Buyer-funded developments equal fraud

In just one example of a buyer-funded development gone wrong, property company North Point Global sold a set of developments in the city of Liverpool with an estimated worth of £360 million (U.S.$506M) to foreign investors. According to comprehensive reporting by the Guardian newspaper—which is the subject of a legal complaint by Liverpool City Councilor Gary Millar, who has been intimately involved in the scheme—the company has “pulled out of its planned suite of projects across the city and stopped picking up the phone, leaving buyers to believe they are the victims of a ruthless scam.” The properties were marketed to investors in China and Hong Kong with promises of high yields. In one example, a Hong Kong investor was convinced to pay 80 percent of the price of a student accommodation upfront, with promises of 6 percent interest on the deposit, and a guaranteed 9 percent return in rental income. Later, buyers received requests for further funds to complete the building, but then North Point Global announced it was ending the project—which had not actually even been begun—and was unable to refund the buyers’ deposits.

In what is a pattern with such schemes, they are riddled with conflicts of interest, with individuals working as directors of the development companies, as contractors and as ‘independent surveyors’ at companies all registered to the same address. In addition, legitimacy was conferred on the project through its association with local government and, in one case, with the former Chancellor of the Exchequer, George Osbourn, who endorsed several projects while he was Chancellor on a government trade mission to China in 2015. At one moment he described himself as tag teaming with Joe Anderson, the mayor of Liverpool, to sell the investments to Chinese investors.

Now developers are in administration, the council is taking them to court and investors have found that their money had been spent but no actual building work has been done.

“What we can say is that we have been warning the profession to be aware of involving themselves in such schemes for a more than a decade,” said Solicitors’ Regulation Authority spokesman Lee Shrimpton. “It is a priority risk for us because here can be huge sums of money involved and the promised protections for investors just aren’t there.” In regard to legitimate property development, Shrimpton said: “Unfortunately, it’s only those firms that fall below the high professional standards expected of them that come to our attention,” adding, “Thankfully, this is only a small minority of solicitors in England and Wales.”

Other developments put in train by another company, Pinnacle, are in the same straits, with investors’ money being spent on administration and marketing but not construction. In each case, the developers blame some other party. The same names of directors, chairmen, and other employees crop up for both Pinnacle and North Point, as well as for construction firms associated with the projects. Indeed, one individual, David Choules, was a founding director and later chair of North Point Global, as well as owning the firm that certified expenditures on the firm’s developments.

“As well as presenting a risk to investors. Investment schemes could also be used as a front to launder money. That’s another reason for operators to use a solicitor’s client account. It’s the reason that Accounts Rule 14.5 was introduced, to stop money flowing through accounts.”
Lee Shrimpton, Spokesperson, Solicitors’ Regulation Authority

So, what is buyer-funded development? It uses deposits from many individual buyers who pay substantial deposits of up to 80 percent of the value of individual properties upfront. This money is pooled and used to fund the entire project, from marketing fees to construction costs. The model was developed because after the 2008 financial crisis it became more difficult to obtain credit from banks. But there is no safety net if costs spiral beyond budget and funds run out. If this happens, in general investors lose most—if not all—of their investment.

Under the more conventional model of off-plan development, as opposed to buyer-funded or investor-led fractional sales, buyers’ deposits, which are more likely to be 10 percent of the purchase price, are held in a secure escrow account. These funds are only released on completion of the building.

The SRA is an outcomes-focused regulator, not rules-based; thus, it does not have any rules surrounding different investment schemes that must be complied with. It is only when disciplinary action must be taken against solicitors that it becomes involved. Nevertheless, it is very active in warning solicitors and investors about bad actors, so that it does not end up having to take action—working on the maxim that prevention is better than cure.

The properties

North Point Global
North Point Pall Mall, Liverpool, launched 2014, £90 million development
New Chinatown, Liverpool, £200 million scheme
Baltic House, Gallery+, Liverpool, 311-unit scheme
Berry House, Gallery+, Liverpool
The Element, Manchester, Salford Quays
Pinnacle Alliance
Angelgate, Manchester, launched in 2015, 344 luxury apartments, over £30m in investor deposits
The Paramount, Liverpool, launched 2013, £35 million development
The Spectrum, Sheffield, 152-unit £10 million scheme
The Quadrant, Liverpool, 240-unit scheme
—Paul Hodgson




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Paul Philip, SRA chief executive, said: “The vast majority of solicitors act with honesty and integrity. Only a tiny number of solicitors are involved in these schemes, but the damage can be huge, with people losing their life savings. We will continue to protect the public by taking action against solicitors who fall short of the high standards we all expect. Yet, the best way for people to stay safe is to make sure they are aware of the risks. If something looks ‘too good to be true’, it probably is.”

