Increasing Investment Scams Can Implicate Lawyers, Too

By James Darbyshire and Heather Clark
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Law360 (November 19, 2020, 3:39 PM EST) --
James Darbyshire
James Darbyshire
Heather Clark
Heather Clark
With business fraud again top of mind during International Fraud Awareness week,[1] it's important to recognize that scams are not only financially and emotionally devastating to the victims, they also pose a significant threat to law firms and individual solicitors.

The Financial Conduct Authority recently reported that it received over 10,000 calls about investment scams in 2019 — an average of over 800 calls a month. In the U.K. in 2018, the average amount savers lost to pension scams was £82,000, with a total of over £197 million reported losses — likely an underestimate because scams are not always reported.[2]

This year, the coronavirus has been a catalyst for even more scamming activity. Ciaran Martin, the departing CEO of the National Cyber Security Center, has noted that cybercriminals were quick to exploit the pandemic, leading to a rise in online scams and suspicious emails.[3] Barclays plc reported a 66% increase in scams for the first six months of 2020, which they have also attributed to the nation's uncertainty during the pandemic.[4]

With more sophisticated scams on the rise, consumers' pensions and savings are under threat and we face a real challenge in maintaining public confidence in the industry. These scams also pose a significant threat to law firms and individual solicitors who become tangled up in them.

The Solicitors Regulation Authority, or SRA, recently warned lawyers of the risks of becoming involved in dubious investment schemes, such as off-plan developments, hotel rooms and self-storage units. These are the types of investments we see a lot at the Financial Services Compensation Scheme.

Investors are given bad advice to move their pension into a self-invested personal pension and to invest the funds in high-risk, and often illiquid, pen assets. For example, we have seen a number of investors who invested their personal pension funds in off-plan hotel developments in the Caribbean and Cape Verde, teak plantations in Asia, and self-storage units and airport car parking spaces in the U.K.

In its August report,[5] the SRA looked at past cases where law firms had acted on behalf of sellers of potentially dubious investment schemes. It found that in 63% of cases, lawyers had failed to carry out proper due diligence on those who ran the schemes, with no checks carried out at all in 20% of cases.

The SRA also found that firms working on such schemes too often focused just on the interests of the scheme promoter and failed to properly protect the interest of the consumers.

In most cases, the law firm acts for the seller or manager of the investment scheme rather than the investors. Scammers may try to involve reputable firms in their schemes to make them appear legitimate.

In fact, sometimes there might be very little legal work for the law firm to do — they are just there to reassure investors that the whole thing is above board. The law firm may also be exploited so that they can administer the scheme and route investment funds through their accounts. Solicitors should only act where there is a justifiable reason for their presence.[6]

Clearly, it is likely to be a conflict of interest to act for both parties. However, even if you are only instructed to act for the seller, it may not be clear to the prospective investors that you are not acting on their behalf, too. They might think the law firm referred to in the promotional materials is acting in the interests of the buyers.

The SRA has warned solicitors that, if they are not acting for the buyers, they must make that absolutely clear to them. Solicitors should strongly advise prospective investors to take their own independent advice from a qualified solicitor of their choosing.

In its recent review, the SRA found that almost half of firms were involved in a scheme where the buyers did not have their own independent legal advice.[7] Any attempt to dissuade buyers from instructing their own solicitor or telling buyers "not to worry, we'll deal with everything" will be taken very seriously by the SRA.

If solicitors think a transaction is potentially fraudulent or so high-risk that it is unfair to buyers, they should cease to act for the seller. The SRA has warned that it is professional misconduct should a solicitor fail to do so.

Solicitors may need to conduct a certain level of due diligence to be comfortable that the investment scheme is viable, credible and not so high-risk that it would be taking unfair advantage of the buyers. Red flags include the promise of unrealistic returns, unfair and poorly drafted agreements or, in the case of property schemes, unusually high deposits.

Solicitors must conduct due diligence even if they know the scheme promoter well and have acted for them in the past. In more than three-quarters of the cases the SRA reviewed, it found that solicitors failed to conduct sufficient due diligence because they already had a preexisting relationship with the scheme promoter.[8]

The consequences for solicitors who get involved in these schemes, whether knowing it is a scam or not, can be equally devastating. Complacent lawyers and firms may face robust action from the SRA.[9] In the last five years, the SRA has taken 48 solicitors and two law firms to the tribunal, which has resulted in 16 strike-offs, eight suspensions and £870,000 in fines.[10]

Financial Services Industry and Legal Sector Must Work Together

As scams become increasingly sophisticated, it is now even more important for the industry to take steps to tackle them at their source. And this includes the legal sector.

