With two cheques to Abbey, they helped a fraudster get rich

As a crooked adviser has proved, there are risks in making a payment out to a financial institution. Sam Dunn reports
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Martin Helm and his wife, Sue, were keen to make the most of their allowance for equity individual savings accounts (ISAs).

Martin Helm and his wife, Sue, were keen to make the most of their allowance for equity individual savings accounts (ISAs).

In February, five weeks ahead of the tax deadline on 5 April, each signed cheques to Abbey, the product provider, for £14,000 and passed them to their financial adviser, Michael Hart, who promptly deposited them at one of the bank's branches. Half the money would be used to buy ISAs for 2003-04, and the other half would purchase accounts in this tax year, in line with the annual £7,000 cap on annual ISA investment.

However, the money went into Mr Hart's own instant saver account rather than any genuine investments.

What began as a routine exercise in financial planning has turned into a protracted and bitter battle for compensation amid accusations that the bank failed to protect its customers.

Mr Hart was sentenced nine days ago to six years in prison for fraudulently directing some £1.8m of customers' cheques into his personal accounts over a 12-year period - and then using the money as he wished.

Banking more than £1m of this with Abbey, Mr Hart regularly pulled out huge sums from cash machines - often in wedges of up to £400 on successive days.

"We were one of the last victims," Mr Helm says. "I had a meeting with him set up for one month later but then learned of his arrest."

His anger, and that of other investors who thought they were signing cheques for products belonging to Abbey (and, to a smaller extent, the Norwich & Peterborough and Leeds & Holbeck building societies), is directed at what they claim was a failure within Abbey's banking system. This was the ease with which Mr Hart managed to bank personal cheques, made payable to Abbey but carrying someone else's signature, in his personal account.

Abbey has expressed "sympathy" with the plight of these customers but says that what happened is an "acceptable" and widespread industry practice.

Unfortunately, it is right.

The loophole that led to the fraud can happen elsewhere on the high street and looks set to remain in place until the conclusion of hastily convened talks between the Financial Services Authority, the City regulator, and two industry bodies: the British Bankers' Association (BBA) and the Building Societies Association (BSA).

In the light of the Abbey fiasco, they are urgently looking at ways to tighten up the system.

The problem turns on a procedure at the counter when a person makes a deposit into his account and the cheque is made payable to that financial institution instead of the individual. While you might think all counter staff automatically verify that the person paying in the cheque is its rightful owner, this is not the case.

The Alliance & Leicester bank conceded that it was possible for someone to ape Mr Hart's actions now in one of its branches. It's the same story at both the Britannia and Norwich & Peterborough building societies. "The system does allow for no checks [to take place] - someone could probably get away with it," admits Britannia's spokeswoman, Lise Bulloch. The society says it relies on the relationship between itself and customers to spot such fraud.

Lloyds TSB and Barclays say that their staff are expected to check details, while HSBC counter staff would probably check "but it's not a black and white issue", says spokeswoman Caroline Mooney.

Since many people still send cheques made payable to a financial institution through the post - when buying a unit trust, say - that leaves plenty of scope for fraudulent interception and subsequent payment into a separate savings account.

In 1992, the cheque paying-in process was tightened up. All cheques now have to be crossed and payable only to the person written down as the account "payee". However, the process becomes hazy when the payee is a financial institution.

Neither the BSA nor BBA have cheque payment guidelines for members. Instead, they point to the Banking Code - a voluntary system - which recommends that customers write their name as the destined account holder on the cheque after the institution's name.

In Mr Helm's case, the fraudulent adviser exploited his trust to get him to make the cheques payable to Abbey only.

The bank says it "strongly believes" that the defrauded investors have claims against Mr Hart and the independent financial advice firm for which he worked. It has so far refused to pay compensation.

However, it admits that it is to shake up its branch counter rules from January 2005. It will no longer accept a cheque made payable to Abbey if the signature on it differs from that of the individual paying the money into a personal account.

But for now, the existing practice will continue.

"It was such a simple check to have been made," Mr Helm says. "All this could have been stopped and not caused so much heartache, stress and pain".

It's not the first time that Abbey has found itself embroiled in a fraud case.

It was fined £2.3m by the FSA less than a year ago for failing to keep proper checks on money laundering. It was found guilty of not reporting suspicious behaviour on a regular basis.

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