PONZI INDICTMENTS REVEAL FAR-REACHING NATURE OF THE BRIBERY ACT

Nick Matthews, Global Head of Forensic Services at Kinetic Partners

In October 2014 the Serious Fraud Office (SFO) revealed it was investigating Sustainable Agroenergy Plc, a company it purported was operating a Ponzi scheme that funnelled money from 2,000 investors into and out of alleged biofuel investments.  The scammers allegedly used the money to buy Ferraris, Aston Martins and Bentleys to accessorise their affluent lifestyles, as they fooled retail investors into believing they were profiting from funds based in Cambodia.

Ponzi schemes promise high rates of return accompanied by little risk.  By enticing new people into the scheme, these schemes are able to pay high returns to the early investors.  However, once the flow of new investors runs dry, gaps in the scheme begin to show and the scams implode.

Interestingly, this is the first time the SFO has used the Bribery Act to charge individuals running a Ponzi scheme, although it was unable to use Section Seven of the Act (‘failure of commercial organisations to prevent bribery’) to penalise the company, as the company itself was allegedly the embodiment of the fraud.

Instead, it was the individuals who created the scam who were left to accept the blame.  The persons involved were charged with ‘making and accepting a financial advantage’, because they supposedly paid their accountant a substantial bribe to generate false invoices from offshore firms to legitimise the company.

It is important to note that the SFO probably did not actually need to use the Bribery Act to achieve a prosecution, as running a Ponzi scheme is in itself a criminal act.  This can therefore certainly be seen as an unusual and imaginative use of the legislation.

The Bribery Act extends its reach

By using the Bribery Act in this way, the SFO was able to spread the responsibility for the crime wider than it might have otherwise done if they had simply focused on the individuals directly involved in running the scheme.  In other circumstances, had the scheme been operating within a corporation, the SFO may have been able to use the Section Seven offense against the entire company.

The SFO may have been motivated to use the Bribery Act for this case for a few reasons.  Firstly, it may have been used so that the SFO could achieve higher penalties for the wrongdoers.  Secondly, it can be seen as extending the application of the Bribery Act to other corporate crimes.

Prevention is better than cure

Due to the flexibility and far reaching properties of the Bribery Act, firms need to make sure they have adequate internal controls in place to prevent scams like these.  It is also worth noting that the Bribery Act does not only apply to the corruption of foreign public officials; foreign and domestic corporate bribery is also a prosecutable offense, as regulators now scrutinize every area of a business.

When the Act came into force in 2011, it highlighted the importance for firms to have processes in place that would protect them against bribery at home as well as deep into the supply chain.  Although financial services firms should obviously have these in place already, this case should act as a wake-up call to spur firms into re-considering the robustness of their anti-fraud and corruption procedures, especially if they haven’t looked at this area for a while.

Detecting Ponzi schemes

The problem with Ponzi schemes, from a monitoring perspective, is that they can be difficult to detect when the economy is doing well.  When people have spending power and optimism, they are looking for favourable places to put their money and so can often be susceptible to such schemes.  However, when the economy becomes unstable, liquidity dries up and people become more wary about their finances, these schemes are more likely to come to light.  This is because investors stop paying in and instead try to withdraw their money.  As a result, the operations come crashing down.

But who is responsible for detecting Ponzi schemes?  Regulators have a role in protecting investors from rogues and instilling ethical culture in firms, but regulators cannot actively investigate every single fund, in every single market. Therefore, some responsibility must ultimately rest with investors and their own due diligence, and so it is imperative that investors are conscientious.

There is, however, a role that the banks and financial services institutions can play.  Although not specifically targeted at Ponzi schemes, firms’ transaction monitoring procedures may help identify the characteristics of such schemes, and could be useful by generating suspicious activity reports.

What is clear, however, is that there is an evolving climate of scrutiny of corporate crime, intended to protect investors and make it harder for firms to get away with committing such violations.  Further evolution in the use of the Bribery Act and the extension of corporate liability to other crimes, is to be expected.