Unregulated investments are a godsend for fraudsters, and the carbon credits trading scam is a favourite ploy. Michael Trudeau investigates.
You lock your car. You hide your PIN. You avoid walking through dark alleys at night. These are all common sense precautions against a basic crime – theft. Even if something does go wrong and you are robbed or burgled, there is redress. Police catch bad guys. The Serious Fraud Office sends fraudsters to jail. And when it comes to financial services, the Financial Conduct Authority (FCA) keeps firms on the straight and narrow.
But what happens when the con-men selling dodgy investments are patient, callous and knowledgeable enough to be able to stay one step ahead of the authorities?
Money Observer readers are arguably more sophisticated investors than many of the victims of these con-artists, but it would be a mistake to assume invulnerability. These operations use tactics specifically to lull their targets into thinking they are legitimate. They will refer to investments being protected by overseas regulators – often not the case – or involve another, properly regulated, company to lend the deal an air of security.
The product in question is usually an unregulated investment such as diamonds, land, foreign hotel developments, plantations, 'store pods'; the list goes on. Inevitably touted as the 'next big thing' in investment, these products are attractive to the less scrupulous because they do not fall under the eye of the regulator and can be easy to misrepresent.
One such alternative investment that has long been on Money Observer's radar is carbon credits. A carbon credit is a unit representing one tonne of carbon being taken out of the atmosphere. European companies are required to offset their emissions by buying these credits from carbon-reducing businesses such as forestry or renewable energy. The sale of carbon credits alone has netted scammers millions of pounds, according to the Insolvency Service.
The box opposite details the sad tale of one investor. Another told Money Observer his mother and late father had lost their savings in a similar way. 'I know that two men visited my parents, each on different occasions, and from the paperwork, I can see that there were three separate payments. The men's names were David White, who contacted them first, and then a man called Philip. They have been victims of this to the sum of £73,000.'
Yet another paid £165,000 to a firm called Abacus Advisory for what he believed were diamonds being held in storage in another country. This money was earmarked to fund care services for the victim's dementia-struck mother.
These and other stories all sound depressingly similar: hope for big returns slowly turns to despair as contact with the broker becomes increasingly difficult. The victims also repeat two names among others: David White and Philip Clarke.
David White may be a familiar name to readers. Money Observer has been warning about White, who was previously a director of MH Carbon, since 2012. He was also connected to a network of 13 companies that raised more than £19 million by selling carbon credits to investors for more than 800 times the original price.
In truth there is no private market for carbon credits. Although they are traded on exchanges, these exchanges are more like Amazon than eBay in that prices don't tend to fluctuate. Even if they did, chances are punters have paid exorbitant sums for them – prices sometimes inflated to hundreds of times the typical amount.
So what can be done?
The FCA can issue fines, close firms and ban individuals from practising. However, it only regulates investments listed in the Financial Services and Markets Act, and because the list of regulated investments was drawn up five years ago, carbon credits do not appear within it.
The FCA's website warns that many investors are not able to sell or trade the carbon credits they have bought, and says none of these investors reported making a profit. Elsewhere on its website is a long list of unauthorised firms to avoid, among which is listed Eco Asian Carbon Consultancy, the firm that Craig Jamieson (see 'a cautionary carbon credit tale' below) first dealt with.
The website warning is the extent of the FCA's ability to protect consumers against investments that lie outside its remit. But if investors don't check the FCA website's blacklist they will have no way of knowing which companies to steer clear of. Companies or individuals pushing unregulated investments do not have to be authorised by the FCA, which would otherwise check to make sure they had the right qualifications and took appropriate care in recommending products.
They may also attempt to sidestep FCA requirements. For instance, individuals are not allowed to give financial advice unless they have been authorised to do so by the FCA. According to Pareet Shaw, case administrator of Abacus Advisory's appointed liquidator Bhardwaj plc, a disclaimer on Abacus' website says that what the firm offers does not count as advice.
However, Shaw adds that several Abacus clients he spoke to said they felt they were receiving bona fide advice. In some cases, they say they were even told to disregard the disclaimer. Shaw adds that he will be reporting the findings of his investigation to the Insolvency Service.
If an authorised firm selling regulated financial products closes down, customers can often get their money back through the Financial Services Compensation Scheme. However, this is not true of unregulated investments such as carbon credits.
The Insolvency Service has succeeded in shutting several companies selling carbon credits and other alternative investments. It has legal powers to investigate companies and take whatever action it deems necessary, including winding up the company, disqualifying directors and liaising with regulators or police.
But what use is shutting down a firm when it is so easy to set up another? Shutting firms down has no direct effect on individuals who are willing to use devious means to continue their activities. In fact, shutting a firm down may be part of the plan: the directors launch another firm without investors getting any money back.
Moreover, Companies House, the government-run register of all companies in the UK, does not require any proof of identity or address, so they can be made up.
Chris Mayhew, company investigations supervisor at the Insolvency Service, says: '[These people] are not always stupid. They put in place these structures to make life difficult for the investors and, more importantly if they are up to no good, for regulators like ourselves or the police.'
He adds: 'It's relatively simple to form another company, take a database of clients and start cold-calling them again to extract more money. People themselves have a part to play. They are entitled to buy whatever they deem fit. The investor's best protection is education and their own due diligence.'
A CAUTIONARY CARBON CREDIT TALE
Last year, Craig Jamieson of Edinburgh bought £20,000 of carbon credits after hearing from a mate that they were a good investment. The company he went to – the same one that had convinced his friend to take a punt – had a slick operation and appeared to be a sophisticated international firm delivering chunky returns to its customers.
He first corresponded with a man calling himself David White of Eco Asian Consultancy, and later with someone using the name Philip Clarke and working for a firm called Abacus Advisory.
'After a consultation phone call with David White, I was told a 20 per cent return on my investment was realistic; I was given written assurances that if I wished to terminate any investment vehicles this would be done without any problem and that my initial investment, or a sum just below it, would be paid back,' says Jamieson.
He became suspicious when White contacted him about a further, 'premium' investment of £20,000 in carbon credits that would be immediately sold to other investors for a 30 per cent mark-up. When he requested an outline of the offer in writing, it contained a passage saying that if he told anybody about the deal it would be rendered null and void, and he could kiss his mark-up goodbye.
The number of companies involved also alarmed him. Eco Asian Consultancy became Eco Business Management. Documents appeared from a firm called SJL Risk, which was regulated by the FCA, and references were made to another firm called Abacus Advisory.
He ordered the sale of his carbon credits soon thereafter, but was told it was impossible, and when he said he would come to Eco's offices he was told the office was closing. After that, Jamieson's contacts dropped off the map. Each time he tried to phone Abacus Advisory, for example, he was told nobody was available to speak to him.
In an email to liquidators seen by Money Observer, Clarke denies ever having worked for Eco, or having been affiliated in any way. He adds: 'It is a simple case where investors have invested in a poorly performing investment vehicle, and are now panicking because they have all realised what they have done.'
What about the police?
The police face problems similar to the Insolvency Service, in that due process takes time and resources. In any case, even if they have a name to follow up, there is no guarantee that it's a real name. Some salespeople use aliases or share names. Some even create posh-sounding identities to give the impression of private education and legitimacy.
The truth is so uncertain and the thieves' operations are so ephemeral that pinning them down is a huge challenge. Despite the best efforts of police, government and regulators, it's all too easy for those without scruples to separate the gullible from their savings. The bottom line is that if someone cold-calls to offer you a deal that sounds too good to be true, it very probably is – and you're better off hanging on to your money, because you're very unlikely to see it again if things go wrong.