The Great UPSC Coaching Fraud

 

Modi ke Acche Din

 

Why we trust fraudsters

From Enron to Wirecard, elaborate scams can remain undetected long after the warning signs appear. What are investors missing? Tom Straw in The FT

In March 2020, the star English fund manager Alexander Darwall spoke admiringly to the chief executive at one of the largest investments in his award-winning portfolio. “The last set of numbers are fantastic,” he gushed, adding: “This is a crazy situation. People should be looking at your company and saying ‘wow’. I’m delighted, I’m delighted to be a shareholder.” 

Seated in a swivel chair at his personal conference table, Markus Braun sounded relaxed. The billionaire technologist was dressed all in black, a turtleneck under his suit like some distant Austrian cousin of the late Steve Jobs, and he had little to say about swirling allegations the company had faked its profits for years. “I am very optimistic,” he offered, when Darwall voiced his hope that the controversy would amount to nothing more than growing pains at a fast expanding company. 

“I haven’t sold a single share,” Darwall assured him, doing most of the talking, while also acknowledging how precarious the situation was. The Financial Times had reported in October 2019 that large portions of Wirecard’s sales and profits were fraudulent, and published internal company documents stuffed with the names of fake clients. A six-month “special audit” by the accounting firm KPMG was approaching completion. “If it shows anything that senior people misled, that would be a disaster,” Darwall said. 

His assessment proved correct. Three months later the company collapsed like a house of cards, punctuated by a final lie: that €1.9bn of its cash was “missing”. In fact, the money never existed and Wirecard had for years relied on a fraud that was almost farcical in its simplicity: a few friends of the company claimed to manage huge amounts of business for Wirecard, with all the vast profits from these partners said to be collected in special bank accounts overseen by a Manila-based lawyer with a YouTube following. Braun, who claims to be a victim of a protégé with security services connections who masterminded the scheme and then absconded to Belarus, faces a trial this autumn alongside two subordinates that will examine how the final years of the fraud were accomplished. 

Left behind in the ashes, however, is a much larger question, one which haunts all victims of such scams: how on earth did they get away with it for so long? Wirecard faces serious questions about the integrity of its accounts since at least 2010. Estimates for losses run to more than €20bn, never mind the reputation of Frankfurt as a financial centre. Why did so many inside and outside the company — a long list of investors, bankers, regulators, prosecutors, auditors and analysts — look at the evidence that Wirecard was too good to be true and decide to trust Braun? 

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In 2019 I worked with whistleblowers to expose Wirecard, using internal documents to show the true source of its spellbinding growth in sales and profit. As I faced Twitter vitriol and accusations I was corrupt, the retired American short-seller Marc Cohodes regularly rang me from wine country on the US west coast to deliver pep talks and describe his own attempts to persuade German journalists to see Wirecard’s true colours. “Keep going Dan. I always say, ‘there’s never just one cockroach in the kitchen’.” 

He was right on that point: find one lie and another soon follows. But short-sellers who search for overvalued companies to bet against are unusual, because they go looking for fraud and skulduggery. Most investors are not prosecutors fitting facts into a pattern of guilt: they don’t see a cockroach at all. 

Think of Elizabeth Holmes, another aficionado of the black turtleneck, who persuaded a group of experts and well-known investors to back or advise her company, Theranos, based on the claim it had technology able to deliver medical results from an improbably small pinprick of blood. The involvement of reputable people and institutions — including retired general James Mattis, former secretary of state Henry Kissinger and former Wells Fargo chief executive Richard Kovacevich as board members — seemed to confirm that all was well. 

Another problem is that complex frauds have a dark magic that is different to, say, “Count” Victor Lustig personally persuading two scrap metal dealers he could sell them a decaying Eiffel Tower in 1925. As Dan Davies wrote in his history of financial scams, Lying for Money, “the way in which most white-collar crime works is by manipulating institutional psychology. That means creating something that looks as much as possible like a normal set of transactions. The drama comes much later, when it all unwinds.”  

What such frauds exploit is the highly valuable character of trust in modern economies. We go through life assuming the businesses we encounter are real, confident that there are institutions and processes in place to check that food standards are met or accounts are prepared correctly. Horse meat smugglers, Enron and Wirecard all abused trust in complex systems as a whole. To doubt them was to doubt the entire structure, which is what makes their impact so insidious; frauds degrade faith in the whole system. 

Trust means not wasting time on pointless checks. Most deceptions would generally have been caught early on by basic due diligence, “but nobody does confirm the facts. There are just too bloody many of them”, wrote Davies. It makes as much sense for a banker to visit every outpost of a company requiring a loan as it would for the buyer of a pint of milk to inquire after the health of the cow. For instance, by the time John Paulson, one of the world’s most famous and successful hedge fund managers, became the largest shareholder in Canadian-listed Sino Forest, its shares had traded for 15 years. Until the group’s 2011 collapse, few thought of travelling to China to see if its woodlands were there. 

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Yet what stands out in the case of Wirecard are the many attempts to check the actual facts. In 2015 a young American investigator, Susannah Kroeber, tried to knock on the doors at several remote Wirecard locations. Between 2010 and 2015 the company claimed to have grown in a series of leaps and bounds by buying businesses all over Asia for tens of millions of euros apiece. In Laos she found nothing at all, in Cambodia only traces. Wirecard’s reception area in Vietnam was like a school lunchroom; the only furniture was a picnic table for six and an open bicycle lock hung from one of the internal doors, a common security measure usually removed at a business expecting visitors. The inside was dim, with only a handful of people visible and many desks empty. She knew something wasn’t right, but she also told me that while she went half mad looking for non-existent addresses on heat-baked Southeast Asian dirt roads, she had an epiphany: “Who in their right mind would go to these lengths just to check out a stock investment?” 

Even when Kroeber’s snapshots of empty offices were gathered into a report for her employer, J Capital Research, and presented to Wirecard investors, the response reflected preconceived expectations: these are reputable people, EY is a good auditor, why would they be lying? The short seller Leo Perry described attending an investor meeting where the report was discussed. A French fund manager responded by reporting his own due diligence. He’d asked his secretary to call Wirecard’s Singapore office, the site of its Asian headquarters, and could happily report that someone there had picked up the phone. 

The shareholders reacted at an emotional level, showing how fraud exploits human behaviour. “When you’re invested in the success of something, you want to see it be the best it can be, you don’t pay attention to the finer details that are inconsistent”, says Martina Dove, author of The Psychology of Fraud, Persuasion and Scam Techniques. She adds that social proof and deference to authority, such as expert accounting firms, were powerful forces when used to spread the lies of crooks: “If a friend recommends a builder, you trust that builder because you trust your friend.” 

Wirecard’s response, in addition to taking analysts on a tour of hastily well-staffed offices in Asia, was to drape itself in complexity. Like WeWork, the office space provider that presented itself as a technology company (and which wasn’t accused of fraud), Wirecard waved a wand of innovation to make an ordinary business appear extraordinary. 

At heart, Wirecard’s legitimate operations processed credit and debit card payments for retailers all over the world. It was a competitive field with many rivals, but Wirecard claimed to have become a European PayPal and more, outpacing the competition with profit margins few could match. Wirecard was “a technology company with a bank as a daughter”, Braun said, one using artificial intelligence and cutting-edge security. As the share price rose, so did Braun’s standing as a technologist who heralded the arrival of a cashless society. Who were mere investors to suggest that the results of this whirligig, with operations in 40 countries, were too good to be true? 

