Fighting the Boiler Room Problem: How the FSA makes a difference
Speech by Jonathan Phelan, Head of Retail Enforcement, FSA
International Boiler Room Conference
10 November 2008
Share scams cause economic and emotional pain on a vast scale. Let me dispel some myths straight away. This is not a crime affecting the rich and privileged. It is not a crime which can be dismissed by saying that the victims are just greedy and should know better. The victims of this crime are people who trust professionals to provide them with advice. They are often elderly and vulnerable. The perpetrators are persistent, organised, clever and, frankly, live in a moral vacuum. When these characteristics of victim and perpetrator collide, you get a terrible outcome. And share scams operated by boiler rooms are one such terrible outcome.
At the FSA, we have made inroads into this serious crime through our Enforcement activities. We have made a real difference by the action we have taken. We have inflicted serious harm on the criminals and taken action to protect potential victims.
But we can do more together, as an international community, to inflict further harm on the criminals. And that is why we are here today.
At the FSA we have many weapons at our disposal to try and win this fight. We can and do freeze assets. We can and do get injunctions to stop unlawful activities. We can and do bring criminal proceedings. We can and do recover money unlawfully obtained and we return it to the victims.
But that is not enough. The share scam problem has some unique features which make traditional law enforcement tools less effective than we would like.
To win this fight, we need to be more creative. We need to be even more creative than our opponents
Let me give you an overview of our strategy. First by analogy to show how we see this problem.
Let’s start by thinking about the more straightforward crime of burglary. If you put a pot of gold in your window someone will eventually break into your house and steal it. There are two ways to defeat this crime; catch the criminals and tell people not to put their valuable possessions on display.
Both these tactics have to go hand in hand. If you don’t educate people to hide their valuable possessions, then catching the criminals is futile. If the pot of gold continues to be on display, then as soon as you arrest one criminal, another one will fall to temptation and take his place.
Now think about the share scams operated by these boiler rooms.
We still have something equivalent to a pot of gold in our front window. If your name is on a share register then someone out there can get your name and telephone you. You are a potential victim of a share scam. And you cannot just draw your curtains to avoid the crime.
The criminal no longer needs to break down doors or climb through windows, so he runs less risk of getting caught. He can get his hands on your property through your telephone line, your post box, or your e-mail. He can be nameless and faceless. He can operate from abroad and over a website, and you can do little to hide your goods from him.
This type of crime needs a different type of tactic to defeat it.
And that is why we are here today. The agenda is simple - I want to share with you our tactics. And I invite you to share your tactics with us. No-one of us will have all the answers. There is no right or wrong way of handling this problem; but there might just be some great ideas out there that I for one will shamelessly steal if I think it will do some good.
The second reason we are here, beyond my tactic-stealing agenda, is because the international dimension to this crime requires increased international co-operation. I might not get some kind of crime-fighters pact of solidarity out of you by the end of this conference; but a commitment to increased international co-operation would go down very nicely indeed.
So, to get the ball rolling, let me talk a bit about the share scam problem posed by boiler rooms in the UK and what we at the FSA are doing about it.
First – how big is the problem in the UK?
Estimating the size of fraud generally is a significant problem. For this type of fraud I have heard estimates that range from a few tens of millions of pounds, up to a billion pounds (although this latter figure was provided by an employee of a boiler room; so, he’s not to be trusted!).
What I can say of the problem is this: about 3,000 victims contact us at the FSA each year and they have lost an average of £20,000 each. The total known size of the problem is therefore 60 million pounds.
This, however, is the tip of the iceberg. There must be an iceberg under the water; but we don’t know how many victims don’t report the crime or how much they have lost.
Experiences elsewhere tells us that perhaps around 10% of high-value fraud victims report the crime. This indicates that there are perhaps around 30,000 victims in the UK each year.
Experience elsewhere also tells us that those who lose smaller amounts of money tend to be the ones who don’t report the crime, so average losses are probably somewhat less than the 20,000 pounds that we hear about from the high value victims who contact us.
