Worldwide: Financial Institution Liability For White-Collar Crimes

Last Updated: April 3 2017
Article by Jessica L. Lewis

Banks and financial services businesses are under increasing pressure following claims regarding their role in fraud: Western Union is on the hook for an exorbitant forfeiture, an individual has claimed that the Royal Bank of Canada contributed to the loss of his business to a fraudster and Lloyds Banking Group has taken financial responsibility for the debt of HBOS Reading.

The largest forfeiture ever imposed on a money services business

Western Union is facing a $586m settlement after admitting to aiding criminals in money laundering and fraud. The global money services business, with headquarters in Englewood, Colorado, has entered into agreements with US authorities, admitting criminal violations, including wilfully failing to maintain an effective anti-money laundering programme and aiding and abetting wire fraud. Western Union will forfeit $586m in its settlement with the Federal Trade Commission (FTC) and the US Justice Department.

Western Union has agreed to implement and maintain an anti-fraud programme with training for its agents and associates, monitoring to detect and prevent fraud-induced money transfers, due diligence on all new and renewing company agents, and suspension or termination, where appropriate, of noncompliant agents.

Edith Ramirez, FTC chairwoman, censured Western Union's conduct, stating: "Western Union owes a responsibility to American consumers to guard against fraud, but instead the company looked the other way, and its system facilitated scammers and rip-offs." Ms Ramirez went on to say that the agreements made between the money services business and the FTC were made to ensure Western Union changes the way it conducts its business, and to provide some financial relief to consumers victimised by the company's criminal acts.

The investigation that led to this settlement uncovered hundreds of millions of dollars being sent to China through Western Union in transactions specifically structured to avoid the reporting requirements of the US Bank Secrecy Act. The failure of Western Union to stay on side of the requisite anti-money laundering laws provided fraudsters with a vehicle to transfer criminal proceeds. One particular type of criminal funds identified by US authorities being transferred through this service, was money sent by Chinese immigrants to pay human smugglers, wiring the money in smaller increments to avoid federal requirements.

Other criminal activity involved fraudsters contacting victims in the US and falsely promising prizes or job opportunities, or even posing as family members in need. The fraudsters directed the victims to send money through Western Union to help a relative or to claim their prize. Various Western Union agents were complicit in these fraud schemes, often processing the payments for the criminals in return for a cut of the proceeds.

US attorney Wifredo A. Ferrer severely denounced the company, saying: "Western Union's failure to implement proper controls and discipline agents that violated compliance policies enabled the proliferation of illegal gambling, money laundering and fraud-related schemes."

$586m marks the largest forfeiture ever imposed on a money services business.

Goudas Foods and the Royal Bank of Canada

The Royal Bank of Canada (RBC) has also recently had to answer allegations relating to fraud. Peter Spyros Goudas, an entrepreneur from Greece who founded Goudas Food Products and Investments Ltd. in Toronto in 1969, has pointed his finger at the Canadian bank, asserting in court documents that he lost his business to a fraud because he trusted his banker.

Goudas alleges that his company went bankrupt in 2014 after the bank encouraged him to trust John Simmonds, and because RBC neglected to conduct proper due diligence before it loaned millions to Simmonds.

Simmonds himself is not unknown to the fraud world, having been arrested three times on fraud charges – twice in 2016 and once in early February of this year. Goudas and Simmonds reportedly met in 2014, and the Greek businessman was persuaded that Simmonds could grow Goudas Food Products into a billion dollar business. However, the offer apparently was conditional on approval from the RBC.

According to Goudas, the bank told him he could trust Simmonds. In an affidavit, Goudas stated: "My contact at RBC, Donna O'Reilly, advised me that RBC had investigated John Simmonds, that he was a highly regarded businessman, that the deal was a fair one, and that RBC would be prepared to consent to a change of control in favour of Simmond's company." This is explicitly denied by the bank in its court documents. The bank asserts that, contrary to Goudas' statements, Goudas informed the bank in 2014 he wanted to sell his ownership interest in the business to Simmonds.

