Anatomy of a scam; lessons from Providence and Lumiere

fraud

Fraud’s victims are usually faceless

If there’s anything good that can come out of the Providence Group’s global network of deceit, it is that it is exposed and offers us its full anatomy. Yesterday I tried to lay out the anatomy at length – I won’t do that again- you may want to refer to my blog on Lumiere.

The manufacturing hub for this scam is Brazil, though mission control was in Miami, Guernsey was used to legitimise the Brazilian fund and Jersey used to sell it. There were even outposts in London used to neutralise UK regulators.

The scam seems to have been sold in the States by unauthorised broker dealers and was eventually detected by the US Securities and Exchange Commission who blew the whistle on it this summer. In the meantime the scam was being sold in the UK to retail customers through micro bonds and in the Channel Island through a dedicated sales team in Jersey. We suspect that there may have been a fair bit of pension liberation going on though details of the victims are sketchy.

There are two and a half regulatory failures here ( I take the FCA’s failure as partial since they  had only indirect oversite). The main failures were at the Guernsey Financial Services Commission which allowed Providence to use protected cell legislation to legitimise the Ponzi scam and the Jersey Financial Services Commission that legitimised the selling of the Guernsey product.


Lessons for regulators

It is clear that Providence abused the GFSC’s trust and convinced them that the financial gain to Guernsey justified the risk of a product marketed as giving a 12-13% guaranteed return from Brazilian factoring. To me it is hard to credit that such a claim could have been believed by anyone, let alone a regulator. Why did the GFSC believe Providence?  We can only speculate, but I have seen the pressure that the Channel Island Regulators work under, they are asked to maintain the reputation of the Islands’ good governance, protect the local population but also ensure that the Islands are seen as good places to do business in. On this occasion, the GFSC clearly got it badly wrong.

Their failure had a knock on failure for their Jersey counterparts who simply took the product on trust (trusting what appears non-existent due diligence from Guernsey). But Jersey’s failure is worse , for by the time Lumiere Wealth was being authorised in St Helier, the scam was already being exposed both on the mainland and in the United States where the SEC investigation would have been well under way.

Did the JFSC behave recklessly or just ignorantly? The outcome was the same but it is up to the local population to find an answer to that question. My worry (having lived on Jersey and worked in Jersey and Guernsey) is that the population are by and large complicit in the failures and beneficiaries of the successes both of the financial services community and its regulators.


Wider lessons for the Islands

It is very hard to speak out against your Regulator on a small island like Jersey or Guernsey. The people who can are outside the financial services industry and they generally have no money or power and are therefore marginalised.

Most people on mainland UK regard Jersey and Guernsey as quaint holiday destinations for their parents (or now their grandparents). If you work in mainland financial services, you may have dealings with the channel islands but they are guilty pleasures -rewarding in an awkward way. There is little confidence in the diligence of the Channel Island finance industry.

Change cannot come from without. The peculiar status of the Islands as Sovereign Dependancies means that they must change from within and so long as the cost of a better reputation is denying the likes of Providence a licence, the conflict is obvious. Jersey and Guernsey cannot afford not to do business with the wrong people (without a drop in GDP and living standards).

But they cannot expect the wider world not to notice. The activities of Lumiere both as fund managers and as wealth managers impacted on Britain and though we did not take a direct hit on the Financial Services Compensation Scheme, there were many people who lost out in the selling of mini-bonds in the UK -and perhaps some whose pensions were liberated into Brazilian Factoring.

This advertisement that appeared in January this year concludes with the footer

“Lumiere Wealth is regulated by the Jersey Financial Services Commission”.

 

Screen Shot 2016-10-30 at 08.03.33.png


Lessons for the UK mainland

There are a lot of financial services companies in the UK which have channel island arms. Lumiere Wealth  was staffed by ex-employees of RBS International, whose name appears on much of their marketing material. It is beholden on these companies to push back to the GFSC and JFSC about how this kind of thing goes on under their noses.

Part of the advertising literature of Lumiere Wealth related to pension transfers. The Pensions Regulator needs to make it clear to the JFSC and GFSC that products like Providence can easily find their way into the marketing literature of the scammers who are trying to liberate UK pensioners not just of their guarantees, but of their money purchase transfer values.

Lumiere were clearly alive to the possibilities.

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The Channel Isle local schemes (and RBSI has one of the biggest) are particularly vulnerable.

The Pensions Regulator and the FCA need to be alive to these risks and the FCA (and SEC) needs to be informing both the JFSC and GFSC of evidence of scams and enquires into them. We have inter-pol and I hope we have inter-reg.

So not just the UK pension regulators but those with responsibility for UK pension schemes (especially those with CI sub-schemes), need to be pushing back on the JFSC and GFSC to ensure that there are not more legitimised scammers both in fund marketing and in “wealth management”.

liberation fraud


Lessons for us all

There has been some strong reaction on yesterday’s blogs from those with liberal attitudes to regulation. Their argument is that people should get wise to the old adage that if it looks too good to be true, it is too good to be true. That is the position in the US where regulation is light and the buyer bewares, it is civil litigation not the SEC that is most feared by brokers.

But it is not the situation in the UK where we trust our regulators and have a financial services compensation scheme which protects us where a scammer gets through. Jersey and Guernsey have no FSCS and they have only Regulators. If their Regulators fail, then those who have bought locally regulated products and services can rightly ask why they were not protected. After all, part of the costs of the financial products and services they buy is a compliance cost.

