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Not so white knights strip companies bare. By Dawn Smith

14th Feb 2006
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Fraudsters disguised as white knights are preying on companies in financial trouble, warns Grant Thornton.

The firm's Recovery & Reorganisation department has noted an increasing trend for fraudsters to buy controlling stakes in companies, then strip them of their most valuable assets or run up a mountain of credit, then disappear with a tidy profit.

"The scam, which is growing in popularity, is a fraudsters' dream, as it rarely gets adequately pursued", says Nick Wood, a Recovery & Reorganisation partner at Grant Thornton.

"Once a company is stripped bare of its assets there are no assets remaining to allow an insolvency practitioner to investigate and pursue the fraudsters. In essence, creditors are usually reluctant to fund insolvency practitioners in an investigation to avoid throwing good money after bad, leaving the Insolvency Service to deal with the matter", he continued.

"One recent case saw a single fraudster play the scam on 94 companies before finally being sentenced to 4 years in prison and being disqualified as a director for 15 years".

Former directors who may have sold a business to fraudsters in good faith may also be at risk, he warns. If the original directors are not changed on the Companies House register, they would remain legally responsible for that company's conduct, and may be left to carry the can for the activities of fraudsters.

It's often hard to catch up with the less-than-white knights, because they may hide their assets in offshore trusts, put them in the name of nominee companies and associates or transfer them to jurisdictions where it is very difficult to recover these funds.

"Many of the traditional offshore havens are starting to assist in the investigation, tracing and recovery of assets which are the fruits of fraud," says Wood. "However, the fraudsters are often one step ahead and inevitably identify new opportunities and jurisdictions which are more accommodating to their activities.'

Companies should therefore try to catch the fraudsters before they disappear. Two services from Companies House can help in this, says Wood: the Monitor service, which notifies companies by email of any documents filed in relation to that company; and the secure Web Filing service, which ensures an authentication code is used to make any changes to that companies' registered office and director listings.

"By keeping a close eye on any statutory changes which have to go through Companies House, company directors can avoid fraudsters changing the identity of that company and engaging in a range of fraudulent activities such as opening credit accounts with suppliers and ordering goods that are not paid for; opening new bank accounts which can be used to launder money or obtaining loans and potentially emptying existing company bank accounts," concludes Wood.


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Richard Murphy
By Richard Murphy
16th Feb 2006 14:36

No doubt Grant Thornton seek to avoid this type of person, but they are big players in the offshore market.

Will they withdraw from it, knowing it is so often used for the purposes of abuse, as is the case here? If they did their comments would have bite. If not, it's hard to see them as credible comment.

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By Accounting WEB
17th Feb 2006 12:03

There are other risks ... ...
The perpetrators of this type of thing may use the firms' bank accounts for Money Laundering and similar purposes.

While great attention has been given during the last few years to establishing the bona fides of those establishing bank accounts there is a loophole in some banks' systems on change of ownership.

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