In March 2014, Simmonds bought the Greek food business for $10m in shares in Simmonds' company. Simmonds agreed to deposit $2.5m of the purchase price into Goudas' bank account five days after the closing. This did not happen and no money was deposited. Goudas claims he has not been paid.

Police have alleged that Simmonds and his associates forged the Goudas Food books to make it appear as though the company was owed significantly more money than it actually was in order to secure additional funds from other lenders and investors. After Simmonds took over Goudas Foods, RBC increased its loan to the company from $10m to $12m in June 2014. The bank says it is a victim of fraud, rather than a part of the problem.

In his affidavit, Goudas went on to say, "It appears that Simmonds was able to borrow against artificial invoices made out to companies related to him or to non-existent companies. I find this odd because when I controlled Goudas Food Products, RBC always rigorously reviewed all my new customers and invoices to ensure that receivables due from such customers were eligible for inclusion in the borrowing base."

Simmonds is out on bail and is under house arrest while awaiting trial.

Lloyds Banking Group on the hook for HBOS Reading fraud victims

Lloyds Banking Group has recently accepted responsibility for compensating the small business customers who were victims of a £245m fraud involving HBOS Reading (Lloyds is the owner of HBOS). The bank did so after a period of serious urging by members of parliament (MPs).

In an open letter to Antonio Horta-Osorio, the chief executive of Lloyds, MPs implored the bank to provide proper relief for the hundreds of businesses tricked by Lynden Scourfield and his associates.

Lynden Scourfield, a former manager with HBOS, pleaded guilty to six counts, including corruption, at an earlier trial last year. Five other defendants were convicted on counts including bribery, fraud and money laundering at the end of a four month trial at the Southwark Crown Court in England.

Remarking on the outcome, a representative from HBOS said: "The trial highlighted criminal actions that bear no reflection on the behaviours of the vast majority of the employees of HBOS at the time or in the group today."

The CPS special prosecutor, Stephen Rowland, said the case was one of the largest and most complex his special fraud division had even prosecuted. HBOS Reading – which was rescued by Lloyds Banking Group during the financial crisis – internally estimated the cost of Scourfield's lending activity as more than £300m in early 2007. However, that figure excludes further losses accrued after that date and huge losses to business customers, many of whom have been ruined. Some estimate the total value of the fraud may be closer to £1bn.

Two businessmen who were convicted, Bancroft and Mills, arranged sex parties, exotic foreign holidays, cash in brown envelopes and various other favours for Scourfield between the years of 2003 and 2007. In exchange for these bribes, Lynden Scourfield would require HBOS' small business customers employ a consulting firm owned by Mills and his wife (who was also convicted for her role in the conspiracy). The Mills' consulting firm, Quayside Corporate Services, purported to offer business experience and expertise to assist small businesses with improving their financial situations. However, this did not always pan out and the businesses were vulnerable to being milked for high fees, and being stripped of their assets. In cash fees alone, according to prosecutors in the trial, £28m went through the accounts of Mills, his wife and their associated companies.

Scourfield and his associates have been sentenced to a combined jail time of 47 years.

Fraud and customer loyalty

In addition to being increasingly vulnerable to lawsuits, banks must be mindful of the impact fraudulent transactions have on customer loyalty. Bank customers trust their banks to protect their financial assets and information. A recent study conducted by Carnegie Mellon University researchers suggests that customers will leave a bank, even if they receive refunds of fraudulent losses. The study found that the threshold for an increased likelihood of customers taking their business elsewhere was $500, which is a low number in the eyes of a bank.

It will be important for banks to become even more diligent in efforts to militate against employees or customers involving them in fraudulent schemes. As fraudsters become increasingly sophisticated, banks must similarly evolve fraud-prevention and regulation efforts to protect themselves from potential liability and customer loss.

Originally published by Financier Worldwide Magazine

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Jessica L. Lewis
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