable accounts offshore and
measures to strengthen the disclosure of
tax avoidance schemes. It remains to be
seen whether the Bill will eventually
include a strict liability offence for those
who fail to declare taxable offshore
income. Last October, 51 countries
promised to pass on financial data to
each other after signing an agreement to
crack down on tax evasion. This
agreement is seen as a major attempt to
tackle the elaborate scheming that is
carried out to ensure people do not pay
the tax they should.
“It is crazy that
only those who
put their money
into tax avoidance
schemes are
properly
punished, and not
those who design,
promote and sell
them,’’
In December 2014, EU states and the
European parliament agreed to update
anti-money laundering rules in a bid to
stop anonymous organisations or shell
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companies being used to help people
evade taxes, finance terrorism or launder
money “Creating registers of beneficial
ownership will help to lift the veil of
secrecy of offshore accounts and greatly
aid the fight against money laundering
and blatant tax evasion,” said Krisjanis
Karins, an EU lawmaker involved in
putting the agreement together.
The effectiveness of such
developments remains to be seen. But in
the UK we have already seen a series of
cases coming to court and stern words
from the Chancellor of the Exchequer
about the “scourge’’ of tax evasion and
the need to treat anyone involved like “a
common thief’’. Whether such words are
pre-election tough talk to please the
taxpayers will not be known for some
time.
But regardless of whether the
aforementioned initiatives are successful
or the politicians back their words with
actions, the issues of both tax avoidance
and tax evasion are high on the
authorities’ agenda. It would be wise for
advisers to carry out the due diligence
checks we outlined earlier – both on
financial schemes they are currently
involved in and on those they are
considering recommending to clients.
In recent years, HMRC has been
given tens of millions of pounds in extra
funding to track down tax that is owed.
By the end of the last financial year, the
number of new tax avoidance schemes
registered had fallen by almost 75% on
the figure from four years earlier. Two
years ago, the government introduced the
General Anti-Abuse Rule (GAAR) to
tackle abusive tax avoidance schemes
that could have been judged acceptable
under existing legislation. From April
2010 to March 2014, HMRC prosecuted
2,650 individuals for tax crimes;
including high-profile financial and legal
experts in their fields.
HMRC likes to make the most of its
successes. But there is no doubt that it
does not always “get its man’’. The
rhetoric coming out of HMRC, however,
shows that the issue of tax and its
non-payment is being taken very, very
seriously – and it is casting its net very
wide to prosecute those it believes are
responsible. Prosecutions are up in
–4–
recent years, as the tax man is favouring
the criminal rather than civil route, and
this is a trend that is unlikely to be
reversed in the near future.
With this in mind, anyone whose role
involves creating or promoting such
schemes needs legal guidance to ensure
they are acting within the law. Not
making sure of this means running the
risk of prosecution, conviction, loss of
assets, damage to reputation and a total
collapse in your client base.
With HMRC out looking for more
and bigger convictions over non-payment
of tax, the financial advisor has to tread
incredibly carefully. Due diligence, an
ongoing commitment to compliance and
access to appropriate legal representation
at the earliest possible stage are essential
if you are to avoid the suspicions of
HMRC.
HMRC is increasingly keen to know
what is in the tin when it comes to
financial schemes. All those involved in
them need to be able to lift the lift the lid
on their affairs without fear of finding
something unpleasant.
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PAYBACK TIME?
The mortgage industry is in a healthy state. But mortgage fraud is still
very common. What can those in the industry do to avoid falling victim
to what is a widespread problem?
The last year or so has been healthy
for mortgage lenders. According to
the Council of Mortgage Lenders,
gross mortgage lending for the
third quarter of 2014 was an
impressive £55.5 billion. This was
an 8% rise on the previous quarter
and 13% up on the same period a
year earlier.
So it’s all good news, then? Well, yes
and no. On the good side, borrowing is
clearly buoyant. On the bad side,
mortgage fraud is still proving very
attractive to criminals. This is a situation
that carries significant financial and legal
risks for mortgage brokers and all other
financial experts who are involved in the
mortgage industry.
As a firm with years of experience in
representing mortgage industry
professionals in some of the country’s
most high profile prosecutions, you may
expect us to emphasise the risks. But
what we would also like mortgage
professionals to remember is the need to
act promptly as soon as anything arouses
suspicion. Seek expert legal advice as
early as possible; as it is the only way to
nip problems in the bud and avoid
problems later on.
Statistics for mortgage applications
show that over the last two years around
0.8% of applications have been identified
as fraudulent.