It seems to me Wirecard used a similar tactic to the founder of software group Autonomy, Mike Lynch, who charged that critics simply didn’t understand the business. (Lynch has lost a civil fraud trial relating to the $11bn sale of the group, denied any wrongdoing, said he will appeal, and is fighting extradition to the US to face fraud charges. Autonomy’s former CFO was convicted of fraud in separate American proceedings.) 

When this publication presented internal documents describing a book cooking operation in Singapore, Wirecard focused on the amounts at stake, which were initially small, rather than the unpunished practices of forgery and money laundering, which were damning. 

Then there was the thrall of German officials. Three times, in 2008, 2017, and 2019, the financial market regulator BaFin publicly investigated critics of Wirecard, taken by observers as a signal of support. Indeed, BaFin fell for the big lie when faced with an unenviable choice of circumstances: either foreign journalists and speculators were conspiring to attack Germany’s new technology champion using the pages of a prominent newspaper; or senior executives at a DAX 30 company were lying to prosecutors, as well as some of Germany’s most prestigious banks and investment houses. Acting on a claim by Wirecard that traders knew about an FT story before publication, regulators suspended short selling of the stock to protect the integrity of financial markets. 

Proximity to the subject won out, but the German authorities were hardly the first to fail in this way. Their US counterparts ignored the urging of Harry Markopolos to investigate the Ponzi schemer Bernard Madoff, a former chairman of the Nasdaq whose imaginary $65bn fund sent out account statements run off a dot matrix printer. 

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For some long-term investors, to doubt Wirecard was surely to doubt themselves. Darwall first invested in 2007, when the share price was around €9. As it rose more than tenfold, his investment prowess was recognised accordingly, attracting money to the funds he ran for Jupiter Asset Management, and fame. He knew the Wirecard staff, they had provided advice on taking payments for his wife’s holiday rental. Naturally he trusted Braun. 

Darwall did not respond to requests for comment made to his firm, Devon Equity Management. 

In the buildings beyond the shades of Braun’s office, staff rationalised what didn’t fit. Wirecard was a tech company, yet in early 2016 it suffered a tech disaster. On a quiet Saturday afternoon, running down a list of routine maintenance, a tech guy made a typo. He entered the wrong command when decommissioning a Linux server. Instead of taking out the one machine, he watched with rising panic as it killed all of them, pulling the plug on almost the entire company’s operations without warning. 

Customers were in the dark, as email was offline and Wirecard had no weekend helpline, and it took days for services to recover. Following the incident, a small but notable proportion of clients left and new business was put on hold as teams placated those they already had, staff recalled. Yet the pace of growth in the published numbers remained strong. 

Martin Osterloh, a salesman at Wirecard for 15 years, put the mismatch between claims and capabilities down to spin. Only after the fall was the extent of Wirecard’s hackers, private detectives, intimidation and legal threats exposed to the light. Haphazard lines of communication, disorganisation and poor record keeping created excuses for middle-ranking Wirecard staff and its supervisory board, stories to tell themselves about a failure to integrate and start-up’s culture of experimentation. 

It was perhaps not as hard to believe as we might think. Facebook, which has probed the legal boundaries of surveillance capitalism, famously encouraged staff to “move fast and break things”. Business questions often shade grey before they turn black. As Andrew Fastow said of his own career as a fraudster, “I wasn’t the chief finance officer at Enron, I was the chief loophole officer.” 

Braun’s protégé was chief operating officer Jan Marsalek, a mercurial Austrian who constantly travelled and struck deals, with no real team to speak of. Boasting that he only slept “in the air”, he would appear at headquarters from one flight with a copy of Sun-Tzu’s The Art of War tucked under an arm, then leave a few hours later for the next. Questions were met with a shrug, that strange arrangements reflected Marsalek’s “chaotic genius”. As scrutiny intensified in the final 18 months, the fraudulent imitation shifted to problem solving, allowing board members and staff to think they were engaged in procedures to improve governance. 

After the collapse I shared pretzels with Osterloh on a snowy day in Munich and he seemed embarrassed by events. He and thousands of others had worked on a real business, until they were summarily fired and learned it lost money hand over fist. Osterloh spoke for many when he said: “I’m like the idiot guy in a movie, I got to meet all these guys. The question arises, why were we so naive? And I can’t really answer that question.”  

Ashneer Grover Vs Bharat Pe

 

First came the Gujju Baniyas, then the Brahmins rigged the NSE, and now the Marwaris join in with the ABG fraud. Yet we must have faith in Indian Hindu businessmen?

 

How a faceless ‘Yogi’ took ‘control’ of the life & work of NSE CEO/MD Chitra Ramkrishna

 

Incredible story of how a faceless yogi ‘conned’ NSE CEO, got 9x salary, 3-day week, promotions

Shubham Batra in The Print

A file photo of the NSE office in Mumbai. | Photo: Commons

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New Delhi: The chief executive of a top stock exchange which handles 49 crore  transactions per day — worth a daily average turnover of Rs 64,000 crore — seeks the “guidance” of a faceless yogi to better perform her job. All over email without having ever met him.

This ‘yogi’ also gets a little-known employee of a public sector company hired as the chief strategy officer (CSO) of the stock exchange, a position that didn’t exist earlier, at an annual salary package of Rs 1.38 crore, more than nine times his previous package of Rs 15 lakh.

The ‘yogi’ gets the CEO to promote the CSO year after year to make him the group operating officer (GOO), even exempt him from the five-day work-week, allow him to come in only for three days and work the rest of the time at will.

That’s not all.

The CEO shares sensitive business information related to the stock exchange’s financial projections for five years, dividend pay-out ratio, business plans, agenda of board meeting and consultations over the ratings/performance appraisals of employees.

Eventually, a probe by the stock exchange which consulted “practitioners of human psychology” strongly suspects the CSO was himself the faceless ‘yogi’ and had created that fake identity to con the CEO and benefit from it.

It’s a shockingly bizarre ‘con job’ and even funny at one level, if it was the plot of a movie or a TV series.

Except this is no fiction, and is alleged to have happened for real at the National Stock Exchange, India’s top share exchange whose stated aim is to “catalyse India’s growth story by creating investment opportunities, enabling access and empowering our stakeholders”.

The CEO in question is Chitra Ramakrishna and the CSO she hired and then promoted is Anand Subramanian — who is also alleged to have doubled up as the ‘yogi’. Between 2013 and 2016, when Ramakrishna was NSE chief, she took business decisions on the advice of this ‘yogi’ and shared sensitive and confidential information about business matters with him.

The revelations came as part of a six-year probe that markets regulator Securities and Exchange Board of India (SEBI) undertook on complaints over misgovernance and wrongdoings at the NSE. In an order Friday, the regulator fined Ramakrishna and Subramanian Rs 3 crore and Rs 2 crore, respectively.

While SEBI maintained that allegations of Subramanian being the ‘yogi’ himself aren’t sustainable, the regulator in its order said the ex-GOO is surely an accomplice in the wrongdoings at the exchange. 

In her submissions to SEBI on whether sharing such information is against the principles of governance, Ramakrishna said: “As we know, senior leaders often seek informal counsel from coaches, mentors or other seniors in this industry which are all purely informal in nature. In a similar strain, I felt that this guidance would help me perform my role better.”

