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Four arrested over money laundering and large-scale fraud at HBOS

Blog post revised and retitled October 3rd, 2010

A fourth person has been arrested in relation to Thames Valley Police’s investigation into “corruption and large-scale fraud in connection with HBOS”. [Note: comments on this post have now been disabled and earlier comments from witnesses have been removed as a result of the police investigation "Operation Hornet". Ian Fraser, December 7th, 2010]

Officers from the force’s economic crime unit swooped on addresses in Berkshire, Warwickshire and Cheshire before 8am last Wednesday, September 29th, arresting three individuals on suspicion of corruption, conspiracy to defraud and money laundering. The individuals — ex-Bank of Scotland Corporate director of mid-market high-risk Lynden Scourfield, his wife Jacquie Scourfield, and ex-director of Remnant Media Tony Cartwright — have been bailed pending further inquiries. (Sunday Herald news article on the arrests).

A fourth suspect, 53-year-old ex-NatWest banker David Mills, founder of the now defunct Quayside Corporate Services, was arrested at Luton airport yesterday afternoon (Friday, October 1st). He has been bailed until February, pending further inquiries.

The four were arrested as part of “Operation Hornet”, a Thames Valley police investigation involving approximately 28 officers including some from the UK’s Serious Organised Crime Agency. The police probe commenced in earnest in June 2010 following a routine meeting with the Financial Services Authority.

I have been researching the BoS Reading saga since just after HBOS collapsed into the arms of Lloyds TSB and the UK government in September 2008.  It is the most egregious financial scandal I’ve come across in 20 years as a business and financial journalist. (What follows was written in September to November 2009, with minor edits).

The scandal started in 2002, the year after Bank of Scotland merged with former building society Halifax. Around that time Lynden Scourfield, Bank of Scotland Corporate’s director of mid-market high-risk for southern England, started to impose the services of Quayside Corporate Services, a London-based “turnaround consultancy” on customer firms.

Bizarrely Quayside, owned and managed by David Mills, had no history in turnaround, was not a member of any recognised professional institute and had only been set up in 2002, apparently by the bank. The fact that several Quayside consultants including Michael Bancroft and Tony Cartwright had a history of embezzlement and of the  misappropriation of company funds didn’t seem to bother either the Edinburgh-based bank or Scourfield.

Customer firms, seemingly cherry-picked from across HBOS’s southern English branch network, some of which had been trading successfully before Quayside’s involvement, were told their accounts were being transferred to Scourfield’s tutelage.

First, directors claim that they were more or less forced to use Quayside’s services. As soon as Quayside’s embezzlers were in place, the bank turned on the monetary taps, lending to the customer firms as if there was no tomorrow — irrespective of ability to repay.

The original directors and owner-managers who were sucked into the scandal insist they saw no benefit from Scourfield’s largesse. Quite the reverse. They claim that the additional borrowings and any profits were either squandered on inappropriate acquisitions or “siphoned out” by Quayside through extortionate “fees” and other disbursements removed from their accounts by the bank without authorization.

Quayside personnel, including the company’s founder and managing director David Mills and textiles consultant Michael Bancroft, used at least some of the proceeds to fund lavish lifestyles and to finance property-buying sprees around the world. Mills also allegedly used some of the cash to fund the purchase price and the running costs of a lavish 100-foot (30-metre) luxury yacht in the Mediterranean, the Powder Monkey.

Quayside-controlled companies were also encouraged by the bank to make sometimes inappropriate acquisitions funded by further borrowings from the Bank of Scotland –  in certain cases, such as Sharpe’s Leisure’s acquisition of Ohio-based rodmakers Thomas & Thomas, the funds never made it into the vendors’ pockets. (Note: Mills, who lives near Moreton-in-Marsh in Gloucestershire, is no relation of the jailed lawyer husband of UK cabinet minister Tessa Jowell, who was found guilty of taking bribes from the Italian prime minister Silvio Berlusconi.)