So, if 30,000 victims lose a real average of 5 to 10,000 pounds, we probably have a crime in the region of 150 to 300 million pounds. There are those who may believe it is bigger than that. And it may well be.
In any event, the impact cannot just be measured in economic terms, despite being a financial crime. This crime has led to human tragedy . . . to suicide, depression and divorce. It leaves people in debt and without life savings for their retirement. The emotional impact is enormous.
In short, there is real human cost to this crime.
So, what is the FSA’s strategy for dealing with share scams?
What we do about it falls into three broad categories of activity which we refer to as the 3 D’s; disruption, deterrence and discouragement. First Disruption.
How do you go about disrupting the activities of a criminal entity that often has no physical presence in your jurisdiction, that legally doesn’t exist, that shifts its location to evade the grasp of regulators and law enforcers and that often only manifests itself to its victim on the other end of a phone line?
It’s certainly difficult, but we’ve put a series of measures in place that we believe at the very least will make things more difficult for the boiler rooms to go about their business.
I’ll briefly talk you through what we do when we learn about a new boiler room targeting UK victims. We receive approximately 5,000 reports of boiler room approaches from people each year and from these reports, we will learn of about 500 new firms.
Once we are sure that we are dealing with an active firm – our yardstick currently is when three people separately tell us about the same firm – we take action.
Before doing so, it’s vital for us to have some understanding of how boiler rooms actually operate. Much of their success is dependent on how plausible they make their activities sound to the victim over the phone. Many people are cautious when they are called out of the blue and offered excellent returns on an investment. So, the boiler room salespeople have to work hard.
They know that the target victim might be an experienced investor and sceptical about being approached over the phone so they need to project professionalism. They will rarely go in for the kill on the first approach, preferring instead to nurture a relationship with the victim over the course of several phone calls and email exchanges.
During this time they will likely direct the victim to their website. Now, the website will play an important role in the boiler rooms’ operations. Cosmetically, it adds colour to their operation, giving the victim something tangible to look at rather than just listening to a voice over the phone.
The website gives the boiler room a chance to project itself as a dynamic, high-powered, global player – a safe pair of hands, someone you can do business with. They will usually claim to be operating from London or New York or Zurich, Hong Kong – illustrated on the website with lots of shots of skyscrapers and images of besuited, square-jawed young guys with gleaming white teeth – and the message is clear; we are a serious, professional broker based in one of the world’s leading financial powerhouses – ‘you can trust us’.
And unfortunately many people will find the mere existence of a website, no matter how basic or derivative it might be, evidence that the firm is legitimate.
So the website can be an important tool for a successful boiler room – our tactic then is to disable the site. We write to the internet service provider, wherever they’re based, and inform them that we believe the website is being used for criminal activity and request that they take the site down and no longer do business with the individuals who registered with them.
This is a successful tactic in many cases. The majority of internet service providers who play host to boiler room sites are based overseas. So unfortunately we often run into jurisdictional problems where the provider will argue that while it may be a criminal activity in the UK, their client isn’t breaking any laws in their country. Some times we receive no response at all.
That’s something we could discuss in the next couple of days. We need your help.
When we do succeed in disabling a site though, it is an effective tactic. It forces the boiler room to look elsewhere for a provider to host its site, costing them time and therefore money in doing so. While this might represent a minor inconvenience in the grand scheme of things, if a firm is forced to do this on a regular basis it can prove very disruptive. Any firm that is continually changing their web address or whose site is regularly ‘under construction’ is likely to lose the credibility that it craves in the eyes of its target victims.
As I said though, we have mixed success with web hosts so I’d be interested to hear your views over the next day or so on how we might address any jurisdictional constraints. For example, can we as regulators and law enforcers bring more pressure to bear on web hosts who provide this vital facility to boiler rooms? Can we help each other more?