Whether we are in the UK or in Channel Islands, products and services  that are regulated by the GFSC and JFSC must be viewed with a degree of caution. Until we have got proof that these regulators are competent in their work, our conclusion must be that CI products and services are best avoided.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , , , , , , , , . Bookmark the permalink.

5 Responses to Anatomy of a scam; lessons from Providence and Lumiere

  1. George Kirrin says:

    Agreed, and it’s stating the obvious but people who think they can make 12% annual returns from anything are being either very stupid or very greedy or both, and yet the rest of us often end up paying for their selfishness.

    This used to be an argument for having trustees to protect people from their ignorant tendencies, but we all know we’re well past that.

    Weak regulation has not been limited to the places you single out, Henry, and we also all know who pays for regulators, weak or otherwise.

    Liked by 1 person

    • henry tapper says:

      Agreed – but even if the promise had been 6-8%, it should have been seen to be bogus. It turns out that only 68% of investors money was invested, (the rest leaked) and that once invested, the 68% has leaked to nothing. Providence declared no charges on the fund – unsurprisingly. These were issues that could and should have stopped GFSC allowing Providence in and JFSC licensing Lumiere Wealth. Are we too dependent on our regulators? The lessons of the American election campaign reinforce the message that no-one ever went bust underestimating the financial ignorance of the public!

      Liked by 1 person

  2. John Mather says:

    Henry can you tell me why Guernsey should continue to be trusted? My experience is that when trouble happens they first increase fees then they resign and then they try to avoid responsibility Back to core strengths for CI. tomatoes, milk and flowers at those they excel

    Liked by 1 person

  3. henry tapper says:

    and potatoes John

    Liked by 1 person

  4. Banjax says:

    Henry; your information is slightly optimistic, or perhaps out of date; and is not perhaps explaining the full ‘extent’ of the Regulators’ approach. It’s not an issue of trust per se; more that the wider public – wherever in the world they are – does not understand (as they are usually not given the information!) what roles these Regulators actually play, and how they go about things.

    The GFSC for example, does not monitor investments; they do not approve investments, the do not regulate investment activity in a micro-management way. They rarely (if ever!) review Fund or Investment Managers business ; they do not verify the reality of returns; they rarely conduct diligence activity on Fund or Investment Managers – unless there are ‘Inter-Reg’ warning flags.
    This is not due to corruption, incompetence or laziness – it is entirely by design. It IS, ‘their role’.
    The regulators are competent in their work – but their work is not what you might imagine..

    The GFSC ‘approves’ Funds, they are a Regulator – but the two things are not connected as many may suppose. If a target fund or investment produces accounts; these should be signed and Audited AFS, if these exist the GFSC will rarely look further. If Directors or Regulated entities (Such as Fund Corp, aka Lumiere) are managing a Fund; the GFSC will not look further; There are fixed and defined statements enshrined in Guernsey Law which must be included in all offering prospectuses which states that ‘approval’ from the GFSC does not constitute approval of, or recommendation of, or oversight by, the GFSC in relation to that specific fund or investment or its performance – this is mandatory wording!

    Their role as regulator is to confirm that the regulated entities (Fund Admins, Investment Managers, etc) are doing their job, as per the law – it is these entities’ responsibility to ensure that accounts are received, Directors are acting correctly, Investment restrictions, target markets, portfolio balances et al are being properly conducted – The GFSC takes little to no interest in any underlying investment or fund – except in the case of colossal ‘red flags’ (for instance: Russian investment, Investment in Lending Funds, Investment in Mining companies). Everything in terms of regulation and oversight is carried out by the Administrators, not the GFSC. Yes; the companies which want to make money from their Admin/Management are the effective regulators.. The GFSC/JFSC essentially just perform oversight on these businesses, and the onus is on the businesses to pick up on fraud, embezzlement, mis-selling, etc. The FSC does diddly-squat unless something major is brought to them through an STR or Police or a whistleblower report. The same is true for the JFSC and by and large, the former FSA in the UK – hence its division into two bodies; one to look after the Investors, and one to look after the Regulated companies; Guernsey and Jersey have no such separation (and indeed, the JFSC is also the Companies House of Jersey).

    Just a little word of explanation – not that it helps the cause of trust in the regulators any; but their own shortcomings/failings (however you wish to describe or interpret them as) are nothing new and nothing drastic, and noting unexpected… There is oversight – and good oversight at that, in many cases, in the Channel Islands, but it’s by the employees of the Financial service companies; not by the J/GFSC…
    The sad thing is, that although in this case Lumiere won over Trust Corp, and took over their Funds business, and committed a potential fraud (though it had been going on long before 2014!) if it hadn’t been them, it would have been someone else.. For every 6-8 businesses that turn away these dodgy characters, there will always be one who turns a blind eye, skims the due diligence, takes word on trust with no backup.. and the investors will lose their money. Somebody will always put profits over doing the right thing, or digging a little deeper.
    This is not something unique to the Channel Islands (nor even to Funds or Investment business!), but ‘Buyer Beware!’ is definitely the order of the day.
    You will receive no protection from the G/JFSC – but the key factor is that none should be expected either.

    Liked by 1 person

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