The bogus brokers who are taking us for at least £200m
'Boiler room' scams are more sophisticated than ever – and UK investors are the No 1 targets. Julian Knight reports
Sunday 11 May 2008
It can start with a seemingly harmless telephone call and end in financial torture. "They often pretend to be conducting a marketing survey and ask you questions about share dealing and investment," says Bob Wishart, detective superintendent at the City of London Police's economic crime unit.
"This is about fact-finding to give intelligence to the con men, who will then call a few days later claiming to be a legit stockbroker. This is when the hard sell starts."
The con described by Mr Wishart concerns "boiler rooms", where a bogus stockbroking firm – in many cases calling from abroad – persuades people to buy worthless shares in companies that often only exist on paper, at massively inflated prices. This con is decades old but it's now more widespread and sophisticated than ever, and UK investors are the number-one target. "They get their leads from the lists of company shareholders in the public domain. The UK has lots of such investors," says Mr Wishart.
And the con artists are plausible in the extreme. "The thing is, these people sound like stockbrokers. They have precise scripts that take account of every objection and eventuality. Some even have websites and claim to be authorised in the UK," says Jonathan Phelan, head of retail enforcement at the Financial Services Authority (FSA), the City regulator.
The attack is coming from all over the globe. "There are rooms operating in Spain, Holland, Germany and North America – even Brazil," adds Mr Wishart.
Opinion differs on how much they get away with, but whoever you believe, the sums are eye-watering. "We get about 600 calls a year and the average loss per call is £20,000," says Mr Phelan. "And we estimate that only between 5 and 10 per cent of victims actually report the crime, as many are embarrassed about being taken in. That works out at a loss of around £200m a year."
But Mr Phelan admits that even £200m may be a serious underestimate. "A case could be made for the amount lost to be as high as £500m or £600m each year. No one knows."
Mr Wishart says the intelligence gathered by the police through the anti-boiler room initiative Operation Archway suggests Spanish-based fraudsters have scammed about £70m from the UK in the past year.
There have been some successes in the fight. Last week, the police busted a suspected boiler room, unusually based in the UK, which is alleged to have scammed at least £6m from 1,200 victims. But, as Mr Wishart concedes, the police and the FSA are like the Dutch boy with his finger in the dyke. "You close one down and they set up somewhere the next day. They are highly structured companies with people at the top selling information on potential victims to what amounts to franchises, who employ teams of boiler room salespeople. We have even seen instances where they have used the American film Boiler Room as a training video."
And it seems many jurisdictions do not take boiler rooms as seriously as they could. "Co-operation definitely varies," says Mr Wis- hart. "In Europe this crime is low on the list of priorities. There are legal complexities because the victims are abroad. As a result, some of the people running the boiler rooms in the EU think they are untouchable."
The FSA believes that, slowly but surely, this situation is getting better. "We are meeting with our counterparts and they do see the importance of this," says Mr Phelan. "However, the difficulty is that in these countries, the equivalent financial services regulator doesn't have the powers we do."
It's not just the continental authorities that can be accused of being laggards. UK banks have been criticised for not raising sufficient alarms when their customers transfer money from their accounts into ones suspected of being run by boiler rooms. This is a charge disputed by the banks. "A typical victim is a middle-aged, experienced investor holding a reasonable amount of cash. The initial transfer of funds may not be out of line so doesn't flag up what's going on," says Brian Capon at the British Bankers' Association.
"Sometimes the fraudsters tell the account holder to say it's a bill payment rather than for buying shares," he adds. "Ultimately, if banks have concerns, they do contact their customers. But it's up to people to do what they want with their own money."
And once the transfer is done, the cash starts to be laundered and is probably gone for ever. "I have seen instances where the money passes through 10 accounts in different countries in a few days," says Mr Phelan. "On occasion, we do re-cover some funds and return it to victims, but I don't want to build any false hope: once the money is gone, the chances are limited."
So to avoid being conned in the first place, how do you spot a boiler room?
First be aware of the con artists' "target market". The City of London Police says the typical victim is professional (such as a doctor or lawyer), middle-aged to elderly and male. He will also have held shares for a decade or more. The point is, these people are hardly gullible – which just goes to highlight the sophistication of the scam that subsequently unfolds.
The initial call may be from someone claiming to work for a market research firm or perhaps offering a share-tipping magazine. Once the initial fact-find is done, the details are passed to the con artists, who will pose as stockbrokers. Mr Wishart says these people are like "paedophiles" in that they groom their victims, talking to them about the market and winning their trust, sometimes over a period of several weeks.
Then the scam moves into full swing. "Victims will be asked for a small sum to buy a share. They may then be told the purchase has done well and will be asked for larger sums," says Mr Wishart. Slowly the stakes are upped and the victims drawn further in, throwing good money after bad.
Finally the penny drops and the victim realises he has been scammed, and this is where the coup de grâce can happen. "The boiler room sells the name of the person to other fraudsters. They then contact the person and say they can find a buyer for their shares just as long as they send a fee to cover the dealing costs," says Mr Phelan. And some people are desperate enough to fall for it.
Ultimately, the advice is simple: if you are called at home by someone you don't know, regarding anything to do with shares, put the phone down.
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