As Quayside allegedly siphoned out cash, prioritizing payments to itself over payments to critical suppliers, the companies concerned were fatally weakened. Meanwhile Scourfield — who a number of sources have claimed was receiving generous “inducements” from Quayside and Quayside-controlled companies — turned a blind eye. When the companies’ owner-managers complained to the bank, it claimed to have investigated the matter and that everything was above board.

In 2004-06 large portions of the equity in some the affected firms were transferred to the ownership of The Sandstone Organisation, allegedly a shadowy off-balance-sheet vehicle of HBOS’s, which appears to have been controlled by Mills via Devonshire Registrars (in 2007, according to documents filed at Companies House, Sandstone’s only directors were Mills and his wife Alison. The company secretary was Mills’s daughter Georgina Elizabeth Paffard Mills).

Directors of victimized firms tell me this often happened under duress. Several of the companies affected by the scandal, including Sharpe’s Leisure/Speyside Angling  Supplies, were serially phoenixed by Mills and his cohorts including failed entrepreneur Craig Treharne.

There is evidence to suggest that some of the BoS customers that came under Quayside’s control — which included BLG Holdings, Bradman Lake Group, Corporate Jet Services (parent of Club 328 and Euromanx), Fransen, Magenta Studios, Mezzanine Group (owner of Smollensky’s and Attica), Multi-Sourcing Group, Remnant Media, Seoul Nassau, Speyside Angling Supplies, Sharpe’s Leisure and Theros — were used as conduits for money-laundering on a massive scale whilst the businesses were under the consultancy’s control.

(Regulatory interlude: The FSA fined HBOS £1.25m after it discovered an “absence of effective systems and controls in respect of its record-keeping policies and procedures”, i.e. lax money laundering controls, in December 2003. The FSA’s Andrew Proctor said the failures were particularly serious as they undermined the bank’s ability to “comply with the requirements of orders served by law enforcement agencies under the Proceeds of Crime Act.” Also in late 2002, the FSA carried out a full risk-assessment across HBOS’s business, known as an Arrow assessment, and identified a need to “strengthen the control infrastructure within the group”. The regulator also commissioned a report from PWC on HBOS’s risk-management framework. At the request of the FSA, Dr Andrew Smith, HBOS’s head of group financial and operational risk, a former KPMG accountant, (now Dr Angela Smith) embarked on an internal review of corporate lending procedures and controls in 2004. This was a “risk mitigation plan” designed to reassure the bank’s board and the FSA that HBOS was tightening up its procedures and controls. Smith was meant to assess the degree of “independent challenge of credit approvals” in HBOS’s corporate arm  and establish whether its “atypical” processes were justifiable. Former head of group regulatory risk, Paul Moore, has told me that Smith’s findings, presented to HBOS’s board and audit committee in either June or October 2004, “may have been a whitewash”. Smith’s report should also have been passed to the FSA. But the FSA was, of course, “outsourcing” banking oversight to the banks’  risk management departments at the time which meant that it would have treated everything in Smith’s report as gospel.

Some time between March and October 2006, more than three years after the alleged fraud got underway, the bank’s line is that a senior executive, believed to be BoS Corporate’s impaired assets director Tom Angus, discovered that something was seriously awry in its high-risk department.

After Angus’s  “discovery” of activities potentially including corruption, large-scale fraud and money-laundering, it would appear that the bank decided the best solution was to seek to orchestrate a “cover up”. It  decided that the best way to achieve this was to “hive down” Scourfield’s circa £1 billion loan book.

This involved shutting down 50-75 customer firms (and it may have been as many as 200), irrespective of whether they merited continued support and regardless of the innocence or otherwise of the original directors and owner-managers who had been sucked into the scandal. Bank of Scotland executives Andrew Scott and Fraser Kelly then ruthlessly executed the “hiving down” plan from May 2007 onwards.

The process started with PWC  the ‘big four’ accountancy firm “investigating” the affected firms. Afterwards large numbers of HBOS’s corporate customers were forced into administration (with PWC handling two of the largest, Bradman Lake Group and Corporate Jet Services) in the ensuing months. If the companies legitimate owners/managers complained to the bank, or made higher offers than those administrators were inclined to accept to buy back their own businesses, they were stonewalled and told to just accept that their businesses were “collateral damage”.

