Warning notice

High-yield investment fraud

Issued on 10 September 2013

This warning notice is for anyone who is involved in, or is considering acting for clients involved in, the promotion or facilitation of financial arrangements that appear dubious.

Law firms have been targeted in the past by fraudsters promoting high-yield investment schemes which have proved to be ineffective and often fraudulent. Practitioners must not become involved in schemes that appear dubious or bear the hallmarks of possible fraud.

Economic pressures on law firms can lead to difficulty in obtaining work or finance and there is temptation to act in financial schemes either for fees or to make a promised profit. After a period of some years in which law firms were rarely involved in such schemes, the SRA is seeing a substantial increase in them again.

It is important always to bear in mind that a scheme that appears to be too good to be true is usually fraudulent. This notice sets out some factors that indicate there may be a fraud.

Whilst this notice does not form part of the SRA Handbook, the SRA may have regard to it when exercising its regulatory functions.

The Principles

It is your duty to ensure you do not become involved in potentially fraudulent financial arrangements. Failure to observe warnings from the SRA could lead to disciplinary action or criminal prosecution. Attempts to limit your involvement, particularly by a purportedly "limited retainer" are ineffective in protecting you if you simply should not become involved.

If you are, or are considering, becoming involved in any financial arrangement, you must consider whether you can comply with the Principles in the SRA Handbook. Whilst all the Principles may be relevant, some require particular attention:

  • integrity
  • independence
  • best interests of the client
  • behaving in a way that maintains the trust the public places in you and the provision of legal services.

What are high-yield investment frauds?

Frauds vary and fraudsters learn to avoid red flag phrases. Firms need to ensure that they understand the proposed scheme and that it makes logical and legal sense. Fraudsters use meaningless terminology but also use genuine terms to mask their frauds. It is important to assess the overall proposal and, if a genuine term is used, to check robustly whether it is being used in the correct context. Some common descriptions have included:

  • High yield investment schemes
  • Prime bank instrument schemes
  • Private placement schemes.

Arrangements are formulated by fraudsters to prey upon vulnerable and sometimes wealthy people or companies. Those in need of money are often the most at risk. These schemes are often highly sophisticated confidence tricks, which involve lawyers facilitating what is essentially a fraud. Some schemes involve the movement of large sums of money and are a combination of a fraud—usually with the intention of stealing the "investment"—and the laundering of criminal proceeds by mixing them into other money transfers.

Common characteristics

It is your duty to ensure you comply with your professional obligations and exercise proper caution in considering any involvement in a scheme involving the "investment" of money or the transfer of funds that are presented to you. The following is a non-exhaustive list of common characteristics of fraudulent financial arrangements.

  • Very high rate of return and disproportionate rewards, often within a short time frame—this is also a common characteristic in Ponzi schemes which involve payments to investors from subsequent investors rather than from any 'profit' earned by the individual or organisation running the fraudulent operation
  • Very large sums of money said to be involved or required for "entry" to the "programme"
  • Confusing and complex transactions with obscure descriptions
  • Unusual currencies
  • Prime Bank Guarantees (PBGs), Promissory Notes or Letters of Credit being offered or being the 'product' underpinning the finance
  • Obscure "security" such as famous paintings or speculative international developments
  • Opinions or letters from law firms or others that support the scheme but do not make sense or are empty of genuine content
  • Security being offered to "investors" includes an undertaking from a law firm or that money will be held by a law firm—sometimes including reference to indemnity insurance or the Compensation Fund
  • Security to be issued by an obscure or offshore bank that is difficult to contact—particularly if there is pressure not to contact the bank (or any other person) on (what are in fact spurious) confidentiality grounds
  • Poorly drafted documentation
  • Overwhelming amount of documents supposedly explaining the transaction; or a lack of any coherent explanation of the investment
  • Suggestions that the scheme is supported by or operates under the auspices of a major international body (e.g. IMF, UN, Federal Reserve or Bank of England)
  • Large projects that are difficult to verify, e.g. financing of a project in distant jurisdiction where it hard to verify its genuineness
  • The need for speed and great confidentiality to secure the deal – usually intended to prevent proper due diligence
  • Unusual letters from genuine banks (that often turn out to be forged or provided by a rogue employee)—contact the bank's fraud prevention office for verification.

