Due diligence – but what to do?

March 17, 2010 at 9:25 am · Filed under Financial Services

The Serious Fraud Office (SFO) recently (December 22) published a press release describing a successful case against a team of fraudsters who had set up a bogus commercial property loans business.

They had set up three companies in the name of Prudential Commercial Investments. The companies were registered in Belize, Seychelles and the UK. The scam was focussed on the ex-pat clients of IFAs who were duped into believing that the companies were legitimate.

The following paragraphs are from the press release.

“The Seychelles company was the one used for marketing and its bank account received the investors’ monies. No promotion was undertaken by PCI directly with investors; instead PCI approached IFAs operating in the ex-pat investment sector. Many of the IFAs had their own established client base and PCI relied on the IFAs to pull in the business.

The PCI website, its business and sales literature were produced to a high standard, intended to impress IFAs and investors alike that PCI and its commercial loans business was a safe and attractive investment opportunity. PCI offered the IFAs a commission incentive of between 4%-6% and relied substantially on the trust that investors had in their IFAs to advise them on their financial affairs. The IFAs were told by PCI that it had a five-year trading track record, that it worked with well-known and reputable service providers and that it had a portfolio of some US$20 million.

Those IFAs who agreed to promote the PCI scheme were unwitting pawns in this designed fraud. Not all IFAs approached were persuaded by the PCI sales pitch but some were taken in and ultimately some were brought down when the fraud was discovered and lost the trust of their clients.”

I think you will agree that the relationship between client and IFA is one forged on trust. In exchange for fees or commission the client is really buying you and your knowledge and experience.

This relationship is very similar to those in other professions such as lawyers and accountants. We all know that this relationship is hard won but very easily lost. How disappointing it is then to hear of cases such as these where IFAs are presented as easily duped and only concerned about commission.

You could sympathise with the IFAs in question and to a certain extent I do but for the cost of some very basic due diligence the whole scheme would have failed and the IFAs in question would have maintained their clients’ trust. It is not for me or any of us to judge our fellow professionals – we all make mistakes and have to live with the consequences.

What concerns me is that such cases continue to bring the IFA profession into disrepute and potentially degrade your professional standing with your clients. We have all suffered to varying degree what seems a continual storm of scandals and debacles that serve up headline grabbing material for the media.

We never hear about all the good advice that is regularly provided to satisfied clients. How many times have your clients mentioned to you something negative that they have read in the papers or heard on the news? How many spurious complaints have been made on the back of a negative media story? I wonder how many clients of IFAs have been lost as a direct or indirect result of negative media comment – I suspect a great many.

All we can do to fight against this is to ensure that everything we do serves to strengthen the relationship of trust between us and our clients. Therefore my advice to you is very simple. Never forget the most basic of due diligence procedures: if it sounds too good to be true then it probably is – take the time to investigate.

Which brings me to – what investigations can you do?

Well – start with google, and then find referees – call someone! Check Companies House and the FSA register and write down what you have done and who you have spoken with. Oh, and what they said!

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