What astonishes me most of all about this extraordinary saga is that the administrations — handled by insolvency practitioners with leading accountancy firms including PwC,  KPMG, Menzies Corporate Restructuring (MCR), Hurst Morrison Thomson and Vantis — is that many seem to have been expressly designed to enable directors and associates of Quayside (since subsumed into a new company, Core Enterprise Management) to take ownership of whatever remained of the victimized firms’ assets.

If counter bidders, including the companies’ rightful owners, made significantly higher offers for the remaining assets, these were spurned by administrators and the bank. Unsecured creditors — including suppliers, employees and the HMRC — got ‘shafted’.

This is all the more surprising since, for at least four years, HBOS and Lloyds have been insisting there was no scandal, no fraud, indeed that nothing untoward happened at BoS Reading apart other than a spot of  “over-generous”, “unauthorised” lending by a “rogue manager” who, the bank claims, was acting entirely autonomously.

Before victimized businesses were put into administration, it would appear that Quayside consultants stripped out some of their most valuable assets, transferring the ownership of these to a web of off-the-shelf companies, some linked to the Sandstone Organisation. Hours before the administrations occurred, Quayside executives also sought to cover their tracks by allegedly destroying corporate financial records — for example by scrubbing computer hard drives and even large-scale burning documents.

In the case of CJS, there is evidence to suggest that multi-million pound payments were made to subsidiary companies  days after the administration occurred. One wonders why Chubb and Jervis, administrators from PWC, allowed this.

One company subjected to similar treatment was the night-club operator Opera House Bournemouth, owned by Ultimate Pleasure. In this case, David Mills’ protege Marcello Alessi (who is also understood to have been arrested and bailed by Thames Valley Police), a Quayside consultant, with assistance from Menzies Corporate Restructuring (MCR) and Hurst Morrison Thomson (HMT), and and with the apparent blessing of Scourfield’s Bank of Scotland colleague Emma Marriott, is alleged to have expropriated the assets of the company’s owner and sole director Clive Collins using shell companies Oakenfold and Tomak.

Experts have speculated that the scandal may have stemmed from a legitimate policy decision made by BoS Corporate in about 2001-02.

In order to accelerate the growth of its corporate loan book and minimize provisions for bad debts, it seems the bank decided to restructure and collateralize (bundle) its impaired SME assets, albeit in somewhat unorthodox ways, before stepping up its lending to them.

One version of what happened next is that things  got out of hand, and that this was linked to the well-documented flaws in IFRS accounting, compounded by Basel II. At HBOS corporate, the situation was exacerbated by virtually non-existent internal controls, atypical approach to credit vetting, and a deeply flawed remuneration structure. Another theory, dismissed as far-fetched by some, is that board-level directors at the bank were actually behind the scandal.

Whoever knew what, it is probable that senior executives at BoS Corporate benefited financially from the bizarre goings-on at Bank of Scotland Reading branch, since their bonuses would have been linked to short-term profitability, which was clearly bolstered arrangement fees, loan volumes (irrespective of loan quality), and overall profitability of their division.

Other senior UK bankers have told me that, in their banks, it would be impossible for Scourfield to have lent up to £1 billion to Quayside-controlled entities without the bank’s board directors knowing about it.

The former head of distressed assets at  another UK bank told me that, at his institution, the main board directors would have seen “red warning lights flashing on their computer screens” if a corporate lending executive had persisted in lending scores of millions  to  firms:- (a) whose annual accounts were qualified by their auditors, or which had failed to file accounts (b) which were heavily loss-making and had little realistic prospect of a return to profit (i.e. which were, in sum, technically insolvent). All or some of the above criteria applied to every firm involved in the BoS Reading scandal within months of Quayside becoming involved.