Lawyers can very much become part of the problem, not part of the solution. Law firms are used to lend legitimacy to dubious investment schemes. Investors believe that the lawyer is acting in their interest and this may cause them to sign up to an investment they would otherwise be uncomfortable with. Law firms must do a certain level of due diligence on their own client when they are asked to act for the seller of an investment scheme.

Law firms must take steps to ensure that they are comfortable that the whole thing is not a scam or otherwise, so high-risk that retail investors shouldn't be investing. If they can't get comfortable on that, they must cease to act. If they are happy to continue, they must make it abundantly clear to investors that they do not act for them and encourage them to get their own legal advice.

It's important for lawyers — not just consumers — to be aware of scams. In addition to promoting awareness through our website[11] and social media channels, FSCS also promotes the FCA's "ScamSmart" campaign and works closely with regulators and other public bodies. Lawyers should make themselves familiar with this material too — they need to be able to spot the red flags of a fraudulent investment scheme.

We report scams to relevant authorities, such as the National Cyber Security Center, the FCA, Action Fraud and the Serious Fraud Office. Online scam advertisements can now also be reported to the Advertising Standards Authority's new reporting service.[12]

When we see an online ad for an investment that falsely claims to be FSCS-protected, we issue cease-and-desist letters to stop them using our name in their ads. But industrywide collaboration is key, such as with the tech sector. Search engines and social media platforms are being used to advertise bogus investments. If these ads were identified as scams before they appeared online, this would stop many consumers from becoming scam victims.

Recognizing that it has limited power to take down online ads for scam investments, the FCA recently published a call for input in relation to harms in the consumer investments market.[13] The FCA is working with other agencies to look at what can be done to ensure that internet platforms take more care before accepting ads for financial products.

We are also working with the FCA and the Department for Digital, Culture, Media and Sport to discuss whether more can be done in this area to protect consumers.

Conclusion

Just as we are being asked to stay alert during the coronavirus pandemic, we also need to be wise to the risks of scams. This applies both when dealing with our own money and when we are instructed in relation to a potentially dubious scheme. If it sounds too good to be true, it probably is — and is best avoided. It's important for lawyers to get behind this too. Lawyers should know the warning signs so they can avoid any involvement with dubious schemes and become part of the solution — not part of the problem.



James Darbyshire is chief counsel at the Financial Services Compensation Scheme and Heather Clark is senior solicitor at Burness Paull LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] https://fraudweek.com/.

[2] https://www.fca.org.uk/publication/call-for-input/consumer-investments-market.pdf.

[3] https://www.bbc.co.uk/news/technology-53918588.

[4] https://www.moneymarketing.co.uk/news/investment-scams-jump-49-in-july/?eea=VTQ2U3EyVTRKb3Q0NTh2R05BNGRuK1JiSXZST1BLZGRNUHFTYnp5eE1wMD0=&n_hash=973&utm_source=e-shot&utm_medium=email&utm_campaign=MM-655-MorningNews-%23973.

[5] https://www.sra.org.uk/sra/how-we-work/reports/investment-schemes-that-are-potentially-dubious/.

[6] Solicitors Regulation Authority "Investment schemes that are potentially dubious" August 2020, page 7.

[7] https://www.sra.org.uk/solicitors/guidance/investment-schemes-including-conveyancing/.

[8] Solicitors Regulation Authority "Investment schemes that are potentially dubious" August 2020, page 5.

[9] Solicitors Regulation Authority "Investment schemes that are potentially dubious" August 2020, page 5.

[10] https://www.sra.org.uk/sra/how-we-work/reports/investment-schemes-that-are-potentially-dubious/.

[11] https://www.sra.org.uk/sra/how-we-work/reports/investment-schemes-that-are-potentially-dubious/.

[12] https://www.asa.org.uk/make-a-complaint/report-an-online-scam-ad.html.

[13] https://www.fca.org.uk/publication/call-for-input/consumer-investments-market.pdf.

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