Boiler rooms often rely on other third party service providers to make the whole thing work. Mail forwarding and telephony services for example can play a key role in both an operational sense and as a means of demonstrating legitimacy. We often find firms claiming to have offices in the West End of London or in Manhattan for example. When we check these addresses we almost always find them to be ‘virtual’ or serviced offices. The usual arrangement here is that the firm pays to have its mail delivered to a fashionable business address and then forwarded on to them at another location. They may also pay for someone to answer the telephone for them.
This all adds to the professional, business-like image they’re so keen to convey and it’s something that we at the FSA look to attack and disrupt. When we see that they are using a UK serviced office provider, we will approach the provider and try and obtain as much information as possible about their clients.
We can’t take action against the serviced office provider for having unsavoury clients as such but we can inform them that they are indirectly facilitating a criminal activity by providing these services. We can encourage them to think twice about continuing to deal with this client. And we can seek to influence whatever due diligence checks they carry out before taking on a new client in the future.
Again this is all with the intention of making life a little more difficult for an overseas boiler room to target UK victims.
Equally we would like to disrupt the boiler rooms’ access to telephony services; but this runs into legal constraints and international co-operation issues. So . . . can you help? We would dearly like to hear from people who have tackled the problems associated with blocking telephone numbers or restricting access to telephony services in this type of situation.
Finally, on the subject of disruption, we also publish on our website a list of unauthorised overseas firms that are operating in the UK. This is a list of firms we have received complaints about. The list is used as a resource, by the public, for checking names of entities who may have approached them. It is also used by law enforcement agencies and banks in their intelligence searches on potentially suspicious account activity. This is another valuable part of our disruption strategy.
In relation to the second limb of our strategy, Deterrence, the FSA doesn’t have suitable powers to conduct investigations overseas; but we are able to provide intelligence to and work closely with the City of London Police and its marvellous Operation Archway. You will hear more from the City of London Police later about their efforts to trace, track down and cause harm to the boiler rooms that operate abroad.
Together, the FSA and the City of London Police, alongside the Serious and Organsised Crime Agency, under the guidance of the National Fraud Strategic Authority aim to work together, co-operatively and without gap or overlap to help cause harm to boiler rooms.
The FSA can make a greater impact and ultimately have more tangible success when we find a boiler room in the UK, or (more commonly) a firm in the UK that is helping an overseas boiler room. And it is crucial that we utilise our powers both in order to protect investors and to provide a credible deterrence to the criminals.
Limited by lack of powers outside our jurisdiction, we do not hesitate to use the full force of our powers within the UK. If we find a firm operating in the UK we will act swiftly to freeze its assets and restrain its activities by injunction. We will then move to wind that firm up using insolvency powers. And where we can, we will make individuals bankrupt. We will also use our criminal powers where appropriate to freeze assets and bring prosecutions.
We have had some real success in the past two years, and I’d like to talk you briefly through the highlights.
We secured compulsory liquidations against two UK based agencies – Securetrade & Title Company and The Inertia Partnership – who were assisting overseas boiler rooms. We believe that approximately 1,000 victims had arranged share purchases through these entities, paying a total of £8 million.
We achieved a similar result later in 2007 against two further agents, Chesteroak Ltd and Bingen Investments Ltd, having earlier in the year frozen their assets and taken out an injunction stopping them from continuing to assist boiler room activities in the UK.
We have also taken action against a UK solicitor who had been assisting an overseas boiler room. A High Court ruling against Adrian Sam & Co forced the partners to pay £360,000 to 63 victims of the boiler room. We later forced John Martin and Adrian Sam, the partners of the firm involved, into bankruptcy.
This year, we were granted a permanent injunction preventing Treadstone Corporation Ltd from illegally promoting and selling shares to UK investors. This UK entity had been instructing agents to cold call investors encouraging them to buy shares in a Finnish company, then issuing false share certificates and retaining proceeds of the sales.
We also have an ongoing criminal investigation in which we have already made two arrests. Pending further investigation we obtained orders freezing assets of up to £5.4 million relating to the investigation.