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Also read: LIC IPO is a delicate business & raises troubling questions

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What happened at NSE

According to the 190-page SEBI order issued Friday, NSE CEO and MD Chitra Ramakrishna hired Anand Subramanian as the bourse’s CSO in 2013 at a remuneration package of Rs 1.38 crore, over nine times his previous compensation of Rs 15 lakh at state-owned Balmer Lawrie.

The position of a CSO didn’t even exist before Subramanian’s appointment, but he didn’t have the required qualifications for such a position. 

Over a period of three years, Ramakrishna kept on promoting him, eventually making him GOO. She even exempted him from working five days a week and instead asked to come only for three days and be allowed to work the rest of the time at will.

All of these decisions were made on the instructions of a faceless ‘yogi’, who goes by the name ‘Siddha Purusha’, according to Ramakrishna’s submissions. 

She said the ‘yogi’ doesn’t possess a physical persona and can materialise at will, adding that he is a spiritual force that dwells in the Himalayas. She sent emails to an ID, rigyajursama@outlook.com, sharing sensitive and confidential information about NSE, the SEBI order showed.

While she was going about making such decisions, between 2013 and 2016, several complaints were made with SEBI to allege governance issues in the appointment of Subramanian, who was also advisor to Ramakrishna.

The SEBI then began a probe, seeking evidence and depositions from the key characters, including Ramakrishna.

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Also read: 5 years, 28 banks, Rs 23,000 cr debt — how ABG Shipyard pulled off ‘India’s biggest bank fraud’

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Subramanian was ‘yogi’, claims NSE

In a 2018 letter to SEBI, the NSE submitted that “its legal advisers had consulted practitioners of human psychology and according to the opinion of these practitioners, Ramakrishna has been exploited by Subramanian by creating another identity in the form of Rigyajursama to guide her to perform her duties according to his wish”.

“Ramakrishna was manipulated by the same man in the form of different identities; one as Subramanian who enjoyed her trust and other as Rigyajursama who had her devotion and dependence,” it had added.

The NSE claimed that the email ID named above, in fact, belonged to Subramanian. The claim was based on the fact that Subramanian also knew this ‘unknown person’ for 22 years. Moreover, he was party to all the email interactions between the CEO and the ‘yogi’.

The SEBI order attached several emails in its order, including one in which the ‘yogi’ instructed Ramakrishna to exempt Subramanian from five-day weeks.

Another email instructed Ramakrishna: “SOM, if I had the opportunity to be a person on Earth then Kanchan is the perfect fit. Ashirvadhams.”

Ramakrishna responded: “SIRONMANI, struggle is I have always seen THEE through G, and challenged myself to on my own realise the difference.”

‘SOM’ refers to Ramakrishna, and ‘Kanchan’ and ‘G’ to Subramanian, the regulator said in its order.

According to the order: “Ramakrishna in the emails sent to the unknown person shared information pertaining to NSE’s financial projections for five years, dividend pay-out ratio, business plans, agenda of NSE’s board meeting and consultations over the ratings/performance appraisals of NSE employees.”

Some of the other emails under investigation revealed that the unknown ‘yogi’ had been interacting with Ramakrishna regularly even on operational issues regarding senior NSE employees. 

NSE’s other troubles

This isn’t the first time that NSE has been accused of lapses in corporate governance. 

In 2017, when the exchange wanted to launch an initial public offering, allegations surfaced that its officials had provided some high-frequency traders unfair access through colocation servers, which could speed up algorithmic trading, giving unfair advantage to these traders over others.

Anand Narayan, who specialises in securities laws and works as an in-house counsel at a major private firm, told ThePrint that “SEBI’s order against NSE and its senior officials shows massive misgovernance issues in one of India’s leading stock exchanges”.

“NSE may like to challenge the order before Securities Appellate Tribunal. However, SEBI has yet again shown its firm intention to protect the interest of investors by acting against NSE,” Narayan said.

Fraud in The Indian Financial Markets

 

Loan Recovery in India: Why the Middle Classes still support BJP?

 

Personal Guarantee, Debt Recovery and Fraud Tycoons

 

The Jet Airways Story- One Scam Ends Another

 

Why you should not trust international rankings of universities and professors

 Pervez Hoodbhoy

Jim Chanos: ‘We are in the golden age of fraud’

Harriet Agnew in The FT 

Jim Chanos has been cast as the “Darth Vader of Wall Street”, the “Catastrophe Capitalist” and the “LeBron James of short selling”. The 62-year-old titan of the $3.2tn global hedge fund industry predicted the downfall of US energy giant Enron almost two decades ago, making a fortune in the process. But the course of true riches, it seems, never did run smooth. On the day of our encounter, Tesla, which Chanos has bet against for the past five years, overtakes Toyota as the most valuable carmaker in the world, leaving him nursing heavy losses. But more about that later. 

I am ensconced at Oswald’s, an elegant London members’ club for oenophiles. It’s the first time I’ve set foot in a restaurant in four months. But where more appropriate to interview the short-seller than an antique mirrored dining room in Mayfair, the heart of the European hedge fund industry? It’s three days before “Super Saturday”, when London’s restaurants and bars can reopen. I’ve been granted an exception and am the sole diner. Social distancing would not be a problem here, however. The round tables are generously spaced apart, designed with discretion in mind. 

I am to have early dinner — Chanos is to have lunch. He is in Miami Beach, where he has been stuck since the start of lockdown in early March. For our encounter, he has persuaded Prime 112 steakhouse, his go-to place on Friday nights, to allow him to use its private room. When he comes on screen, his air is more benevolent academic than pantomime villain, dressed in a white open-necked shirt and blazer. Chanos likes to present himself as a “real-time financial detective who is incentivised to root out fraud”. Or, more prosaically, a “forensic financial statement junkie”. 

To critics, short selling represents the scourge of modern capitalism. Whereas so-called value investors such as Warren Buffett try to buy shares in companies that the market is underestimating, short-sellers such as Chanos seek out overvalued companies. They borrow shares and then sell them, hoping to buy them back later for less. In short, “they are profiting when others are losing money”, says Chanos — and this makes some people uncomfortable. 

Chanos is buoyant. A week earlier, one of his largest short positions — the German payments company Wirecard — filed for bankruptcy, after admitting that €1.9bn of its cash probably did “not exist”. This followed a five-year FT investigation into its accounting practices. Chanos’s funds made almost $100m from the trade, according to an investor. He laughs: “It’s bittersweet, Harriet, because short-sellers put up with weeks and months of misery, and you feel good for hours and days.” 

Even its detractors acknowledge that short selling, in a normal environment, helps the markets to question conventional wisdom. But a sharper complaint, usually heard from targets, is that short-sellers acting together to sow FUD (fear, uncertainty and doubt) about a company’s accounting or financial position can become a self-fulfilling prophecy. In the past, investors such as Chanos have moved markets just by revealing a bet against a particular company. 

Chanos happily concedes that he talks frequently to other short-sellers. He shorted Luckin Coffee, once touted as China’s answer to Starbucks, after Carson Block of Muddy Waters encouraged him to look at it. (The company is now being investigated for accounting fraud.) But it’s “a myth” that short-sellers act together, he tells me from Prime 112’s private room. “If there were conspiracies, we’d be in something much more profitable than short selling.” 

I mention Canadian insurer Fairfax Financial. It sued a group of hedge funds, including those run by Chanos, Dan Loeb and Steve Cohen, for allegedly driving down its stock under a short selling scheme. “That was the perception, but it wasn’t true,” says Chanos. “The case was thrown out [in 2018] on jurisdictional grounds. Our allegation was that the company was overstating their earnings, and during the process they restated their earnings.” 