The agency has seen a substantial increase in investment fraud scams not limited to buyer-funded developments. It received 12 reports about potential investment scams in the nine months since the last warning notice, an increase on the 18 reports in the preceding 18 months, or double the number. And there has also been increased enforcement action.

Recent cases include Sanders and Co., where many investors lost money in a Brazilian Ecohouses scheme, involving a large-scale development of eco-homes. And the case of Naresh Chopra, who was “found to be acting for investment companies offering opportunities in diamond and fine art trading,” said Shrimpton. Chopra was struck off. Since September 2017, there have been three cases which have been taken to the Solicitors Disciplinary Tribunal (SDT), where investors lost a total of more than £35 million (U.S.$49M). “One solicitor was struck off, three solicitors were suspended, and another fined £40,000 [(U.S.$56K)],” said Shrimpton. Cost orders, or the costs of the legal proceedings, totaling more than £120,000 (U.S.$169K) were also imposed on the five solicitors. In addition to these financial penalties, a solicitor in Yorkshire was jailed for eight years for fraud and money laundering, after being used to give credibility to a £5 million (U.S.$7M) investment fraud.

SRA public advice

Below is some advice from Europe’s Solicitors’ Regulation Authority.
The law firm is not working for you—it is working for the company trying to persuade you to hand over your money.
The investment company does not need to promote its products by involving a law firm so you should ask yourself why they are doing so.
There is no need for your money to go through a law firm. The only time law firms are allowed to pass money through their client accounts is when they are providing proper legal services—in these cases they often are not.
The involvement of a law firm or solicitor does not mean security. In fact, it may be a warning sign because it is being used as a selling point.
Be wary of law firms or solicitors offering “undertakings” to secure a scheme. This is not a proper use of solicitors’ undertakings and may not give you protection or security.
Our Compensation Fund is unlikely to pay you compensation if you have not looked after your own interests carefully.
Source: SRA




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The rise in such investment frauds are a key priority for the SRA not only because its member solicitors are, often unknowingly, being used to confer legitimacy on such schemes. In legal developments, solicitors are not involved between investor and developer and there is no reason to “pass through” money; nor does it confer protection on such investments—as is often part of the promotion—because the solicitors’ client is the developer not the investor.

The Saunders and Co/Eco houses scheme, that already led to disciplinary action against four solicitors, is an example of a buyer-funded development. The solicitors in question involved themselves and their firm in a “complex overseas investment scheme that was outside their or the Firm’s area of expertise and experience.” More importantly, “there was no legitimate need for the involvement of a firm of solicitors.” In addition, the solicitors permitted payments into, and withdrawals from, the firm’s account, which were not related to any necessary legal transaction—in other words, money laundering.

SRA: other investment scams

Carbon credit trading – individuals cannot realistically buy and sell in this market.
Diamond trading, fine wines, graphene, rare earth metals and so on – of course, products like diamonds and wine can be bought and sold but there is no special way to make a high return.
Landbanking: buying a small strip of land because it is claimed that it will rise hugely in value if planning permission is granted to develop it. In the cases we have seen, permission is not granted and was never likely to be granted.
Taking a lease or other rights for a room in a hotel – we cannot see why someone wanting to invest in a hotel needs to buy a room (also involving expensive conveyancing).
Overseas agricultural rights – we have seen failed schemes in Ukraine, Africa and other countries.
Property developments abroad – people are invited to pay in full or partly for holiday homes before they are built. Of course, people do buy and sell holiday homes, but the schemes to watch out for are where the buyers do not have their own solicitor looking after their interests. These schemes are often in countries where checking the development is real or recovering money if things go wrong is difficult or impossible.
Source: RSA

“As well as presenting a risk to investors,” said Shrimpton, “investment schemes could also be used as a front to launder money. That’s another reason for operators to use a solicitor’s client account. It’s the reason that Accounts Rule 14.5 was introduced, to stop money flowing through accounts.” Rule 14.5 states that money can only be deposited in a firm’s account if it is: “in respect of instructions relating to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities.” There is a long list of exceptions, but they do not apply to investments.

While the North Point Global and Pinnacle investment schemes have not been revealed as involving money laundering as yet, individuals involved have been and are being investigated for tax fraud and defrauding charities, and funds were channeled through a solicitor from buyers to developers, conferring legitimacy on the transaction.