This does not, admittedly, seem like a
huge percentage. But it is worth
considering a couple of points. Firstly, this
is only the amount of mortgage
applications that have been recognised as
being fraudulent. We do not know for sure
the precise number of fraudulent
applications. Many more may have been
successful and yet not have been identified
as fraudulent. Secondly, any single
successful mortgage fraud can create a
huge amount of financial hardship and
finger pointing between the lender and
the other parties involved. If we take that
0.8% figure, it means that at least one in
every 125 mortgage applications is
fraudulent. And if we take figures from
last year that show the average mortgage
being taken out by first-time buyers is
£121,500 then it’s clear that one successful
fraudulent application can involve very
large sums of money.
–5–
Increasing demand for mortgages
and rising house prices have led to
lenders scrutinising applications more
closely. But it would be surprising if this
has not simply led to those attempting
mortgage fraud becoming more devious
in their attempts to obtain the five-figure
sums they are seeking. It is clear that the
authorities are aware of the problem - as
more than 100 people associated with the
mortgage industry have been banned
since 2006 – but it is in the best interests
of the mortgage industry as a whole if
everyone involved does everything they
can to make sure they do not fall victim to
fraud or become unwittingly involved in
it.
It is no secret that lenders have, in
recent years, made some incredibly risky
loans without carrying out adequate
checks. The US saw the bundling up and
selling on of mortgage debt with
disastrous consequences while all
involved somehow retained their AAA
ratings from the major ratings agencies.
In the fall-out from the economic crash,
mortgage fraud cases have been coming
to court here and in the US. Some have
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involved tens of millions of pounds and
the involvement of people in all parts of
the mortgage chain: mortgage advisors,
brokers, valuers and solicitors. While
some have been elaborate cases of
property over-valuation, with the
relevant professionals fully aware of what
is being perpetrated, many more have
seen such people unknowingly involved
in huge mortgage frauds.
When people accused of mortgage
fraud state that they knew nothing about
any illegality, the prosecution will often
react with disbelief. Such a response is
often unfair. It should be remembered
that if a fraud was detailed enough to
dupe the lenders then it could just as
easily have fooled some of those who
became involved in it. But as this is rarely
a view taken by the likes of the Serious
Fraud Office (SFO), professionals
involved in all stages of the mortgage
process need to make sure that they are
doing everything they can to reduce the
chances of them becoming involved in
such a criminal operation.
Whatever the size and precise nature
of the mortgage fraud, the central issue in
any prosecution will be dishonesty. Can
the accused justify their actions? Did they
carry out adequate research prior to
becoming involved in the application?
When working on this application, did
they do anything differently from the
hundreds or thousands of other
applications they have handled? With the
right solicitor making appropriate use of
relevant documentation, expert witnesses
and the client’s professional pedigree, a
prosecution case can be challenged
vigorously; no matter how strong the
accusations may appear at first glance.
But what about trying to prevent
matters ever reaching that stage? We live
in an era in which the authorities have a
keener sense of the need to seek
prosecutions – and many of these
organisations have more resources and
more useful legislation at their disposal
than they have had before. Legislation
such as the Fraud Act places a huge
responsibility on companies and
individuals to comply. As a result, anyone
looking to prevent – or, at the very least,
detect – mortgage fraud has to be
introducing some form of compliance
procedures into their activities.
Bodies such as the SFO, the police,
HM Revenue and Customs, the Financial
Conduct Authority (FCA) and their
foreign counterparts are all working
closer together than ever before; aided by
technological advances and an increased
awareness of the potential international
dimensions of financial crimes such as
mortgage fraud. The obvious outcome of
this is that more wrongdoing is being
uncovered. As a result, it is imperative
that anyone in the mortgage application
chain is able to show that they made a
thorough and carefully prepared attempt
to prevent any wrongdoing being carried
out in their name. The chances of
mortgage fraud being uncovered and
prosecuted are far higher than they were
even a decade ago.
Whatever the size
and precise
nature of the
mortgage fraud,
the central issue
in any
prosecution will
be dishonesty.
Ignoring the importance of
compliance or throwing together a quick
compliance policy so it looks like you
have “done your bit’’ will cut no ice with
investigators who suspect wrongdoing. If
they are to be of any value whatsoever,
compliance procedures need to be strong,
thorough and introduced after careful
study of the way the company, its staff
and representatives work with any other
organisations or individuals. And
introducing well thought-out procedures
is not enough: they must be properly
–6–
publicised, routinely monitored,
reviewed and revised when necessary and
seen to be followed by all staff of all
ranks.