These examples, we hope, send strong messages to any firm or individual prepared to assist an overseas boiler room. Clearly we can and will take action when we have evidence of a UK link. And if this deters others who might be tempted to get involved in the fraud then it means we are doing a good job.
The key to our investigations – and doubtless ones that you have been involved with - have been to follow the victims’ money wherever it takes us. And this has provided us with the clearest evidence yet that when we seek to tackle the boiler rooms, we are likely to be dealing with a complex, multi-national, multi-jurisdictional criminal operation. If we are going to enjoy continued success, we absolutely need international co-operation. Because quite simply, without it, without your help the boiler rooms will thrive.
The third area of our work against boiler rooms is Discouragement. By this we mean discouraging people from dealing with these brokers when they call.
My colleague, Chris Pond, will be talking to you more after lunch about the work we do at the FSA trying to help prevent people from becoming the victim of share scams. So, I’m conscious here of the need to avoid treading on his toes too much.
But this is the area I feel most passionately about. Despite working in law enforcement, I am not afraid or ashamed to say that catching the criminals and disrupting their activates comes well behind this as a priority.
Let me explain. Take yourselves back to my burglary analogy. So long as the pot of gold is in the window, the criminals will keep on coming, no matter how much we disrupt and deter.
We must solve this problem by getting people to avoid becoming victims. They cannot simply hide their pot of gold in a safe. We have to face facts, shareholders names are freely available. Shareholders therefore need our help to know what to do when they get that cold call.
What the FSA does here has been very successful, but it is a continuing job. Over the last year we made some 120 media appearances on television, radio and in newspaper and other media articles to warn people about the dangers of dealing with boiler rooms. In that time, the usage of the phrase "boiler room" has become sufficiently recognised and widespread that, as reported by the BBC in July, the phrase boiler room has made it into the Oxford English Dictionary. As did, apparently, the phrase “credit crunch” and the phrase "sub-prime" – whatever they are!
As an example of the evolution and success of our discouragement messages, some years ago we told people, quite simply, not to deal with overseas firms. In response, we saw the boiler rooms change their tactics and increasingly use UK firms to assist their activities. This was to lend an air of legitimacy to the boiler rooms operations and hide the fact that they operated from overseas. It was this that resulted in the FSA’s flurry of legal activity from 2006 to 2008 to close down UK firms that helped overseas boiler rooms.
While it is nice to see boiler rooms having to change their tactics in response to our messages we also had to make sure our messages evolved. We started to emphasise that people should check that they are dealing with an authorised firm by checking our register of authorised firms. We know that this also caused harm to boiler rooms because they have again changed their tactics. More recently we have found that boiler rooms are now stealing the identity of UK authorised firms, pretending to call from a known, authorised firm. So, when the potential victim checks the register, the firm appears to be legitimate.
So, again, we have caused harm to the boiler rooms and our message has evolved. We now tell people to check a firm is authorised and to call it back through its switchboard number and ask to speak to the salesperson who called them. Of course, that salesperson will not exist.
I’d now like to highlight some of our more recent work which is specifically designed to target our discouragement messages at victims and potential victims.
Broadly this falls into two areas; the first, helping investors who have already fallen victim to a scam and the second, pro-active initiatives to educate potential future victims about boiler room fraud.
One of my teams in the Enforcement Division at the FSA is dedicated to assessing reports of overseas boiler rooms targeting UK investors and taking whatever action is appropriate. This team hears directly from victims about the approaches they receive, the investments that they make and, sadly, the money that they lose. Much of our work involves speaking to victims and finding out more about their experiences with the fraudsters.
Of the 5,000 people that report boiler room activity to us each year, more than half have actually made some kind of investment as a result of being approached. Some of these people will have guessed already that they have fallen victim to a scam, will be cursing themselves for having fallen for the scam, and will have already resolved to not get caught by the scam again.
But many others may regard their experience as a stroke of bad luck, like betting on the wrong horse, where something in the investment just happened to go wrong. Others just can’t or won’t accept that such a professional and convincing sounding outfit turned out to be a scam.
