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Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539
Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539

Understanding Civil Fraud: Don't Bank On It - Rahman Ravelli Expertise

Author: Azizur Rahman  14 June 2013
5 min read

Land bank fraud is on the rise, with many people having lost fortunes to it in the past decade. Here, we look at how it came about and the challenges it poses for legal teams.

Land has always been a contentious issue. Owning it, leasing it and building on it have always offered the potential for dispute. But in the past decade or so, the issue of land banking has brought its own series of problems.

Insolvency Service figures show that 67 land bank companies have gone into liquidation since 2009, resulting in recorded losses totalling £50M for investors. The past few months have seen the first ever UK convictions for running such schemes. Land bank schemes are estimated to have lost UK investors somewhere around £250M. The sales pitch doesn’t seem to vary a great deal: would-be investors are told they can buy a small portion of a larger piece of land that is ripe for development and is about to receive planning permission. But all too often the land is in green belt areas, where obtaining planning permission is virtually impossible. The result, as many have found to their cost, is that people pay hugely inflated prices for small portions of land which cannot be built on. Meanwhile, the companies who bought the land – probably at a very modest price per acre – make a huge profit on each and every portion. This leaves their investors with land that is worth very little to them; certainly much less than they paid for it. Even if, by some bizarre circumstance, planning permission was granted for building on a land bank site, no developer will want to go to the effort of buying small portions of land from hundreds of individual owners; some of whom may be prepared to hold the scheme to ransom by holding out for a higher price than the others.

Investors are left out of pocket after being given eye-catching “facts’’ such as that their investment will triple in value over a couple of years, that developers were itching to buy the land and that they could pull out of their investment at any time. But when people started to have doubts about the first two facts they often found that the third one was also bogus. Trying to get your money back from such schemes is about as likely as the portion of land you have bought ever being given planning permission for development.
The Financial Services Authority (FSA) has had some success against a small number of people running land bank schemes but it admits that the chances of investors ever getting all their money back are extremely remote. If investors do get cold feet and tell those running the scheme that they want to pull out, it is often the case that they are told that they have to make further investments if they are going to ever get any money out at all. Such threats may go by random names such as “corporate privilege scheme’’ but they are essentially a way of retaining an investor’s money while trying to persuade them to part with even more. And the reason for this is quite simple – land banking is a form of investment fraud.

Land banking can join the same list as bonds, boiler rooms, Ponzi schemes and pension liberation. They all claim to offer amazing benefits to investors in ways that seem too good to be true – and that is because they are – and the only people who really stand to gain are the people at the top. Last year, we wrote an article about investment fraud being driven by dishonesty. Land banking is a perfect example of what we were highlighting. Dishonesty is central to all fraud prosecutions, whatever type of fraud is being investigated. Whether it is a professional accused of fraud or someone who more easily fits the “wide boy’’ stereotype of a conman, the issue of dishonesty has to be established if any prosecution is to be successful.
At Rahman Ravelli, we represent all manner of people accused of fraud, from chartered accountants and company directors through to sole traders and groups of people. In each and every case, the vital ingredient in any case is whether there was dishonesty as opposed to simple bad judgement. The degree of failure of a scheme, the number of investors, the amounts of cash involved, the number of accused and the commodities being marketed may vary but the issue of dishonesty is always crucial. When it comes to dishonesty, the defendant’s state of mind is what has to be ascertained. In  Ghosh (1982), the Court of Appeal ruled that the test was that “according to the ordinary standards of reasonable and honest people, what was done was dishonest’’ and that, if that was the case, the jury must be convinced that the accused “must have realised that what he was doing was, by these standards, dishonest’’.

Proving a person acted dishonestly or honestly is no straightforward task. The prosecution will have their strategy for painting the darkest possible picture of the defendant. But that will never be the full picture. Any defence team worth their salt will have to overcome such an approach by making sure that a jury understands and appreciates every aspect of the defendant, his work and his motivation for acting in the way he did. The investment scheme may have collapsed spectacularly but that alone is not grounds for a conviction. In explaining how and why the scheme went wrong, the defence team can lay out – in simple terms that a jury can understand – the honourable hopes the defendant had when starting the scheme. By explaining in detail the nature of the work he carried out, the reasoning behind his actions and the justification for decisions taken, the defence can challenge the prosecution’s assertions that the defendant did everything for illegal gains. Expert witnesses can be called to give their judgement on the defendant’s actions, other aspects of his work career can be analysed and explained to provide examples of how he works to the highest standards and previous clients can be called as character witnesses. In short, investment fraud cannot exist without dishonesty. A defence’s task is to prove that dishonesty was not a motivating factor in their client’s behaviour.

Success in this task can depend on disclosure. Defence teams are able to be closely involved with the prosecution in large and complex fraud cases, due to the Attorney General’s Supplementary Guidelines in relation to the disclosure of digitally stored material and Lord Justice Gross’ review of disclosure. A sharp-eyed defence team may find something among the evidence not considered useful by the prosecution to further their argument that their client acted with the best of intentions and had a genuine interest in promoting a scheme he believed could bring decent returns for investors. The issue of land banking is relatively new to the UK courts; with the first convictions only arriving in December last year. It remains to be seen how many prosecutions arise. But the issue of disclosure could prove crucial.
At Rahman Ravelli, our experience of defending a wide variety of investment fraud cases has given us awareness that there is often a tier of people at the top of such a scheme and many more on a lower level. It can often be the case that those at the head of a scheme and the people working for them genuinely believe that they are promoting and carrying out a completely legal activity. If such people are ever prosecuted, any defence team has to be proactive and open to all means of proving that their clients acted in good faith. As we mentioned earlier, the crucial point to be established by a defence lawyer is that the people involved in the scheme did not act dishonestly. They may have exercised poor judgement, they may have suffered an unforeseeable misfortune or even been unable to run such a scheme effectively – but such shortcomings are not criminal.
As more land investment fraud cases come to court, the issues mentioned here are likely to be central to any trial. Land banking may be a recent fraud phenomenon but the questions it raises are the ones that have guided the prosecution and defence cases for years.

Azizur Rahman C 09369

Azizur Rahman

Senior Partner

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Aziz Rahman is Senior Partner at Rahman Ravelli and its founder. His ability to coordinate national, international and multi-agency defences has led to success in some of the most significant corporate crime cases of this century and top rankings in international legal guides. He is recognised worldwide as one of the most capable legal experts regarding top-level, high-value commercial and financial disputes.

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