6th August 2019

Special Report: Scams and the City

Sophisticated boiler room operations located in the UK and abroad are scamming the UK consumer out of millions of pounds every year.

By Michael McCaw
Freelance writer for JTS
“Investment fraudsters are still targeting people throughout the country and they employ aggressive sales tactics”
“British consumers were bombarded with 3.9 billion nuisance phone calls and texts last year”
“In terms of using our powers to isolate the calls it can be a process of trying to work with overseas regulators”

At the beginning of this year, the Government made it illegal to make unwanted or unsolicited calls to people regarding pensions – with offenders facing fines into the millions of pounds.

But with investment fraud rampant across the United Kingdom, it’s been argued the rule change doesn’t go far enough.

Steve Playle, CTSI Lead Officer and Trading Standards Manager at the City of London Corporation, told the Journal of Trading Standards website back in January when the legislation was introduced: “Pensions is a good starting point, but there are lots of other people being ripped off by other investment products that aren’t regulated.

“We’d like to see the Government focus more on those and introduce a ban on cold-calling across the whole investment sector, not just pensions. When we first heard about the Treasury consultation on cold calling a couple of years ago, we thought it sounded like a good idea. But our concern was, why just stick at pensions when you could deal with any type of investment cold calling?”

The Financial Conduct Authority (FCA) – the national body in charge of administering the government’s rules – lists cryptocurrencies, binary options, foreign exchange, shares and bonds above pensions as the most searched for scams by consumers on the regulator’s website.

“People who are trying to make cold calls about pensions are treated as rogues, but if they cold call you offering to sell other investments, the implication might be that they’re going to be OK – and of course that isn’t the case,” Playle observed. “The concern we’ve got is that it legitimises people cold calling selling non-pension products, which is crazy. The rules don’t apply to overseas operators, so what will happen is that most of the people involved in pensions cold calling will place themselves abroad.”

Louise Baxter, Team Manager of the National Trading Standards Scams Team, said at the time of the ban on pensions cold calling: “Pension scams can be life-altering for people – at retirement they can find that they were the victim of a pensions scam many years ago, and hadn’t realised.

“What we often see is that once you’ve become the victim of one sort of scam, you become a repeat victim because you get added to what’s called the ‘suckers list’. Then your details will be trafficked and you will be targeted repeatedly. “Because pensions are so complex and people don’t really understand them, it immediately puts you in a vulnerable situation and more susceptible to being scammed or defrauded.”

Investment fraud is rampant. Scams and the illegitimate sales of complex investment products account for around £50m in 2018 according to UK Finance, as crooks masquerading as experienced traders gang together as ‘boiler room’ cold call fraudsters.

“In 2018, our specialist team received, reviewed and assessed 16,709 reports of potential unauthorised business which includes potential scams and frauds, and published alerts in relation to over 500 firms,” says Mark Steward, the FCA’s executive director of enforcement and market oversight. “Last year we prosecuted our second largest criminal proceeding, leading to jail terms totalling 28 years against all five defendants.”

Within binary options alone – high-risk exotic options instruments in which the buyer is exposed to a cash-or-nothing agreement – fraudsters scammed consumers out of more than £18m in the first half of 2017, according to Action Fraud, the UK’s national fraud and cyber crime reporting centre.

“It is clear that binary options fraud is on the increase,” said City of London Police’s Chief Superintendent Glenn Maleary, head of the Economic Crime Directorate at the time. “And this is the result of opportunist fraudsters who have decided to take advantage of an unregulated market and have done everything they can to defraud unsuspecting investors.”

The rapid rise of cryptocurrencies has also given boiler rooms a tool with which to scam unsuspecting consumers. The problem for market participants and regulators is the fact that cryptocurrencies are so new, and so different from the many established instruments available on financial markets today. So enigmatic are cryptocurrencies that regulators are yet to build robust frameworks around them, and jurisdictional lawmakers are at odds with one another as to how to deal with them.

At the time the UK Government put the pension cold call rules out to consultation, organisations and individuals suggested cryptocurrencies and other high-risk financial products should be included in the rules, but the Government decided to take a “wait and see” approach to the market’s new tool, according to enforcement officers close to the matter.

In the City of London, boiler rooms have turned to this growing, unregulated market which are considered to provide substantial returns. During a two-month period last year, City of London Police revealed reports of around 200 people being targeted by crypto boiler rooms, with average losses of around £10,000. As the latest tool used by the City’s scam artists, enforcement authorities are attempting to clamp down on the activity.

