Diamonds are not forever – SRA “will shut down” firms involved in dodgy investment schemes

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23 September 2016

Diamonds may not be a solicitor's best friend

Diamonds may not be a solicitor’s best friend

The Solicitors Regulation Authority (SRA) has revealed that it is investigating law firms involved in “dubious” high-yield investment schemes – and promised to close down those practice involved in them “urgently”.

The regulator said in a warning notice to solicitors that these schemes were costing consumers “many millions” of pounds, although the true figure was “probably much higher”, because of cases dealt with by other regulators or the police, or because foreign investors may not have contacted the SRA.

“We are particularly concerned about the dangers of investment schemes where the involvement of a law firm is used to give an impression of credibility or security,” the regulator said.

The SRA said some law firms which facilitated dubious schemes improperly provided banking services through client account.

“In designing the schemes, law firms and the promoters of the scheme pay attention to red flags that we and other regulators warn about. They then deliberately create a scheme that avoids raising those red flags.

“To evade rules preventing the improper movement of money, they also manufacture a process which they claim means that the firm is acting in a genuine underlying transaction.

“The reality is that they are simply allowing their client account to be used to commit what is very likely to be a fraud – and to launder the proceeds.”

The SRA went on: “Over many years, we have closed down law firms and many solicitors have been disciplined as a result of their involvement in such schemes. Some have been prosecuted and imprisoned by others.”

The regulator referred to the case of Pascale Wood-Atkins, a sole practitioner who was struck off by the Solicitors Disciplinary Tribunal this time last year for lack of integrity in facilitating a fraud. The SRA said the returns offered to investors in this case were said to be 40% per month.

“We still see crude, high-yield investment schemes where ‘investors’ are offered extraordinary returns which are clearly unrealistic.

“There is reference to secret banking or monetisation transactions through which high returns can be made. They are invariably nonsensical.

“Our previous warnings on high-yield investment fraud remain important. The nature of these schemes is now so well known that any solicitor who becomes involved in them may face being closed down urgently and alleged to have acted dishonestly.

“Members of the public who ‘invest’ in these schemes are very unlikely to be compensated because it is so dangerous and imprudent to become involved in them.

“Fraudsters have paid attention to warnings and moulded their schemes. They will now usually avoid offering ridiculous profits but will still mention returns that are very high compared to conventional investments, such as 20% per year.”

The SRA said fraudsters would claim there was a “lucrative market” in new or unusual investments.

The regulator said failed investment schemes it had seen included carbon credit trading, which was “never a market that it was sensible or practicable for individuals to try to invest in”.

Other examples were diamond trading, fine wines, “rare earth minerals” or graphene. The SRA also cited landbanking, or buying small strips of land which would increase hugely in value if they managed to secure planning permission, leasing of hotel rooms, overseas agricultural rights in countries like Ukraine or in Africa, overseas property developments or using famous works of art as ‘security’.

The SRA described unusual investments abroad as “particularly problematic”, with “very low” chances of recovering money if things went wrong. The regulator said it had seen examples of schemes where investors were assured their money would be held ‘in trust’, even though the law in that country did not recognise the concept of a trust.

The SRA warned that law firms and investment companies sometimes “manufacture a process” involving ‘certification’ or ‘verification’ to give the impression they were doing some legal work.

“The law firm will be instructed or pressured by the investment company to release the money as soon as possible and will often have no independent knowledge of whether what the investment company is telling them is true or not.”

The SRA said promoters used the involvement of law firms in their brochures or on websites, in one case saying the money was “looked after by an English law firm which holds an insurance policy”. The insurance company refused to pay any claims.

“We also see cases where perhaps £50m passes through a law firm but it only has insurance cover of £3m.”

Paul Philip, chief executive of the SRA, commented: “This is not the first time we have warned the profession about such schemes. We will continue to deal quickly and decisively with any solicitor who becomes involved in them.

“Fraudsters have certainly paid attention to our warnings and adapted their schemes to avoid suspicion. Solicitors asked to use their client account, or any other account, for this purpose should be extremely careful.

“In normal circumstances, there is no good reason for investors to pay money to a law firm which could be paid direct to an investment company. Firms should also remember that, even if they are acting for an investment company, they have a duty not to take unfair advantage of others.”

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