Chanos’s hedge fund manager Kynikos Associates is named after the ancient Greek word for “cynic”. His pitch is that he can identify corporate disasters-in-the-making. The New York-based outfit employs 20 people and has $1.5bn in assets under management. Chanos also teaches a course on the history of financial fraud (“how to detect it, not how to commit it”, he quips) at Yale University, his alma mater. The syllabus stretches back to the 17th century. Today, he says, “we are in the golden age of fraud”. 

Chanos describes the current environment as “a really fertile field for people to play fast and loose with the truth, and for corporate wrongdoers to get away with it for a long time”. He reels off why: a 10-year bull market driven by central bank intervention; a level of retail participation in the markets reminiscent of the end of the dotcom boom; Trumpian “post-truth in politics, where my facts are your fake news”; and Silicon Valley’s “fake it until you make it” culture, which is compounded by Fomo — the fear of missing out. All of this is exacerbated by lax oversight. Financial regulators and law enforcement, he says, “are the financial archaeologists — they will tell you after the company has collapsed what the problem was.” 

All in all, it’s “a heady witch’s brew for trouble”. 

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A waiter arrives to take his order. Chanos knows the menu by heart and picks a wedge salad of iceberg lettuce, bacon, tomatoes and Roquefort dressing, followed by a strip steak (medium) with a baked potato. He doesn’t normally eat or drink like this at midday but says he will make an exception for Lunch with the FT, and orders a glass of Cabernet Sauvignon. 

At Oswald’s, the general manager Michele greets me with a glass of champagne and explains that the chef will prepare his own selection of dishes for me. I’m out of practice with ordering, so this comes as something of a relief. 

Chanos’s mission is focused on understanding a company’s business model and then ascertaining if its financial statements reflect it. Certain themes crop up time and again in his hunt for short positions: technological obsolescence, consumer fads, single-product companies, growth via acquisitions and accounting games. Notably he looks for “legal fraud” — where companies adhere to the accounting rules and regulations but there’s still an “intent to deceive”. Enron epitomised this — Chanos identified that it was using aggressive accounting to front-load profits and hide debt in its subsidiaries. 

He wasn’t the first short-seller to the Wirecard party. Chanos initiated a short in the German payments company last year and increased the position last autumn, when the FT published documents indicating that profits at Wirecard units in Dubai and Dublin were fraudulently inflated and that customers listed in documents provided to auditor EY did not exist. 

Wirecard’s collapse, when it finally came, was dramatic. But, says Chanos, most fraud is on the edges. And these days, often it is “staring at you right in the face through the use of company-designed metrics” through which they are “gaming the system”. He is referring to creative accounting measures used to flatter companies’ books, notably office-space provider WeWork’s now infamous community-adjusted ebitda. The coronavirus crisis has spawned “ebitdac”, or earnings before interest, taxes, depreciation, amortisation — and coronavirus — where companies are adding back profits they say they would have made but for the pandemic. 

Regulators, he says, could be much firmer in clamping down on metrics “that just are increasingly unmooring themselves from reality”. 

Growing up as the son of Greek and Irish immigrants who ran a chain of dry-cleaning shops in Milwaukee, Chanos says he was interested in stock markets at an early age. After Yale, he worked for an investment bank in Chicago and then retail brokerage Gilford Securities, where he began writing research on individual stocks. He had a baptism by fire: “The first major company I looked at and wrote up turned out to be an immense accounting fraud.” 

Baldwin-United was a piano company that had morphed into a financial supermarket. Chanos’s research pointed out inconsistencies with its numbers and recommended that investors sell the stock. It went bankrupt the following year, in 1983, at the time the largest-ever US corporate bankruptcy. Baldwin’s collapse piqued the interest of Gilford’s hedge fund clients who followed its stock recommendations, notably George Soros and Michael Steinhardt. “What else does the kid not like?” they asked, Chanos recalls. 

Soon afterwards, he joined Deutsche Bank in New York. It was a shortlived affair. In September 1985, The Wall Street Journal ran a front-page investigation into the “aggressive methods” of a network of short-sellers that it alleged was driving down the shares of US companies. The then 27-year-old Chanos was portrayed as an enfant terrible at the centre of the network. “People think I have two horns and spread syphilis,” he quipped in the article. Deutsche fired him and his boss. “The postscript is that nine of the 10 companies mentioned [in the article] either went bankrupt or were prosecuted for fraud,” he says. 

Chanos’s wedge salad and my own starter (a plate of oysters, deliciously juicy, with a glass of crisp white Burgundy) arrive. 

It must take a certain personality type to be a perma-bear, I venture. 

A long time ago, Chanos believed that going short was just “the mirror image of going long”. He has changed his tune on this, however, “because there is a lot of behavioural finance at work in the markets”. On Wall Street, he says, “the bull case is everywhere” — optimistic management projections, takeover rumours that boost targets’ stock prices, and company earnings estimates revised upwards. 

“So I think that it does take a certain peculiar personality — and I’ll leave it at that — to say ‘OK, here’s my facts and here’s the conclusions I draw from my facts, and that’s why I think there’s an opportunity on the short side here.’” 

Many can’t stomach it. Less than a year after the 1985 launch of Kynikos — amid “the rip-roaring bull market” of the time — Chanos’s business partner declared that he wasn’t comfortable with the pure short selling side of the business. He said his accountant had advised him to sell back his stake to Chanos for a nominal amount of $1. “And I paid him right there on the spot out of my wallet,” says Chanos. “It was the greatest trade I think I ever did,” he adds with a chuckle. 

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Chanos has put the remains of his salad to one side to make way for the steak. I’m delighted by my main course: deep red toro tuna carpaccio, garnished with avocado mousse. 

My guest has one of the best track records in the hedge fund industry. The Kynikos Capital Partners fund, a long/short equity strategy, has gained 22 per cent a year on average over the past 35 years — double that of the S&P 500 index. In the same period, against the backdrop of rising equity markets, its US short-only Ursus strategy — named after the Latin for “bear” — has lost 2 per cent a year. 

The past decade has been a difficult one for short-sellers in general, as trillions of dollars of central bank stimulus have lifted prices of assets indiscriminately across the board. How do you trade that? “Very carefully and painfully,” he says. 

Fundraising has been tough. Kynikos’s assets peaked at around $7bn after 2008, when short-only Ursus gained 44 per cent, net of fees. They have slumped to $1.5bn since then. This year Chanos sold a minority stake in the management company to boutique investment firm Conlon & Co and the family office of Richard M Daley, former mayor of Chicago. 

Prolonged periods of quantitative easing — most recently to ease the economic pain of the coronavirus crisis — is “adding to inequality” by benefiting the people who own financial assets, says Chanos. He believes that the Federal Reserve ought to cut credit card rates for consumers, which are still 15-18 per cent in the US, and sees a potential political backlash against the central banks for their part in how “the rich have gotten much richer and the vast majority of people have not”. 

Political risk is one of the reasons that Chanos is shorting gig economy comp­anies such as ride-hailing apps Uber and Lyft and online food-delivery platforms Grubhub and Just Eat Takeaway. Not only are they losing money, but he believes that there is going to be a greater political focus on low-wage workers, which poses an existential threat to their business models. 