An intriguing sub-plot is that, after their existing auditors failed to deliver clean audits, many of the Quayside controlled entities appointed Manchester Square-based Brett Adams as auditors. Bizarrely, Brett Adams shares an address with The Sandstone Organisation / Devonshire Registrars.

After the discovery of widespread torture and physical abuse by the US army at the Abu Ghraib prison in Iraq, the people ultimately responsible — the Pentagon and US government — eventually accepted accountability and the individuals responsible were jailed. However no-one at Lloyds Banking Group or HBOS has accepted responsibility for anything that occurred at BoS Corporate’s Beauclerc House branch in Reading and its London offices in Bishopsgate.

Directors of HBOS customers whose life’s work was snuffed out and snaffled as a result of the alleged fraud have on countless occasions since 2006 complained to the boards of HBOS and Lloyds Banking Group about this scandal. Yet they have repeatedly been given the brush off.

When directors of one affected firm made a formal written complaint to HBOS’s entire board in August and September 2007, they didn’t even get the courtesy of a response. Instead they received a letter from the law firm Denton Wilde Sapte, suggesting they should take their “allegations” to the police or their local fraud squad. When the directors did so, the Cambridge fraud squad told them it would only investigate the matter if HBOS sought an investigation itself. The bank declined to do so.

In the media, the bank has consistently claimed it has done nothing wrong. Here’s a quote  from HBOS’s former communications chief Shane O’Riordain:-

“We strongly believe that we have acted throughout in a fair and responsible way. Bank of Scotland deals in a sensitive and fair way with all of its corporate banking customers, including those experiencing difficulties. We stand by our customers and support them closely in managing their financial difficulties.”

And here’s a quote from by anonymous HBOS spokesman given to The Times on November 24, 2007.

“We are very confident that we have robust procedures in place around the appointment and continued engagement of consultants by our clients.”

In addition to these statements from the bank, we’ve had a public refusal to confirm or deny whether an investigation is underway from the FSA, a refusal to investigate from the Treasury Select Committee, a total lack of interest from Lloyds’ 43% owner UK Financial Investments and bizarre diversionary tactics from HM Treasury, the ultimate owners of the government’s stake. The police did not become involved in June 2010.

To add insult to injury, Lloyds Banking Group, which completed its takeover of HBOS in January 2009, has continued to victimise scores of customers who were financially crippled by the alleged fraud. The bank, led by chief executive Eric Daniels and executive director wholesale G Truett Tate, has continued to seek to repossess their homes or to hold them to (presumably invalid) personal guarantees. This is despite the fact that the victims’ inability to honour these commitments tends to be a direct result of HBOS and Quayside’s earlier interventions.

In the case of one couple, Paul and Nikki Turner of Cambridge-based music publishers Zenith, the bank has tried to evict them from their home and place of business, unsuccessfully, in at least 21 separate court hearings. Astonishingly a senior partner in the law firm Denton Wilde Sapte, Rory McAlpine, has seen fit to show up at many of these hearings, even though his client has no direct involvement.  In recent days, the bank has scrapped attempts to throw the Turners out their home having apparently decided that since it would be inappropriate for one victim to continue to victimize another.

After acquiring HBOS in January 2009, Lloyds’s chief executive Eric Daniels had an opportunity to draw a line under this appalling scandal and lance this particular boil. He could have admitted wrongdoing, declared that such behaviour would no longer be tolerated, compensated the victims and displayed some moral backbone. But Daniels did no such thing. Already in a deep hole, the “quiet American” just keep on digging.

Note 1: The UK authorities were persuaded to take the Bank of Scotland Reading scandal seriously after years of apparent disinterest and neglect in early June 2010. The Financial Services Authority was asked by a group of MPs in parliamernt to investigate the matter in June 2009 but didn’t get around to launching a Section 168 “enforcement action” for another 12 months. This played a part in prompting Thames Valley Police to launch their investigation.