Finding the time, effort and funds to
make sure a company is fully legally
compliant may seem like a chore in the
fast-moving financial world. Mortgage
brokers, financial advisors, lenders and
everyone else with a stake in the multibillion mortgage market already have
their days full enough as they strive to
gain and maintain a slice of the business.
At Rahman Ravelli, we advise companies
and individuals on compliance. We
understand that compliance may not be
viewed as the most dynamic part of the
workload for anyone in the finance
industries. Many will consider it
something to be avoided or, at best, paid
lip service to. Yet nothing can be more
damaging to anyone’s prospects than
being investigated, charged or convicted
of fraud.
When it comes to an area of business
such as financial advice, the merest hint
of wrongdoing could prove devastating.
Anyone found to have been involved in
mortgage fraud or especially vulnerable
to it will find it extremely difficult, if not
impossible, to keep attracting the
all-important stream of clients necessary
for a business to survive and prosper.
Anyone suspecting wrongdoing in
their operation has to speak to
experienced, specialist lawyers
immediately. But in reality it is far better
to be proactive rather than reactive when
it comes to tackling fraud. As we
mentioned earlier in this article, just one
successful fraudulent mortgage
application can be hugely damaging –
far more costly than the price of
compliance.
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THE LAW AND LIBYA
In 2011, we predicted that bribery prosecutions could follow the
collapse of the Gaddafi regime in Libya. That prediction has now come
true…and is a stark reminder of how bribery anywhere in the world
can be identified and acted upon.
When, in 2011, Libya overthrew the
dictator Muammar Gaddafi, many
people said the consequences could
be wide ranging. Political stability
in Libya, the effect on neighbouring
states, the price of oil and the
consequences for his relatives
living abroad were all mentioned as
issues to watch.
As Rahman Ravelli is a firm
specialising in commercial fraud and
business crime cases, we looked at what
was happening in Libya from a different
perspective. We took the view that one
result of Gaddafi’s overthrow would be
the prosecution of companies from the
UK and elsewhere and the confiscation of
their assets for their use of bribery to woo
business from figures within the hated
Libyan regime.
In 2011, few – if any - people seemed
to be voicing the same opinion as we
were. But it does now appear that events
have unfolded in the way we believed
they would. At the time of writing, there
are no UK companies in the dock yet
because of their relationships with
Gaddafi. But the biggest criminal trial of
Western corporate executives accused of
bribing Gaddafi-era Libyan officials for
–7–
contracts has begun. It is a fairly safe bet
to say that business figures in the UK who
did business with Libya prior to the
revolution will be watching very closely
as events unfold in the trial of senior
figures who were working for Norwegian
fertiliser company Yara International. In
the years before the revolution and after
the Tony Blair-led reconciliation with
Libya, there was scope for doing business
in Gaddafi’s dictatorship. The issue now
for Yara and many other companies is
just how scrupulous western business
figures were in securing deals.
Yara has already paid fines for its
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behaviour in Libya. Prosecutors have
claimed that Yara executives turned a
blind eye as large payments were made to
officials, including the oil minister’s son,
and a company that was created in a tax
haven. Four senior Yara figures have
pleaded not guilty at an Oslo court in a
case that is expected to last up to three
months. The charges carry sentences of
up to 10 years in prison and it is fair to
say that it is not only Yara that is
anxious about its dealings in Libya.
There is now the
distinct
possibility that
companies who
have had
unblemished
reputations for
decades will end
up in court to
answer for their
actions. As
international
business crime
specialists, we
know that such
cases can be long,
drawn out and
complex.
Two civil cases are being prepared
in London against Goldman Sachs and
Société Générale; with both banks being
sued by the Libyan Investment
Authority (LIA). The LIA accuses the
banks of coercing Libyan officials into
investing the financially impoverished
country’s wealth with them.
In the Yara case, executives are
accused of allowing or overlooking the
large payments to Libyans to secure
deals. It is alleged that they ignored
claims of wrongdoing that were made by
whistleblowers. Some of Norway’s most
senior business figures are to give
evidence in the Yara case. But its
importance is recognised far beyond
Norway’s borders. For example, US
investigators are examining the actions
of a London-based hedge fund that
persuaded Libya to invest in it and the
role of at least one middleman. The City
of London Police is reported to be
examining sleazy allegations relating to
how London-based executives at a
financial services company treated
Libyan officials to lavish parties in
Morocco.
Further afield, Canadian and Swiss
investigations into a Canadian
engineering company, ANC Lavalin, led
to the conviction of its former head of
global construction for bribing
Gaddafi’s son Saadi in order to gain
major contracts.