Chanos sits on the finance committee of US presidential hopeful Joe Biden, who is supporting a new California law to strengthen legal protections for gig economy workers. A Biden administration raises the prospect of higher taxes. “I think it’s fair that rates of taxation on capital probably should go up, relative to rates of taxation on earned income. I know that makes me a communist on Wall Street but I’ve always felt that.” 

Chanos declines a second glass of wine, joking that “I don’t want to be drunk for this.” Defeated by his huge steak and salad, he asks the waiter to put them in a doggy bag. On my encouragement, he decides to be a good sport and orders the “decadent” fried Oreos that the restaurant is famous for. My own dessert is a coconut choc ice. 

I return to the subject of Tesla, whose shares have surged around six-fold in the five years since Chanos began shorting the company. What is going on here? “I think Elon Musk has personified the hopes and dreams of this bull market,” he says, setting out his bear case against Tesla, which he sees as unprofitable, highly leveraged and facing increasing competition. Tesla “burnishes its results through aggressive accounting”, in his view. He also describes it as “a culture of deception” because it is selling self-driving to consumers, which as yet “doesn’t exist”. 

What, I ask, is Chanos’s main motivation: to be rich or to be right? 

“I want to do this until they pull me out of the seat,” he replies. When Wirecard filed for insolvency, there was “an electricity” that ran through Kynikos. “That keeps you going.” And so, he says, does his belief that “this market is setting up to be one of the great short opportunities of all time”. 

“Trouble’s coming, I don’t know when, but it’s coming.”

After Wirecard: is it time to audit the auditors?

The industry’s failure to spot holes in the accounts of several collapsed companies has led to clamour for reform writes Jonathan Ford and Tabby Kinder in The FT


At the end of 2003, the Italian dairy company Parmalat descended into bankruptcy in an eye-catchingly abrupt manner. A routine bank reconciliation revealed that €3.9bn of cash which Parmalat was supposed to have at Bank of America did not actually exist.

The scam that emerged duly blew apart one of Italy’s best-known entrepreneurial companies, and sent its founder, Calisto Tanzi, to prison for fraud. Dubbed Europe’s Enron, it humiliated two large auditing firms, Deloitte and Grant Thornton, and ended up costing the former $149m in damages. 

Yet it rested on an apparently simple deception: the reconciliation letter on which the auditors were relying had been forged. 

There were shades of Parmalat’s collapse again last week when, nearly two decades later, another fast-growing European entrepreneurial company blew up in strikingly similar circumstances. 

After years of public questions about the reliability of its accounts, primarily from the FT, the German electronic payments giant, Wirecard, was forced to admit to a massive hole in its balance sheet. 

Rattled by the failure of an independent probe by KPMG to verify transactions underpinning “the lion’s share” of its reported profits between 2016 and 2018, and unable to publish its results due to issues eventually raised by its longstanding auditors EY, Wirecard finally capitulated. It announced that purported €1.9bn cash balances at banks in the Philippines probably did “not exist” and parted company with its chief executive Markus Braun. Evidence relied on by EY had been bogus. 

It remains unclear exactly how the crucial confirmation slipped through the cracks. According to one EY partner: “The general view internally is that confirming historic cash balances is auditing 101, and [that] ordinary auditing processes were followed, including third party verification, in which case the fraud was sophisticated in its use of false documents.” 

Others, however, take a less charitable view of such slip-ups, especially when, as with both Wirecard and Parmalat, they were preceded by so many questions about the reliability of the figures. 

“The integrity of the cash account [which records cash and should reconcile to all the other items in the accounts] is totally central to the whole system of double-entry bookkeeping,” says Karthik Ramanna, professor of business and public policy at Oxford’s Blavatnik School of Government. “If there is no integrity to the cash account, then the whole system is just a joke.” 

Shareholder support 

Wirecard’s collapse is the latest in a wave of accounting scandals that has swept through the corporate world, including UK outsourcing group Carillion and Abu Dhabi-based hospital group NMC Health, as well as alleged frauds at the mini-bond firm London Capital & Finance (LCF) and the café chain Patisserie Valerie. 

Many fear a further surge as the Covid-19 lockdown washes away those companies with weakened balance sheets or business models in the coming months. 

Questions about “softball” auditing have dogged many recent high-profile insolvencies. Carillion’s enthusiasm for buying companies with few tangible assets for high prices led it to build up £1.5bn of goodwill on its balance sheet. Despite vast losses at some of those subsidiaries, it had written down the value of just £134m of that goodwill when the whole edifice caved in. 

Similar questions hang over LCF, where close reading of the notes in the last accounts it published show how the estimated fair value of its liabilities far exceeded that of its assets in 2017, making it technically insolvent roughly 18 months before it collapsed taking with it more than £200m of savers’ cash. Yet EY gave the accounts a clean bill of health. 

Such cases have raised concerns about the independence of auditors, and their willingness to challenge the wishes of management at the client, who are often driven by their own desire for self-enrichment or survival. 

“It’s so important if you want to keep the relationship to have a rapport with the finance director,” says a financier who once worked at a Big Four auditing firm. “It is basically sometimes easier to swallow what you are told.” 

It is a problem that has deepened with the adoption of modern accounting standards. Over the past three decades, these have progressively dismantled the traditional system of historical cost accounting with its emphasis on the verifiability of evidence and using prudent judgment, replacing it with one based on the idea that the primary purpose of accounts is to present information that is “useful to users”. 

This process has allowed managers to pull forward anticipated profits and unrealised gains, and write them up as today’s surpluses. Many company bonus schemes depend on the delivery of the “right” accounting numbers. 

In theory, shareholders are supposed to provide a check on the influence of self-interested bosses. They choose the auditors and set the terms of the engagement. But in practice, investors tend not to assert themselves in the relationship. Scandals rarely lead to the ejection of auditors. 

So after UK telecoms group BT announced a £530m writedown in 2017 because of accounting misstatements at its Italian business, the auditors, PwC, were not sanctioned by investors. Far from it, the firm was reappointed with more than 75 per cent support. And when EY came up for re-election at Wirecard in the summer of 2018, despite rumblings about the numbers, it was voted back by more than 99 per cent. 

Tight budgets and timetables 

 It is not only an auditor’s desire for an easy life that can drain audits of that all important culture of challenge. There are practical issues too. Tight budgets and timetables limit the scope for investigation. 

Audit fees in Europe are far below those in the US. Audits of Russell 3000 index companies in the US cost 0.39 per cent of company turnover on average. Those in Europe average just 0.13 per cent, while for German companies it is a feeble 0.09 per cent. 

With fees low, auditing teams are often stretched thin, with only limited support from a partner out of a desire to limit costs and maximise the number of audits done. Audit is traditionally the junior partner in a big accountancy firm, with around four-fifths of the Big Four’s profits coming from the non-audit consultancy side. 

Take the last audit of BHS under the ownership of Philip Green, who sold the failing UK retailer to a little known entrepreneur, Dominic Chappell, in 2015. The chain subsequently collapsed the following year. 

The PwC partner, Steve Denison, recorded only two hours of work auditing the financial statements. The number two, an auditor with just one year’s post-qualification experience, recorded 29.25 hours, and the more junior team members 114.6 hours. Mr Denison was later fined for misconduct and effectively banned by the audit regulator. 

According to Tim Bush, head of governance and financial analysis at the Pensions & Investment Research Consultants, a shareholder advisory group, this reliance on juniors tends to result in “box checking” rather than an investigative approach to audit processes. “Audit teams are less likely to have a feel for the company’s business model,” he says. 