These are the people we aim to help because there is every danger, that despite losing thousands to one set of fraudsters, exactly the same will happen the next time they receive a call out of the blue. We know that boiler rooms will often share their suckers lists (as they call them) – the lists of people to target – so the chances of a victim receiving calls from other fraudsters is high. And while the fraudster might have to work a little harder to win someone over who has recently been stung, they can work on the investor’s desire to recoup recent losses.
The ‘recovery room’ tactic is something that we are increasingly hearing about. This is essentially where boiler rooms recycle their victims by calling up offering to buy shares at high prices that the shareholder believed to be worthless. Very tempting but here’s the catch – they need to send a large ‘arrangement fee’ first.
It is precisely this kind of cycle that we need to break and the best way of doing so is through consumer education. With our media appearances we aim to reach out to these people to get the message across that this is fraud and that if you give your money to these people, you are likely to lose it all.
I’d also like to tell you about two recent initiatives that we have taken which have been aimed squarely at reaching the very people who we believe are most vulnerable when it comes to boiler room crime. Both initiatives involved working in partnership with other key stakeholders and counterparts and serve to illustrate how important and effective a collaborative approach can be.
The first involved producing a flyer warning potential victims about the dangers of boiler room scams and providing advice on how to protect oneself from becoming a victim. We worked in collaboration with the Institute of Chartered Secretaries and Administrators (ICSA) whose members issue share certificates to shareholders and we worked with the Association of Private Client Investment Managers and Stockbrokers (APCIMS) which represents stockbrokers in the UK. These bodies helped us to distribute the flyer directly to UK shareholders. And we estimate that up to 300,000 shareholders will have received our warnings.
We know that boiler rooms obtain their target details from share registers. So, by going direct to shareholders we hope to have a major impact on raising awareness of the issue where it is most needed. What was particularly pleasing with this exercise was the involvement of both ICSA and APCIMS. Both bodies share our concern that boiler room fraud is a major problem and they were prepared to ask their respective members to help publicise the warning to shareholders.
The second initiative is perhaps a little more enterprising. One of my managers recently attended a conference and met a delegate who works for a regulatory body based in Canada. During an investigation the regulator had uncovered a suckers list comprising details of 11 and a half thousand UK based citizens. All, therefore, potential boiler room victims.
The FSA is currently in the process of individually contacting each consumer listed, warning them that they may well be an imminent target of boiler room crime and advising them how to protect themselves against becoming a victim. This is the largest direct communication that we have been involved with and we sincerely hope that it encourages all of those people on the list to do three things if and when they’re approached by a boiler room;
- make a note of the firm’s name and find out where they claim to be based;
- put the phone down on the caller and keep doing so if they continue to call; and
- report the firm to the FSA.
We truly believe that if everyone took these steps when called out of the blue by someone selling shares, then boiler room fraud would be all but eradicated. The problem of course is ensuring that this message gets out and that is something that we at the FSA and our colleagues at the City of London Police are committed to doing.
I said at the beginning that I wanted to give you a sense of what the FSA does to tackle boiler room fraud. Hopefully, I've achieved that.
When we are aware of criminals who are operating outside of our jurisdiction, we try to disrupt their activities in whatever ways we can by targeting websites, mail services and telephony services.
When we find a UK link, we can and will take action, including using our criminal powers, to bring them down and deter others from becoming involved in the crime.
And when it comes to potential targets of boiler room crime, we continually work to discourage potential victims from dealing with these people and becoming their next victim.
Of course we can do more and we will. If I may return to the tactic-stealing agenda that I mentioned earlier – you should all feel-free to steal any aspect of our strategy if it helps your fight. For my part, I want to learn more about what you do to fight the boiler rooms. I want to hear about what methods bring success in your jurisdictions and I want to hear your ideas about how we can present an effective, a cohesive and a united front against the criminals.
In today's economic climate, we need to be ever more effective at using our finite resources.
So my challenge for all here today is to think creatively about how we can tackle this terrible crime together.