The locations of the companies
involved and the nature of their work
may vary but one theme runs through
the allegations: the bribing of people in
Libya in order to do lucrative business
in that country. Some of those accused
have said they did not know what was
going on, others have blamed it on
rogue former employees. Their
arguments follow a train of thought that
says they cannot be held liable as they
were not aware of the wrongdoing. In
this day and age, such an argument is
becoming less and less successful in
court.
In the UK, the Bribery Act 2010
makes it an offence to bribe someone,
receive a bribe, bribe a foreign official or
fail to prevent bribery. The Act applies
to all UK-based organisations and
individuals and covers any activities
carried out anywhere in the world by
them, their staff, representatives or
trading partners. As the Act only came
into effect in July 2011 – by which time
the Libyan uprising was already
underway – it is unlikely it will lead to
any prosecutions of UK-based
companies because of their dealings
with the Gaddafi regime. But the Act is
part of a wider worldwide awareness of
the need to investigate and prosecute
bribery and corruption. The
multinational flavour of the first
generation of legal actions being brought
against those alleged to have improperly
curried favour with the Gaddafi regime
indicates this.
Authorities around the globe are
now looking closer than ever at how
companies conduct business around the
globe. UK companies could find
themselves being prosecuted for
–8–
activities carried out in far-flung parts of
the world many years ago. Rolls-Royce
is a clear example. Legal freezing orders
could become a more common
occurrence, as countries such as Libya,
as well as aggrieved individuals and
organisations, look to the law to put
right previous wrongs.
There is now the distinct possibility
that companies who have had
unblemished reputations for decades
will end up in court to answer for their
actions. As international business crime
specialists, we know that such cases can
be long, drawn out and complex. Anyone
who does become the subject of such an
investigation must seek legal advice
from solicitors who are both experts in
dealing with the authorities concerned
and capable of putting together a case
that crosses international borders. And
those under investigation must seek
such advice at the earliest possible stage
Authorities
around the globe
are now looking
closer than ever at
how companies
conduct business
around the globe.
if they are to benefit from the best
protection available under the law.
As Libya is starting to show, it
would be a mistake to believe that any
business wrongdoing will never come to
light, regardless of when or where it
happened. While a strong, proactive
legal defence may be the best remedy
for anyone facing such problems it is
well worth remembering that
prevention is better than cure. Taking
strong action to develop an anti-bribery
culture in a company from the top
down is the best possible way to
prevent future problems. By assessing a
company’s risk of exposure to bribery
and then devising, implementing and
monitoring measures to “design it out’’
any organisation or individual can go a
long way towards making sure that
what happens now is done in a way that
can cause no major legal headaches in
the future.
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PAYING ATTENTION TO PENSIONS
In next month’s newsletter, we will examine major pensions issues
facing independent financial advisors (IFA’s). Here, Aziz Rahman
summarises some of those issues and their legal implications.
Pensions have not traditionally
been thought of as an area where
controversy reigns. But in recent
years the pensions industry has
commanded increased attention
from the authorities, the
government and even the general
public.
Last year, the Financial Conduct
Authority (FCA) was lambasted for the
way it announced an investigation into
closed book pensions. Many in the
industry were critical because the
announcement caused share prices of
some insurers to drop sharply. The
incident showed the sensitivity of
pensions as an issue: in this case, the
regulators, the pensions providers and
pension holders all stood to be affected.
And yet this was just one in a series of
changes to the pensions industry this
millennium. As we enter a new year,
there are a number of factors affecting
pensions that IFA’s have to be both aware
of and able to respond to appropriately.
Our next newsletter will examine
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many of these issues in detail, from a
legal point of view and from the
perspective of the IFA. Here, I just want
to flag up some of those concerns that can
prove problematic for IFA’s who are
closely involved in the pensions industry.
One of the most obvious is, of course,
pension liberation. Call it liberation,
busting, unlocking or whatever else
people know it as; it involves an investor
taking their money from their pension
early and is not usually a wise move.
People are tempted to do it when they
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realise the low returns they will receive
on retirement.
This has stimulated a mini industry
of people who “liberate’’ a person’s
pension – but only for a large fee. This
may seem a sharp practice but it isn’t
illegal.
The question of dishonesty – and,
therefore, fraud – arises if investors are
persuaded to put their liberated pension
cash into a proposition far riskier than
where it was previously. In such
situations, it is essential that an IFA is
able to take steps to prove that they acted
honestly and with the best of intentions.
Specialist legal help can assist in building
such a case should the authorities
indicate they are looking to prosecute.
But it may even be worthwhile seeking
legal advice before taking any action with
clients’ money that could bring such
problems at a later date.