This in turn can open the door to abuse. Scams often hinge on faith in some implausible business activity. Parmalat’s €3.9bn cash pile, for instance, was supposed to have come from selling milk powder to Cuba. But an analysis of the volumes claimed suggested that if the company’s numbers were accurate, each of the island’s inhabitants would have needed to be consuming 60 gallons a year. 

As the author Richard Brooks noted in his book The Bean Counters: “It shouldn’t have been difficult for a half-competent audit firm to spot.” 

No ‘golden age’ 

The academic Prem Sikka rejects the idea that auditing has gone downhill in the past few decades. “Go back into history and you will find there was never a golden age,” he says. 

He argues that most of the weaknesses are of longstanding vintage, and are down to a lack of accountability. “On the audit side, there is no transparency. You have no idea as a reader of accounts how much time the auditors spent on the task and whether that was reasonable,” says the professor of accounting at the University of Sheffield. 

While there are signs that the UK regulator is getting tougher, it is down to shareholders to provide stronger governance, Prof Sikka says. If they won’t do it, the government should consider setting up a state agency to commission audits of firms and set fees. “It wouldn’t have to be everyone. You could just do large companies and banks.” 

Britain has recently been through a comprehensive review of audit, including how it is regulated and competition in the market, plus a review by the businessman Donald Brydon of its purpose. This devoted many pages to establishing it as a distinct new profession and coming up with new statements to include in already groaning company reports. 

Far from creating new tasks, many observers think that audit should reconnect with its original purpose. This is to assure investors that companies’ capital is not being abused by over-optimistic or fraudulent managers. “At their heart, audits are about protecting capital, and thereby ensuring responsible stewardship of capital,” says Natasha Landell-Mills, head of stewardship at the asset manager Sarasin & Partners. 

Yet modern accounting practice has made audits more complicated while watering down the legal requirement to exercise the judgment needed to ensure the numbers are “true and fair”. Despite the endless mushrooming of numbers, it is no easier to know if the capital is really present and can thus justify the payment of dividends and bonuses. 

Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales says auditors need a “renewed focus on internal controls, going concern and fraud. The vast majority of business failures are not the fault of the auditor, but when audit quality is a contributory factor, the problem generally involves these three fundamental areas.” 

Mr Bush thinks a radical simplification is in order. “Without clarity there is never going to be proper accountability,” he says. “What we have is a recipe for weak auditing, and ever more Wirecards and Parmalats. In the extreme it facilitates Ponzi schemes. Stay on that route and it won’t be long before you come unstuck.”

How Britain can help you get away with stealing millions: a five-step guide

Dirty money needs laundering if it’s to be of any use – and the UK is the best place in the world to do it writes Oliver Bullough in The Guardian 


Kleptocrats, fraudsters and crooks steal hundreds of billions of pounds, dollars and euros from the rest of us every year, but that gives them a problem: how can they stop the rest of us knowing what they’ve done with the proceeds? They have to stop their haul looking suspicious, to cleanse it of any criminal taint, or face losing their hard-stolen cash.

Money laundering, as this process is known, is notoriously difficult to uncover, investigate and prosecute. Occasionally, however, an insider breaks cover – someone such as Howard Wilkinson, who blew the whistle on perhaps the largest money-laundering scheme in history, the movement of €200bn of suspect funds through the Estonian branch of Denmark’s biggest bank between 2007 and 2015, most of it earned in the dodgier corners of the former Soviet Union, some perhaps belonging to Vladimir Putin himself. 

“No one really knows where this money went,” Wilkinson, a former Danske Bank employee, told Denmark’s parliament last year. Once the money had got into the global financial system, “it was clean, it was free.”
Britain’s most famous money launderer is HSBC, thanks to its systematic cleansing of the earnings of the Latin American drug cartels over the second half of the last decade, for which it was fined $1.9bn by the US government in 2012. But that was a tiny operation compared to the Danske Bank scandal. If gathered together, the suspect funds moved through the bank’s Estonian outpost could buy HSBC, with more than enough left over to buy Danske Bank too.

The scandal has been big news in Denmark and Estonia, but barely grazed public consciousness in the UK. This is strange, because Britain played a key role. All of the owners of the bank accounts that first aroused Wilkinson’s suspicions had their identity hidden behind corporate structures registered in the UK – including Lantana Trade LLP, the one that may have been connected to Putin. That means this is not just a Russian, Estonian or Danish scandal, but something far closer to home. In November, Wilkinson told a European parliament committee that the countries hosting these companies are just as culpable. “Worst of all is the United Kingdom,” he said. “The United Kingdom is an absolute disgrace.”

The British government is supposedly committed to tackling grand corruption and financial crime, yet Britain’s involvement in this mega-scandal has never been mentioned in parliament, or been addressed by ministers. It is far from the first time that British companies have been involved in high-profile money-laundering. Among the characters who have used British shell companies to hide their money are Paul Manafort, disgraced former chairman of Donald Trump’s election campaign, and Viktor Yanukovich, overthrown president of Ukraine, among thousands of lower-profile opportunists.

It is increasingly hard to avoid the conclusion that Britain tolerates this kind of behaviour deliberately, because of the money it brings into to our economy.
That being so, why should hardened criminals be the only ones getting rich off Britain’s lax enforcement? Here’s how you too can use British shell companies to cleanse your dirty money – in five easy steps.

 

Step 1: Forget what you think you know

If you have ambitions to steal a lot of money, forget about using cash. Cash is cumbersome, risky and highly limiting. Even if Danske Bank had used the highest denomination banknotes available to it, that €200bn would have weighed 400 tonnes, an amount four times heavier than a blue whale. Just moving it would have been a serious logistical challenge, let alone hiding it. It would have been a magnet for thieves, and would have attracted some unwelcome questions at customs.

If you want to commit significant financial crime, therefore, you need a bank account, because electronic cash weighs nothing, no matter how much of it there is. But that causes a new problem: the bank account will have your name on it, which will alert the authorities to your identity if they come looking.

This is where shell companies come in. Without a company, you have to act in person, which means your involvement is obvious and overt: the bank account is in your name. But using a company to own that bank account is like robbing a house with gloves on – it leaves no fingerprints, as long as the company’s ownership information is hidden from the authorities. This is why all sensible crooks do it.

The next question is what jurisdiction you will choose to register your shell company in. If you Google “offshore finance”, you’ll see photos of tropical islands with palm trees, white sands and turquoise waters. These represent the kind of jurisdictions – “sunny places for shady people” – where we expect to find shell companies. For decades, places such as Anguilla, the British Virgin Islands, Gibraltar and others sold the companies that people hide behind when committing their crimes. But in recent years, the world has changed – those jurisdictions have been cajoled, bullied and persuaded to keep good records of company ownership, and to reveal those records when police officers come looking. They are no longer as useful as they used to be.

So where is? This is where the UK comes in. When it comes to financial crime, Britain is your best friend.

Here is the secret you need to know to get started in the shell company game: the British company registration system contains a giant loophole – the kind of loophole you can drive a billion euros through without touching the sides. That is why UK shell companies have enabled financial crime all over the world, from giant acts of kleptocratic plunder to sad and squalid frauds that rob pensioners of their retirement savings.

So, step one: forget what you think you know about offshore finance. The true image associated with “shell companies” these days should not be an exotic island redolent of the sound of the sea and the smell of rum cocktails, but a damp-stained office block in an unfashionable London suburb, or a nondescript street in a northern city. If you want to set up in the money-laundering business, you don’t need to move to the Caribbean: you’d be far better off doing it from the comfort of your own home.