Promoters operating these scams engage the assistance of law firms for a number of reasons. The involvement of lawyers and their firms:

  • Lends credibility to the scheme
  • Enables promoters to offer a false sense of security based on the existence of compulsory insurance and the alleged safety net of the Compensation Fund
  • Provides promoters with access to client accounts which can be utilised for the transfer of funds
  • Enables promoters to make use of solicitors' undertakings as a means of appearing to give investors security
  • Enables promoters to abuse legal professional privilege.

Types of legal services that promoters might request include:

  • Moving monies through client account
  • Advising on and drafting documents and/or contracts that have little genuine content
  • Marketing and promoting the fraudulent scheme to attract investors
  • Adding credibility to the fraudulent scheme by attending meetings, engaging in correspondence or providing undertakings
  • Certifying or verifying documentation
  • Use of the lawyer's office address and facilities.

Complying with the Principles

To comply with the Principles it is important that you and your firm are able to identify fraudulent or dubious financial arrangements and manage the associated risks.

The promoters of fraudulent arrangements will often want you or your firm to hold 'investor funds' in your client account (see Rule 14.5 of the SRA Accounts Rules 2011). You must not allow money to move through your accounts or an account you control unless you are doing so in the context of a genuine transaction about which you are providing legal services. Bear in mind also that the money may be the proceeds of the defrauding of the investors.

There are specific outcomes in chapter 11 of the SRA Code of Conduct 2011 in relation to undertakings.

If you are approached you must ensure that you comply with your obligations under the Money Laundering Regulations and related legislation.

Do not assume that because you are not acting for investors that you owe no duties as a matter of professional conduct. Not only must you avoid facilitating a fraud, monies sent by investors may well be subject to implied trust obligations particularly if the scheme is fraudulent.

Investors may be unrepresented or based overseas and may be unaware of the risks involved in financial arrangements or may have been induced in a scheme on the basis they will be protected because you or your firm is regulated. Whilst your client may be the promoter of the arrangement, you must not forget your public obligations as a lawyer and your overriding duty to act in the public interest.

How do I reduce the risk of fraud?

  • Do not act if you have any doubts about the propriety of the transaction; or about how or why it is structured in a particular way.
  • Never act if you do not fully understand the transaction, if it does not make sense or if you are essentially just providing a facility for the transfer of money.
  • Do not be blinded by apparent involvement in high value international transactions sometimes including promises of or actual international travel or meetings since it is part of the psychological approach to fraud to impress the victim or professional who will facilitate the fraud.
  • Always verify properly the identity of who you are dealing with.
  • Bear in mind that Ponzi schemes involve the payment of "profits" at first—by using the funds of other investors—and so "evidence" that a scheme "works" is part of the fraud.
  • Ensure that proper due diligence is performed before accepting any funds into your client account—be extremely wary of any scheme which requires the depositing of any substantial sums on money with you particularly if you are to be paid for doing very little. Do not hold money in your client account (or any other account) for clients you know little about or who you are not providing legal advice to in relation to the transaction for which you are expected to hold money.
  • Why you? Be particularly careful if you are asked to act in an area outside of your usual expertise. A small firm asked to act in an international financial transaction is at severe risk.
  • Use of documentation – beware of any scheme which requires you to send details of your bank, client account or blank letterheads. Such information may be used to make unauthorised payments from your client account.
  • Undertakings – do not give any form of undertaking to guarantee a financial obligation unless you are acting in a transaction you fully understand and you are fully secure in having funds to meet the obligation.

SRA action

Whilst we are committed to working constructively with firms and practitioners, we will take enforcement action against those that fail to address the issues and risks associated with dubious financial arrangements.

We have seen a number of solicitors and firms who have become involved in fraudulent schemes, some as investors and some as participators of the fraud, each with the intention of gaining an extra funds for the firm that could be used to run the practice, whether that be through the payment of a success fee for participation in the fraud or through profits arising from the scheme.

A defence based on ignorance or lack of understanding of the transactions involved is considered weak. Turning a blind eye to the suspicious features of a scheme or failing to verify the promoter's true intentions can constitute dishonesty.

Further assistance

If you require further assistance with understanding your obligations in relation to high yield investment schemes please contact the Ethics Helpline.

If you have evidence of one of these schemes or are concerned that you have been approached or have become involved, please contact your SRA supervisor.

If you are already involved and become concerned, urgently contact the Red Alert line.

Please use www.sra.org.uk/investmentfraud to link to this page.

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