PCI Inc

Five men jailed for using offshore financial advisers to attract investments in supposed commercial property loans

Time and time again the media tell us of the latest financial fraud. The astonishing schemes perpetrated by the likes of Bernie Madoff; they all have an uncanny ability to take in not only individual investors but also some of the most high profile professionals.

The story is always the same: investment returns unavailable elsewhere or safe schemes promising inflated returns; too good to be true.

Mainstream UK investments with well known institutions are now so intensively regulated that fund managers have to abide by an investment strategy and the placement of funds is overseen by a custodian, typically a bank. Funds are also held in nominee accounts so if the institution fails investors’ money should not be at risk. So whilst not removing investment risk at least you can be sure your money will not end up in someone’s pocket paying for a luxury lifestyle.

UK Independent Financial Advisers (IFAs) are responsible for conducting appropriate checks on investments to ensure suitability for their clients.

The UK also has the Financial Services Compensation Scheme (FSCS) which is going to be a huge relief to investors who have found recently that the counterparty risk of their particular investment was held by Lehman Brothers.

The latest court case sees a firm operating under the name Prudential Commercial Investments (“PCI”). The scheme was a fraud from inception; around £1.93 million was defrauded from 56 from investors. 

PCI's investors were predominantly British ex-pats retired or living abroad. They believed on the basis of advice from their local financial advisers that their funds would be channelled into a lending scheme for commercial property buyers in the UK secured by mortgages and would reap high returns. 

Instead the fraudsters diverted investors' funds to offshore accounts for their personal benefit. Two of the defendants pleaded guilty. Verdicts on the other three were returned at Worcester Crown Court yesterday and HHJ McCreath, Recorder of Worcester, passed sentenced on all five.

The PCI operation

The PCI group of companies has no connection with the well known Prudential Assurance Company, although a number of the victims thought that the companies were linked. PCI Ltd was incorporated in Belize, PCI Inc in the Seychelles and PCI Admin in the UK.

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 local financial advisers operating in the ex-pat investment sector. Many of the financial advisers had their own established client base and PCI relied on them to pull in the business.

The PCI website, its business and sales literature intended to impress financial advisers and investors alike that PCI and its commercial loans business was a safe and attractive investment opportunity. 

PCI offered the financial advisers a commission incentive of between 4%-6% and relied substantially on the trust that investors had in their financial advisers to advise them on their financial affairs. PCI made up 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 financial advisers who agreed to promote the PCI scheme might at best be unwitting pawns in this designed fraud but as reasonably competent professionals should have been able to see through the glossy brochures and lack of accountability. Not all financial advisers 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.

There is no doubt that the financial advisory firms are at fault. The relationship with a client is a professional arrangement. Schemes promoted by financial advisers wherever they may be resident require the ability to conduct a full due diligence on the investments.

For many UK authorised and regulated independent financial advisers (IFAs) the Financial Services Authority feels like an over burdening authority but compared with many sunnier jurisdictions the FSA provides welcome security to investors using financial services products recommended by UK IFAs.

The PCI scheme was heavily promoted offshore where either no regulation exists or is so light-touch that it has little power or value to protect the consumer.

Investigation and Proceedings.

The scheme operated between March 2003 and March 2004 and came to an end when West Mercia Police received a tip-off that the scheme was too good to be true. 

The scale of the damage could have been much greater had the operation not been interrupted by the prompt intervention of West Mercia Police's Economic Crime Unit. The investigation commenced in March 2004 and the defendants were charged in June 2008 with prison sentences

Confiscation of assets is to be sought. The Serious Fraud Office (SFO) will ask the Court to compensate the victims of the PCI investment scheme from any assets that are recovered from the convicted.

Conclusion

Living and being resident offshore brings many advantages but in the complex world of financial products it may be worth looking back to the UK for sound secure advice. There are some highly professional firms offshore and many highlight the capabilities and UK qualifications of their staff. So why don’t they remain UK FSA authorised and regulated and provide services offshore?

The answer may well be that these companies regard the regulatory burden on both the company and the products as too onerous. The transparency requirement of UK advice and products has not managed to even cross the English Channel, and thus fraudulent products can creep through into the offerings of offshore advisers.

The UK is not perfect but at least if something goes wrong there is an established procedure to seek and attain redress. Caveat emptor has never been so important when dealing with offshore financial services products.