Step 2: Set up a company

The second step is easy, and involves creating a company on the Companies House website. Companies House maintains the UK’s registry of corporate structures and publishes information on shareholders, directors, accounts, partners and so on, so anyone can check up on their bona fides.

Setting up a company costs £12 and takes less than 24 hours. According to the World Bank’s annual Doing Business report, the UK is one of the easiest places anywhere to create a company, so you’ll find the process pretty straightforward.

This is another reason not to bother with places like the British Virgin Islands: setting up a company there will cost you £1,000, and you’ll have to go through an agent who will insist on checking your identity before doing business with you. Global agreements now require agents to verify their clients’ identity, to conduct the same kind of “due diligence” process demanded when opening a bank account. Almost all the traditional tax havens have been forced to comply with the rules, or face being blacklisted by the world’s major economies.

This means there are now few jurisdictions left where you can create a genuinely anonymous shell company – and those that remain look so dodgy that your company will practically scream “Beware! Fraudster!” to anyone you try to do business with.

But Britain is an exception. While it has bullied the tax havens into checking up on their customers, Britain itself doesn’t bother with all those tiresome and expensive “due diligence” formalities. It is true that, while registering your company on the Companies House website, you will find that it asks for information such as your name and address. On the face of it, that might look worrying. If you have to declare your name and address, then how will your company successfully shield your identity when you engage in industrial-scale fraud?

Do not be concerned, just read on.

Step 3: Make stuff up

This third step may be the hardest to really take in, because it seems too simple. Since 2016, the UK government has made it compulsory for anyone setting up a company to name the individual who actually owns it: “the person with significant control”, or PSC. Before this reform it was possible to own a company with another company and, if that company was not British, the actual owner could hide their identity.

In theory, the introduction of the PSC rule should have prevented the use of a British shell company to anonymously commit financial crime. Don’t worry though, because it didn’t. Here is the secret: no one checks the accuracy of the information you provide when you register with Companies House. You can say pretty much anything and Companies House will accept it.
So this is step three: when you’re entering the information to create your company, make mistakes. Suspicious typos are everywhere once you start delving into the Companies House database. For instance, many money-laundering investigations involving the former USSR eventually bump against a Belgian-based dentist, whose signature adorns the accounts of hundreds, if not thousands, of different companies, including Lantana Trade LLP. When he was tracked down to his home address in Belgium last year, the dentist claimed that his signature had been forged and that he had no connection to the companies. Whoever was filing the documents was remarkably imaginative when it came to spelling his name. Every document filed with the UK registry has the same signature, but his name is spelt in at least eight different ways: Ali Moulaye, Alli Moulaye, Aly Moulaye, Ali Moyllae, Ali Moulae, Ali Moullaye, Aly Moullaye and, oddly, Ian Virel.

With such boundless opportunities for creativity, why not have fun? Recently, while messing about on the Companies House website, I came across a PSC named Mr Xxx Stalin, who is apparently a Frenchman resident in east London. It is perhaps technically possible that Xxx is a genuine name given to Mr Stalin by eccentric parents – but, if so, such eccentric parents are remarkably widespread.

Xxx Stalin led me to a PSC of a different company, who was named Mr Kwan Xxx, a Kazakh citizen, resident in Germany; then to Xxx Raven; to Miss Tracy Dean Xxx; to Jet Xxx; and finally to (their distant cousin?) Mr Xxxx Xxx. These rabbitholes are curiously engrossing, and before long I’d found Mr Mmmmmmm Yyyyyyyyyyyyyyyyyy, and Mr Mmmmmm Xxxxxxxxxxx (correspondence address: Mmmmmmm, Mmmmmm, Mmm, MMM), at which point I decided to stop.

As trolling goes, it is quite funny, but the implications are also very serious, if you think about what companies are supposed to be for. Limited companies and partnerships have their liability for debts limited, which means that if they go bust, their investors are not personally bankrupted. It’s a form of insurance – society as a whole is accepting responsibility for entrepreneurs’ debts, because we want to encourage entrepreneurial behaviour. In return, entrepreneurs agree to publish details about their companies so we can all check what they are up to, and to make sure they’re not abusing our trust.

The whole point of the PSC registry was to stop fraudsters obscuring their identities behind shell companies, and yet, thanks to Companies House’s failure to check the information provided to it and thus to enforce the rules, they are still doing so. How exactly could society find someone who gives their identity as Mr Xxxxxxxxxxx, and their address as the chorus of a Crash Test Dummies song?

Even when the company documents provide an actual name, rather than a random selection of letters, the information is often very hard to believe. For example, in September, Companies House registered Atlas Integrate Services LLP, which declared a PSC with a date of birth that showed her to be just two months old at the time. In her two months of life, she had not only found time to get started in business, but also apparently to get married, since she was listed as “Mrs”. The LLP’s incorporation document states: “This person holds the right, directly or indirectly, to appoint or remove a majority of the persons who are entitled to take part in the management of the LLP”. It does not explain how exactly a babe in arms would achieve this.

This is not a one-off. The anti-corruption campaign group Global Witness looked into PSCs last year, and found 4,000 of them were under the age of two. One hadn’t even been born yet. At the opposite end of the spectrum, its researchers found five individuals who each controlled more than 6,000 companies. There are more than 4m companies at Companies House, which is a very large haystack to hide needles in.

You don’t actually even need to list a person as your company’s PSC. It’s permissible to say that your company doesn’t know who owns it (no, you’re not misunderstanding; that just doesn’t make sense), or simply to tie the system up in knots by listing multiple companies in multiple jurisdictions that no investigator without the time and resources of the FBI could ever properly check.

This is why step three is such an important one in the five-step pathway to creating a British shell company. If you can invent enough information when filing company accounts, then the calculation that underpins the whole idea of a company goes out of the window: you gain the protection from legal action, without giving up anything in return. It’s brilliant.

But don’t dive in just yet; there are two more steps to follow before you can be confident of doing it properly.

Step 4: Lie – but do so cleverly

Most of the daft examples earlier (Mmmmmmm, Mmmmmm, Mmm, MMM) would not be useful for committing fraud, since anyone looking at them can tell they’re not serious. Cumberland Capital Ltd, however, was a different matter. It looked completely legitimate.

It controlled a company called Tropical Trade, which, in October 2016, cold-called a 63-year-old retired postal worker in Wisconsin identified in court filings as “MJ”. On the phone, a salesman offered her an investment product, which – he said – would make returns of 81%. He chatted about his wife and family and came across as “kind and trustworthy”, MJ later told police. “During two weeks in November of 2016, she allowed Tropical Trade to charge $34,500 on her Mastercard and Visa credit cards,” the filing states. When she tried to get her money back, her emails and calls were ignored, and she never saw it again.

She had fallen victim to the global epidemic of binary-options fraud. Binary options are a form of betting on the stock market that are now banned in many countries – including Israel, where much of the industry was based – since fraudsters used the idea to fix odds, keep winnings and target the vulnerable. According to the FBI, taken as a whole, these fraudsters may have been fleecing their marks of up to $10bn a year.

When US police came looking for the people behind Cumberland Capital Ltd, they searched the Companies House website and found that its director was an Australian citizen called Manford Martin Mponda. Anyone researching binary-options fraud might quickly conclude that Mponda was a kingpin. He was a serial company director, with some 80 directorships in UK-registered companies to his name, and features in dozens of complaints.