“Investment fraudsters are still targeting people throughout the country and they employ aggressive sales tactics which are often used to pressure unsuspecting victims into parting with large sums of money,” City of London Police Inspector Mark Forster said in a statement, after Action Fraud had been alerted to one such scam in which fraudsters had made £160,000 through cold calling and conning consumers into a cryptocurrency that, it was later found out, didn’t exist.

Operation Broadway

The City of London Police Fraud Squad is responsible for tackling some of the most complex and significant fraud investigations in the UK, and is assisted by a range of authorities, including trading standards.

Formed in 2014, Operation Broadway is a London-wide, intelligence-led drive to uncover and disrupt London’s boiler rooms, and has thus far conducted inspections and disruptions of well over a hundred offices in the City and Canary Wharf. The teams are made up of representatives of the City of London Police, City of London Corporation Trading Standards, Metropolitan Police, National Trading Standards Scambusters team, HMRC and the FCA. The aim, according to the body, is to unsettle the boiler rooms enough that they cease and desist.

However, regulators are tackling the threat of cold calls from fraudsters at different points in the chain. At the point at which the scammed consumer is asked to transfer payment, an authorised push payment (APP) is requested. Not limited to cold calls, APP fraud can be conducted through email, telephone or online – and represents the fastest growing type of fraud in the UK, where 35,000 people lost a total of £145m in the first half of 2018.

Aware however of the growing urgency with which APP fraud must be tackled, the FCA introduced two crucial rule changes at the end of January this year: previously, those scammed out of transferring money could complain only to their own bank. Now, complainants can take the issue to the receiving bank – a move the FCA hopes will encourage banks to identify when a fraudster is using their services. Also, banks currently only check that a sort code and account number match the associated account, but not the name. Confirmation of Payee, which the regulator has asked banks to initiate before the end of the year, means the payer will receive a notification if the name on the account is different from that they have entered.

Further, in May this year a voluntary APP code was implemented, by which signatory banks will reimburse victims of APP scams in any scenario where their bank or payment service provider is at fault and the customer has met standards expected of them under the code.

Time for action

Action is being taken within the context of how firms market products and services, which may be crucial in how boiler rooms operate with binary options fraudsters who use social media campaigns to target younger demographics. The Information Commissioner’s Office (ICO) is taking direct action on nuisance calls and messages, and as well as investment proposals, it is looking at accident claims, home improvements, pensions, gambling and a variety of other scams.

Previously, boiler room companies could simply liquidate, allowing directors to start up again and avoid financial penalties, but as of December, new legislation handed the ICO the authority to hold company officers personally liable for fines. During the month to the end of January 2019 the ICO had more than 80 cases under investigation across its remit.

“Estimates by Ofcom show British consumers were bombarded with 3.9 billion nuisance phone calls and texts last year,” said Minister for Digital and the Creative Industries, Margot James, at the time the changes were announced.

“Previously it was only the businesses themselves that were liable for fines of up to £500,000 rather than individuals. Some directors escaped paying by declaring bankruptcy only to open up again under a different name. Now the ICO can hold company directors directly responsible with further fines of up to half a million pounds.”

An ever-present problem for the ICO and the other agencies involved in tackling the cold call problem, is the whereabouts of the perpetrators. London has a long-standing reputation for boiler rooms, but illegally operating call centres are present in other UK cities, according to the ICO’s group manager for enforcement Andy Curry.

A greater problem still, says Curry and the FCA’s Steward, is the large number of organisations targeting the UK retail investor market from outside the country.

“It’s an emerging picture as to where a lot of these organisations are, and we’ve seen in some areas they’ll try to offshore their call centre operations even though the beneficiaries tend to be in the UK,” says Curry. “In terms of using our powers to isolate the calls it can be a process of trying to work with overseas regulators.”

Given the whereabouts of investment scammers and their abilities to take advantage of the seemingly complex nature of exotic financial products, a number of initiatives have been created to increase consumer awareness of the threats at hand – be they posed by telephone or online scams. From Financial Fraud Action UK’s Take Five to the FCA’s ScamSmart campaign, agencies are engaging with those targeted by fraudsters just as much as projects such as Operation Broadway to shut down boiler rooms and other methods employed by fraudsters.

According to Steward, it’s working: “The FCA has increased its intensity on consumer education and awareness and delivering the ScamSmart campaign, which gives tips on how to spot scams and avoid being defrauded,” he says.

“The ScamSmart campaign has become a very popular site for consumers and has received wide coverage in the media”.

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