Managing Associate James Clark analyses the rise in financial crime and fraud in the UK in Law360



July 3, 2023

In light of the recent conviction of investment fraudster Anthony Constantinou, Managing Associate James Clark explores how the UK has become known as the fraud capital of the world.

 

 

James’ article was published in Law360, 3 July 2023, and can be found here.

The recent conviction of Anthony Constantinou[1] (the head of CWM FX, a foreign exchange firm) for running an elaborate Ponzi scheme was a rare success for prosecutors, who have struggled to bring other criminals to book in recent years due to chronic underfunding and manpower shortages.  As a reflection of such issues, the UK has been dubbed the “fraud capital of the world” as regulators and authorities fight a seemingly losing battle against the emboldened perpetrators of fraud and financial crime.

Constantinou, who was sentenced to 14 years in absentia after skipping bail in April, was found guilty of one count of fraud, two counts of fraudulent trading and four counts of money laundering after defrauding hundreds of investors out of an estimated £70 million.

Constantinou had promised returns of 5% per month to clients, claiming to deploy a trading strategy which guaranteed such large profits. In reality, however, he siphoned off vast sums to fund his luxury lifestyle, including paying for his £2.5 million wedding and funding private jet travel and cruises for his family and associates. His operations were halted in 2015 following a raid of his CWM FX division’s headquarters by City of London police officers, leading to his being charged and ultimately convicted eight years later.

Many such schemes are little more than variants on the classic framework developed by Charles Ponzi to defraud investors in the U.S. over a century ago. While the march of time has seen such scams evolve down the years, the tactics remain the same. In a Ponzi scheme, money is collected from new investors to pay previous investors, i.e., the fraudster robs Peter to pay Paul. Eventually, the money owed is more than the money being collected and the scheme collapses, leaving all of the current investors out of pocket.

Constantinou deployed such tactics in his defrauding of investors, reliant on targets being seduced by the promise of eye-watering returns despite the illogic of his claims. Following in the footsteps of fraudsters such as Bernie Madoff, Allen Stanford and David Ames, Constantinou relied on the trappings of wealth and luxury to build an image of himself as a successful entrepreneur with a thriving business.

With luxury offices, expensive cars and sponsorship deals with the likes of Chelsea Football Club, Constantinou went to painstaking lengths to create the outward appearance of success to dupe investors. Such alluring marketing tools are commonly used across social media platforms, tricking targets into believing that they too could live such seemingly-glamorous lives if they simply sign up to an account and allow the operators to put their money to work on their behalf.

The length of time it took to prosecute Constantinou is just one of several factors that have created a perfect storm in the U.K. in which financial crime has soared, leading the Chief Executive of UK Finance to label the country the “fraud capital of the world”With criminals well aware of the lack of resources available to regulators and law enforcement to tackle fraud, they are able to operate with near impunity, safe in the knowledge that even if they are eventually caught, it will take years for their case to proceed all the way to trial.

The UK’s legal system charts a painfully slow course when it comes to complex frauds such as Constantinou’s ponzi-scheme, due to the lack of investment in services, lengthy forensic auditing processes and the frequently delayed criminal justice process. Even if a fraud case is navigated through this legal quagmire, the success rate is extremely low. The U.K. government’s ‘Fraud Strategy,’ which was published last month, revealed a lamentable statistic: For every 1,000 estimated frauds committed there is just one successful prosecution

Increasingly, criminals are also aided by the sophistication of technology now available to carry out their schemes, as well as by the proliferation of websites and social media platforms on which to publicise themselves and lure in investors. Artificial intelligence such as ChatGPT enables fraudsters to finesse their pitches even further, resulting in slick promotional material which resembles that of professional financial advisors, helping them deceive an even wider pool of targets.

The criminals’ success in targeting U.K. citizens has led to a considerable rise in investment fraud in recent years, with the FCA reporting in February that the number of reports about suspicious investment schemes has grown by 193% in the past five years. Attempts by the FCA and other regulators to warn off potential investors from putting money into such schemes has failed to deliver a reduction in financial crime. Educational advertising and communiques via the press have proved no match for the flash, brash messaging of criminals who know exactly the right buttons to press to tempt investors.

Until significant funds and resources are deployed in the fight against financial crime, there will continue to be a proliferation of fraudsters entering the marketplace, and a corresponding rise in sums lost by unwitting investors as a result. While prevention is of course better than the cure, at present law enforcement and regulators are failing at both, resulting in the current situation in which criminals are emboldened to operate, hiding in plain sight as they target their victims.

The government’s Fraud Strategy confirmed fears that it would be insufficient in tackling the burgeoning problem, despite its stated aims of reducing fraud by 10%on 2019 levels by 2025. While the abolition of Action Fraud – dubbed “unfit for purpose” by the Justice Select Committee last year – was welcomed by many, its replacement will only have £30 million of funding, a drop in the ocean compared with the sums available to criminals by way of their ill-gotten earnings.

At the same time, the strategy’s approach to online financial crime – which makes up an estimated 77% of all fraud in the UK – was watered down from earlier proposals. Instead of making technology companies liable for fraud originating on their sites, the final text simply proposed “voluntary agreements” between industry and government, abrogating the firms of responsibility for reimbursing victims of fraud.

Against such a backdrop, fraudsters are further incentivised to continue targeting the UK market, aware that there will be little serious change in the near future in terms of cracking down on their activities. Tough action is required from the top down to effect serious change; in its absence, being the “fraud capital of the world” will continue to be the dubious honour of the UK.

 

[1] R. v. Anthony Constantinou, Case Number T20210267, Southwark Crown Court

[2] https://www.cityam.com/fraudsters-stole-1-2bn-in-2022-as-uk-labelled-fraud-capital-of-the-world/

[3]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1154660/Fraud_Strategy_2023.pdf

[4] https://committees.parliament.uk/committee/102/justice-committee/news/173618/justice-response-inadequate-to-meet-scale-of-fraud-epidemic/