It already looked like a major scandal that British regulation was so lax that Mponda could have been allowed to conduct a global fraud epidemic behind the screen of UK-registered companies, but the reality was even more remarkable: Mponda had nothing to do with it. He was a victim, too.

Police officers suspect that, after Mponda submitted his details to join a binary-options website, his identity was stolen so it could be used to register him as a director of dozens of UK companies. The scheme was only exposed after complaints to consumer protection bodies were passed onto the City of London police, who then asked their Australian colleagues to investigate.

Companies House has since deleted Mponda’s name from documents related to dozens of other companies, but it was too late for “MJ” and thousands of other victims. A small number of the binary-options masterminds have been caught, but the money they stole has vanished into the labyrinth of interlocking shell companies, and the individuals behind Cumberland Capital have not been identified.

“Most of the binary-options firms claimed to be in the UK. People are more likely to deal with a UK company than a company in Israel, as it has a better reputation when it comes to finances,” said DS Alex Eristavi of the City of London Police’s investment fraud team. “Companies House records are provided in good faith. There’s not so much scrutiny as goes on in, say, Italy or Spain, where you have to go through the lawyers and do it properly. Here the information is submitted voluntarily. People don’t realise that, they take it as being carved in stone.”

So here is step four: don’t just lie, lie cleverly. British companies look legitimate, so look legitimate yourself. Steal a real person’s name, and put that on the company documents. Don’t put your own address on the documents, rent a serviced office to take your post: Paul Manafort used one in Finchley, the binary options fraudsters went to Liverpool, and Lantana Trade was based in the London suburb of Harrow.

The financial documents you file look better if they’ve been audited by an accountant, so file genuine-looking accounts, and claim they’ve been audited by a proper accountancy firm. That isn’t checked either, so just find an accountant online and claim you’ve employed them. Accountants quite regularly find themselves contacted about accounts they have never seen before, and make the unwelcome discovery they have been personally named as having approved them.

Steps 1-4: A brief recap

So, to summarise the tricks so far, if you want to create an impenetrable weapon for committing fraud: first, forget about the supposed offshore centres and come to the UK; then take advantage of the super-easy Companies House web portal; then enter false information; and finally make sure that information is plausible enough to deceive a casual observer.
We’re nearly there. It’s time for the final step. 

Step 5: Don’t worry about it

I know what you’re thinking: it cannot be this easy. Surely you’ll be arrested, tried and jailed if you try to follow this five-step process. But if you look at what British officials do, rather than at what they say, you’ll begin to feel a lot more secure. The Business Department has repeatedly been warned that the UK is facilitating this kind of financial crime for the best part of a decade, and is yet to take any substantive action to stop it. (Though, to be fair, it did recently launch a “consultation”.)

Before 2011, only registered company-formation businesses could access Companies House’s web portal, which meant there was a clear connection between an actual verified individual and companies being created, since you could see who had created them. There was still fraud, of course, but it was relatively easy to understand who was responsible.

In 2011, then-business secretary and Liberal Democrat MP Vince Cable decided to open up Companies House, and everything changed. After Cable’s reform, anyone with an internet connection, anywhere in the world, could create a UK company in about as much time as it takes to order a couple of pizzas, and for approximately the same amount of money. The checks were gone; there was no longer any connection to a verifiably existing person; it was as easy to create a UK company as it was to set up a Twitter account. The rationale was that this would unleash the latent entrepreneurship within the British nation by making it easy to turn business ideas into thriving concerns.

Instead of unchaining a new generation of British businesspeople, however, Cable let slip the dogs of fraud. At first, this rather technical modification to an obscure corner of the British machinery of state did not garner much attention, but for people who understood what it meant it was alarming. One such person was Kevin Brewer, a Warwickshire businessman who had been in the company forming business for decades, and who attempted to warn Cable of the potential risks inherent in the new policy.

The method Brewer chose to make his warning was perhaps slightly unwise. He registered a company – John Vincent Cable Services Ltd – with Vince Cable listed as the sole shareholder, then wrote to the business secretary to explain what he had done. It was intended as a demonstration of how easy it is to file unverified information with Companies House, but it failed to focus attention in the way he had hoped. Jo Swinson MP, who worked with Cable, wrote Brewer a stern letter, telling him he should not have done what he did, and assured him that the new system was very good. Brewer concluded that the coalition government was not going to take his concerns seriously.

In 2015, there was a general election, Cable lost his seat, the Conservatives formed a majority government, and Brewer decided to try again with the same stunt. He created Cleverly Clogs Ltd, a company apparently owned by three people: James Cleverly MP, Baroness Neville-Rolfe, who was a minister in the business department, and a fictional Israeli called Ibrahim Aman. Brewer was no more successful in persuading Tories than he had been at persuading Liberal Democrats, however. At that point, he gave up on his attempt to show the government it was enabling limitless opportunities for fraud.

There is, it turns out, a simple explanation for why successive governments have failed to do anything about it. Last year, when challenged in the House of Commons, Treasury minister John Glen stated that Companies House simply couldn’t afford to check the information filed with it, since that would cost the UK economy hundreds of millions of pounds a year. This is almost certainly an exaggeration. Anti-corruption activists who have looked at the data say the cost would in fact be far less than that, but the key point is that the reform would pay for itself. As Brewer has pointed out, “the burden of cost is one thing. But the cost of fraud is far greater.”

VAT fraud alone costs the UK more than £1bn a year, while the National Crime Agency estimates the cost of all fraud to the UK economy to be £190bn. The cost to the rest of the world of the money laundering enabled by UK corporate entities is almost certainly far higher. Spending hundreds of millions of pounds to prevent hundreds of billions’ worth of crime looks like a sensible investment, however you look at the data, particularly since the remedy – obliging Companies House to check the accuracy of the information filed on its registry – would be so simple. (When I put this to Companies House, they provided the following statement: “We do not have the statutory power or capability to verify the accuracy of the information that companies provide. However, tackling abuse of the register is a key priority and that’s why we work closely with law enforcement partners to assist their investigations into suspected cases of economic crime and other offences.”)

That is not to say that the government has taken no action. It is illegal to deliberately file false information in registering a company, and punishable by up to two years in prison. In late 2017, Companies House at last alerted prosecutors to the activities of one persistent offender. The target of the prosecution was Kevin Brewer, for the crime of trying to inform politicians about how easy it is to create fake companies.

He was summonsed to appear at Redditch magistrates’ court and, on legal advice, pleaded guilty in March 2018. After adding together his fine, and the government’s costs, he is £23,324 the poorer – quite a high price to pay for blowing the whistle. He is paying it off at £1,000 a month, and remains the only person ever convicted of spoofing the UK’s corporate registry, which is quite a remarkable demonstration of Companies House’s failure to do its job. 

Following his conviction, Brewer’s company National Business Register was removed from the list that Companies House publishes of company formation agents, which had been a key source of new business for him. “There are company formation agents on that list who have permitted huge amounts of fraud, and I’ve been excluded for trying to expose it. I find it incredible that they should turn a blind eye,” he told me. “Is it deliberate? Are they actually trying to get this money into the UK? I don’t want to believe it, but I can’t explain it any other way.”

We don’t know the answer to that, but it does give us lesson number five: don’t worry about it. Commit as much fraud as you like, fill your boots, the only reason anyone would care is if you kick up a fuss. And what sensible fraudster is going to do that?