Here is an aide-memoire for those looking to spot the next fraud — or indeed for aspirant swindlers who want to learn the basics of their trade. Surprisingly, very little changes — many of the same tricks were played 50 or even 100 years ago.
● Cash businesses: it is much easier to disguise nefarious activities if you run a cash business — then HMRC, banks, auditors and others find it hard to monitor real takings. This sort of trade enables villains to launder money from illegal activities, or simply skim money to keep it away from the taxman.
● Base it offshore: make sure the holding companies are registered in tax havens with strict secrecy laws. That way no one can tell who owns the business or see consolidated accounts to judge how solvent the business is.
● Don’t pay creditors: in the 1980s, I did business as a tiny supplier to a large firm run by a very famous entrepreneur. We discovered he adopted a straightforward policy: don’t pay small creditors unless they sue. Eventually we served a writ and he coughed up in full.
● Fill all senior roles with family members: ensure only trusted members of the inner circle know what’s going on. Look at frauds such as the Robert Maxwell or Bernie Madoff scandals. Sons and daughters rarely whistleblow and incriminate their fathers.
● Buy companies from desperate sellers: find assets so undesirable that you can pay nothing for them — or even better, you get paid to take them over. A classic case was the disposal by Sir Philip Green of BHS to serial bankrupt Dominic Chappell with a dowry of £94.5m in cash, £110m of loan guarantees and £200m of property — all for the price of just £1. Of course, the business collapsed only 13 months later. The sale of Rover by BMW was a similar story — the Germans provided the loss-making car manufacturer with a large dowry — a chunk of which the Phoenix Four owners siphoned off as profit, while the underlying business went broke.
● Keep lots of plates spinning: financial bandits know that the more opaque their operations, the less regulators might detect any wrongdoing. So dodgy entrepreneurs are experts at shuffling their corporate assets — changing names and owners frequently.
● Threaten litigation and sue people: intimidate those who would expose you by sending lawyer’s letters or even writs. Crooks need to conceal their wickedness, so scaring away investigative reporters, disgruntled ex-staff and so on is vital.
● Run several sets of books: once upon a time I bought a substantial Belgian family business in the printing sector which used special software to prepare two sets of accounts — one reflecting the true picture, and one showing a much less profitable state of affairs — for the tax authorities. Fortunately, the vendors were obliged to sell the business based on the latter numbers, so the business was actually much more profitable than it appeared.
● Make it complicated: most people do not understand the technicalities of investing or accounting. Many con artists fool investors by making the apparent complexities of their scheme so esoteric that no one can see the fraud. Both Madoff and Theranos chief executive Elizabeth Holmes did this. Ivar Kreuger, the Match King, invented instruments such as convertible shares, stock options, preferred shares and non-voting shares in the mid-1920s. He came to a sticky end — shooting himself in a Paris hotel suite in 1932.
● Exploit your own community: from Tino de Angelis and the Salad Oil Swindle, to Carlo Tanzi at Parmalat, to Charles Ponzi, clever scammers exploit people from within their circle of acquaintances — because they are trusted and familiar. These cheats are somehow the worst because they really don’t care to whom they lie.
● Hire dodgy advisers: from auditors to lawyers to investment bankers, the wily fraudster employs professionals who put profits before principles. There are certain City firms with whom I avoid doing business because I know they are less scrupulous about their choice of clients: as long as their bills get paid, then for investors it is devil take the hindmost.
● Think big: even clever investors sometimes fall for the most ambitious fraudsters, since scale itself provides a kind of endorsement. Why were huge swindles such as Enron and WorldCom not discovered earlier? Because nobody believed such huge companies were rotten.