Note 2: The UK authorities, including the SFO and FSA, have previously been reluctant to properly investigate the matter — and only agreed to do so following pressure from victims, MPs, myself, and other sources thought to have included Bank of England governor Mervyn King. The FSA did carry out a “light touch” investigation into the scandal in 2007 but after talking to one or two HBOS insiders, it concluded the bank had done nothing wrong!! The earlier investigation happened at a time of “regulatory capture”, when former HBOS chief executive Sir James Crosby was the FSA’s deputy chairman.

Note 3: Even though BBC Radio 4′s ‘File on 4′ did investigate aspects of the scandal in May 2009, the mainstream media in the UK has for the most part shied away from covering it. A number of national newspapers in the UK have come close to lifting exposing affair — but most except  the Sunday Herald have chickened out at the last minute.

Note 4: Bizarrely, some quite prominent business people saw fit to partake in aspects of the scam. For example, according to Companies House records, Robin Southwell, CEO of defense and aeronautics group EADS was, from November 2002 until it went bust in September 2007, a director of Corporate Jet Services, which owed BoS Corporate a reported £113m at the time of its collapse in September 2007. Southwell and his fellow CJS directors were directors of Quest Aviation Services, a specially-created “phoenix” vehicle which was permitted by administrators David Chubb and Michael Jervis of PwC to acquire most of CJS’s assets for an initial £7 in September 2007 — even though they were the very managers who had driven CJS into the ground. Southwell seems to be quite close to Mills. He was a director of Quayside Corporate Services from February 2008, after Mills bought it out of boutique investment bank Parkmead, and has been chairman of Mills’s Core Enterprise Management since October 2008.

  • Published as Banking’s Abu Ghraib, November 6th, 2009 and originally as ‘Re-examining HBOS’, September 4th, 2009.
  • To listen to a BBC Radio 4 ‘File on 4′ documentary broadcast on 26th May 2009 which covers aspects of the scandal, click here
  • To read a brief history of Halifax Bank of Scotland (“Was this the worst bank in the world”) click here

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Posted by on Oct 2 2010. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

11 Comments for “Four arrested over money laundering and large-scale fraud at HBOS”

  1. Thanks, Ian for staying with this scandal when others have put it on the back burner.

    My personal experience of the actions supposedly being taken by the FSA/SFO is somewhat worrying!

    Although James Paice MP, supported by Eric Pickles, Vince Cable and others, secured the debate in Westminster Hall the promise of FSA/SFO action is very much in question! I emailed a submission to those agencies some weeks ago — and other than receiving an immediate acknowledgement, have heard nothing else! There have been no requests for further evidence, of which they know we have much.

    Your readers might be interested in seeing just a little of this evidence, which confirms that Bank of Scotland was engaged in similar activity dating back to 1989/1990. This was in cahoots with BoS auditors Ernst & Young who also audited Nursing & Care Associates [so similar to the Scourfield links!]. This is currently being updated at: http://www.cbr.me/index.php?page=The-Baker-s-Dozen.

    What we know is that from about 1989/1990 BoS could see nothing wrong with having multi-layered conflicts of interest with its auditors and consultant/management company [this was certainly in breach of its banking licence on Isle of Man – and possibly also of its Bank of England licence].

    BoS advised my wife to use N&C, run by Peter Stanniland -– when the bank knew or should have known that N&C was trading while insolvent at the time. Who better to tell them than BoS/N&C auditors, E&Y? But E&Y wouldn’t tell BoS, or if they did BoS ignored them, as subsequently did the Royal Courts of Justice!!?

    N&C clung on despite all directors, except Stanniland, having resigned. It finally ceased trading in October 1992 but it was replaced by another Stanniland company, Petilda Ltd!! What became a fraudulent court appointed receivership [perhaps the other dozen were too?] lasted for some 13 years until there was nothing of the original £7m equity left!

    Should any of your readers know of the other dozen companies similarly ‘eaten alive’ by this grouping, then they are invited to contact us via http://www.CBR.me to discuss a possible class action against the parties named here.

    Our immense sadness is that, although the files had the personal attention of Alistair Darling and Jack Straw, to name but two -– nothing has actually been done! Had proper action been taken against BoS in the 1990s then the HBoS Reading casualties would not have been created, or should not have been!!

