A sting, a Picasso and, guess what, offshore tax havens

You know a firm is out of control when it switches from real estate investments to Picassos to launder money, because real estate is too risky and art is the “only market that is unregulated.”

The U.S. Department of Justice unveiled a multicount indictment on March 2 against a London brokerage firm, Beaufort Securities, five of its brokers, an uncle, an art dealer, and a series of related offshore management firms. On the same day, the Financial Conduct Authority (FCA) slapped operating restrictions on the firm and placed it and its sister firm, Beaufort Asset Clearing Services Limited, into insolvency. The offshore firms were located in Mauritius, Budapest, and Saint Vincent and the Grenadines. That the indictment comes as a result of a sting by undercover FBI agents does not detract from the DoJ’s findings that the brokers had been engaged in these activities routinely, and the firm had clearly countenanced them, over a number of years.

So what was the scheme? According to the indictment, the defendants “opened brokerage accounts for their clients in the names of offshore shell companies with nominee shareholders and directors, and then conducted manipulative trading” in U.S. public companies listed on OTC (over-the-counter) exchanges. The indictment alleges that Beaufort Securities “facilitated at least ten ‘pump and dump’ schemes involving U.S. stocks, generating over $50 million in proceeds for its clients.” The FBI sting began in October 2016, just a few short months after Beaufort had told the FCA that it had taken “remedial measures to correct deficiencies in the firm’s financial crime controls and anti-money laundering processes.” Did anyone at the FCA check up on that? Or the firm’s external auditors?

In addition, the defendants laundered securities fraud proceeds for their clients by transferring funds to corporate bank accounts at Loyal Bank, one of the offshore firms, opened in the names of yet more offshore shell companies controlled by the firm’s clients. Loyal Bank then gave debit cards to these clients to withdraw funds “in an untraceable manner.” 

Finally, an uncle of one of the defendants (now, of course, also a defendant), agreed to laundering £6.7 million (U.S.$9.4M) initially using real estate investments. This was deemed too risky, however, so the uncle contacted a “highly respected” art dealer acquaintance of his to develop a scheme to “clean up the money” through the purchase and subsequent sale of a 1965 painting by Pablo Picasso entitled “Personnages.” One of the defendants is said to have described the art business as the “only market that is unregulated,” and that art was a profitable investment because of “money laundering.”  The scheme was halted by the FBI prior to the painting’s purchase.

The FCA appointed PwC to be the firm’s administrator in its insolvency. PwC is attempting to recover, for approximately 14,000 clients, entitlements that include £36.85 million (U.S.$51.5M) of client money and £664 million (U.S.$928M) in client assets. Since the firm’s assets are limited, however, the costs of this will fall on the investors.

According to the Financial Times, “a shareholder in Beaufort Securities, who did not wish to be named, said the firm’s collapse was down to ‘a couple of total idiots … gone rogue,’ but labelled the FBI approach as ‘entrapment.’ ” Other firms were aware, however, of the firm’s slapdash reputation. The FT also noted that the Financial Ombudsman Service has had about 600 complaints about the company in the past year. Furthermore, while the FCA had imposed limits on some operations and assessed its solvency during the last 12 months, it is not clear when a report from PwC stating the firm was insolvent was given to the regulator. There is also no evidence that it had checked on the firm’s actual compliance with the new financial crime controls and anti-money laundering processes it said it had introduced.

News has also emerged that the FCA delayed closing Beaufort for several months to allow the FBI to finish the sting. It seems that the glamor of the FBI operation blinded the FCA to its duty to protect Beaufort’s clients by, if not shutting down the firm entirely, at least placing restrictions on its operations as it has done now. These actions could have been taken much earlier. But who knows how many of the 14,000 clients had been bamboozled into placing their savings with the firm since December. How many of them had been led into share manipulation schemes with promises of quick riches since then. How many shell companies had been formed to launder money since then. It is as likely that the firm’s worsening reputation led clients away, and the actual number of affected individuals in December might have been much higher. We won’t know the answers to these questions until PwC publishes its report later this year and the FCA publishes its findings. Nevertheless, when criminals are left at large to continue their crime spree, it is typical that more crimes are committed, so any delay in prosecution is generally unwise.