IFA’s can clearly play a vital and
effective role in pension liberation.
However, the pension liberation industry
is not regulated, there is no
compensation to the individual if
promised returns fail to appear and, for
these two reasons alone, it is an area that
attracts those looking for fraudulent
gains. Such people may use completely
legitimate IFA’s, who are regulated by
the FCA, to give the fraud an air of
respectability. In these situations, an IFA
may be able to show they acted honestly
and were not, therefore, part of any fraud
carried out, thus saving themselves from
any possible prosecution. Yet the damage
to such a person’s professional standing,
not to mention the time, cost and stress,
will do little to enhance their future
career prospects.
At Rahman Ravelli, we are strong
advocates of due diligence and the need
for compliance. Pension liberation is an
area where such an approach is vital;
especially as the Chancellor’s Autumn
Statement ushered in huge freedoms
from April 2015 for the over-55’s looking
to spend their pension money how they
wish. From April, pension liberation
could grow rapidly in size in the UK. It is
important that IFA’s are aware of the
risks that go with this.
Before anyone can liberate their
pension they do, of course, need to have
purchased one some years earlier. IFA’s
are ideally placed to advise on such
schemes and have done so for decades.
What has changed in recent years,
however, is the approach of the
regulators. As any IFA knows, anyone
wanting to sell a pension has to be
authorised to do so by the FCA; under
s19 of the Financial Services &
Management Act.
Since replacing the much criticised
Financial Services Authority (FSA) in
2013, the FCA seems keen to take a far
more aggressive approach when it comes
to IFA’s and pensions selling. Its
handbook replaced the FSA’s and carries
in it a wide range of standards and
principles. Its high level standards
section refers to 11 over-arching general
principles. Treating the customer fairly is
just one of these principles – this
principle alone sets six requirements of
those selling pensions. There is not
enough space in this article to examine
them all. The point that needs to be
made that IFA’s have to know where they
stand with the FCA before, during and
after any pensions transactions they are
involved in. If they do not, or they are
unsure, then immediate, expert legal
help must be sought.
HMRC, the FCA
and even the
Regulator can
choose the civil or
criminal route for
their cases. In
most instances, an
IFA under
investigation will
prefer a civil
settlement.
That we have reached halfway in this
article without even mentioning the
Pensions Regulator indicates the amount
of regulation facing IFA’s who sell
pensions. But that does not mean that, as
it comes up to its tenth birthday, the
Regulator can be ignored. It is yet
another body that any IFA has to take
clear legal steps to comply with. Since
replacing OPRA (the Occupational
Pensions Regulatory Authority) in April
2005, it has been proactive in ensuring
regulation and has taken a particular
interest in the potential risk of any
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pensions products being sold.
In its role of registering every
pension scheme and protecting
investors, anyone running a pension
scheme (a trustee) has to be formally
recognised by the Regulator. This
recognition can require intense scrutiny
by the Regulator, whose need to see
evidence of real investment, Relief at
Source (RAS) tax relief being properly
claimed and proper money management
systems used by trustees are the types of
enquiries that can protect investors. In
the current pension liberation climate,
the Regulator’s diligent approach is as
likely as anyone’s to uncover illegality.
The onus is on IFA’s to make their
own investigations into potential
investment to make sure they are not
implicated in wrongdoing. Anyone
familiar with the allegations of fraud
made by HM Revenue and Customs
(HMRC) last year at Birmingham Crown
Court as part of the major pension fraud
case (Operation Cactus Hent) that saw a
number of IFA’s in the dock will be
aware that pensions are targets for tax
fraud – and IFA’s can quite easily
become embroiled, knowingly or
unwittingly. The Cactus Hent case did
eventually fail to gain the convictions
HMRC was seeking; due mainly to the
pension scheme in question ticking all
the statutory boxes. But it is a clear
indicator of HMRC’s increasingly
aggressive approach to pensions. Cases
that would previously been taken on by
the Pensions Ombudsman or HMRC
using the civil law are now more likely to
be prosecuted.
HMRC, the FCA and even the
Regulator can choose the civil or
criminal route for their cases. In most
instances, an IFA under investigation
will prefer a civil settlement. But without
taking on specialist business crime
lawyers at the earliest possibility, the
chances of securing a civil outcome can
be remote.
As this article has indicated,
pensions selling and management is a
lively legal area at present. Our next
newsletter will examine the issues
outlined here and others that are on the
horizon for IFA’s working in this sector.
It is vitally important that those
operating in it use their financial
expertise to stay on the right side of the
authorities – or seek the appropriate
legal expertise to help them do this.
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