    Thanks again,
    Alan Edwards
    [also: cbrhq@hotmail.com].

  2. Great piece, Ian. Thank you for your valuable and articulate expression of what is really going on within our financial markets — I wish there were more people like you, more journalists with vision and their ‘eyes on the ball’. You are a shining light and example of what the rest of the media could be, if only they weren’t ‘got at’ by corrupt politicians and banksters.

    Banking has become a black hole of corruption, particularly since derivatives trading was legalised again in 1999 — what a mess this deception that has created for innocent people. Bankers have been engaging in the worst possible type of financial mugging, as you and millions like you and I have seen.

    But the government’s eyes are “wide shut” to it all, and they’re too afraid to confront the stark reality that many of us are having to contend with. Why has James Crosby’s apparent involvement with the Vavasseur Fraud escaped justice – to the detriment and cost of hundreds of us, scores of who have lost their homes?

    At last, I feel the energies are finally starting to shift, and it won’t be long before the balance is tipped and the positions of unprincipled plutocrats are reversed.

  3. I’d like to add that it was Halifax Bank of Scotland’s close relationship the FSA that enabled Vavasseur victims’ moneys to be stolen — in broad daylight — by sleight of hand and abuse of power dressed up as alleged “regulation”. The people responsible should be made to pay personally and jailed.

    The FSA effectively seized $250,000 belonging to Vavasseur creditors, which was money that was held in ‘trust’ by the banking system through various offshore accounts that HBOS had been conveniently accessing via hedge funds. They used this money to play their games with (to coin Shin Gangar’s phraseology) or in banking terms to issue derivatives and corporate bonds … hence their voracious appetite for the loans that they issued against people’s family homes, in the knowledge these loans would cause their “clients” to lose their houses.

    It seems that Bank of Scotland conspired to defraud hundreds of house-owners of their homes within the carefully-crafted deceptions of the Vavasseur fraud. Sir James Crosby even got St James Place employees to set up private IBC’s posing as “mortgage advisory companies”, in order to harvest people’s assets.

    Yet the monies “loaned” were fiat money, backed merely by faith, tying the subjects to the Bank of Scotland with their fate sealed…

    BRING BACK THE MAGNA CARTA! No man can be deprived of his home, under the Rules of the Magna Carta, let’s get back to basics shall we?

    It’s high time that we named and shamed the banks that were the most responsible for inflating the torrid credit bubble which is now swallowing up the assets of the common man.

  4. Where was and is the outrage over this? Here we seem to have a bona fide and clear cut case of massive and malicious fraud and nothing. People were wanting to hang Fred Goodwin from the lamp post for at worst being incompetent.

  5. [...] in the past few weeks, in response to Thames Valley Police’s current investigation into the “BoS Reading fraud“, the bank has changed its tune. It appears to have acknowledged that a fraud did occur and that, [...]

  6. [...] Four arrested over money laundering and large-scale fraud at HBOS Ian Fraser (hat tip Richard Smith) [...]

  7. [...] the bizarre contortions the bank has got itself into over the alleged £1bn plus Bank of Scotland Corporate fraud — something I’ve been following off and on since September [...]

  8. [...] surprise me.Take the bizarre contortions the bank has got itself into over the alleged £1bn plus Bank of Scotland Corporate fraud — something I’ve been following off and on since September 2008.Since last summer, the [...]

  9. [...] police force investigating the alleged £1 billion fraud at the former Reading operation of HBOS has no plans to probe the possible role of former senior [...]

  10. [...] fraud investigation for a long time. See this earlier NC post. The police force investigating the alleged £1 billion fraud at the former Reading operation of HBOS has no plans to probe the possible role of former senior [...]

  11. christina.sutherland0911@gmail.com

    I have never written on a blog before, but my family was very badly affected by the disgusting behaviour of the management at HBOS. I wonder, in the light of the new scandal at RBS, would it be worth bringing this story back into the public arena..

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