Using limited liability companies as vehicles to commit fraud on the public is relatively recent in Belize and may have occurred only within the last two decades or so. In countries like the United Kingdom though, fraudulent use of limited companies has been an all too common feature in practice. The devious methods employed by fraudsters have in instances pushed a reluctant UK court to lift “the veil of incorporation,” (remove the distinction between a company and its members) to prevent fraudsters from getting away with their crimes.
Belize has started out late in the world of fraud (perhaps owing to the fact that independence was only in 1981), but if all is as it appears, we have started out with a bang. The revelations of the Senate hearings into the Social Security Board and the DFC Commission of Inquiry have left a stunned public “mind boggled” by the enormity of the mishandling of hundreds of millions of dollars, and at a loss as to what the next step should be.
But while Belize has not travelled this path before, others have. Why not then learn from the best of all teachers, the country who invented “limited liability fraud,” “those good old Englishmen.”
A BIT OF HISTORY
The history of limited liability companies as vehicles of fraud goes back in the United Kingdom as far as the origins of the eighteenth century concept of companies. Recognized as separate legal entities or artificial persons, unscrupulous persons (then as now) have used these vehicles of business as a means of divesting an ignorant and unaware public of huge sums of money.
The entire eighteenth century saw massive frauds in the UK. Perhaps of particular relevance or interest to us in Belize, as it involved no less than politicians, is the “South Sea Bubble.” This venture involved UK royalty and ministers of the Crown (including the Lord Chancellor). This monumental fraud was built around “securing a very large part of the national debt on the illusory fortunes of the South Sea Company,” a limited liability company specially formed to trade on the lucrative shores of South America and the South Sea Islands. The enormity of the fraud prompted a public outcry and led the UK government eventually to introduce measures of control.
However, despite a spate of legislation for the protection of investors and the public since, fraud continues with a vengeance in the UK, as well as elsewhere. One has only to look at recent happenings in the UK and US to confirm this. In the past few years, we have seen a number of classic cases of fraud, including Maxwell House, Polly Peck, Tyco International, Peregrine Systems, Worldcom, and Enron.
Enron is undoubtedly the most highly publicized case of all. Employees alone lost an estimated 800 million dollars in pension benefits owing to fraudulent falsification of accounts. Jail time since has been meted out to the main participants in this scam, but this does little to lessen the dismal future most older employees face who lost all their pensions.
Incidentally, the scam took place under the very noses of Arthur Andersen, which was ranked among the largest and most reputable international auditing firms then, and the “all powerful” US Securities and Exchange Commission (SEC), the body charged with regulating companies on the stock exchange. In the fallout from the case, Arthur Andersen went out of business, and as for those “highly qualified” Harvard business graduates employed by Enron, well, they are somewhere out there looking for the next sucker to show up.
LEGISLATIVE RESPONSE OF GOVERNMENTS
In the meantime, the US Government has responded to the Enron and other recent fraud cases with stiff legislation in the form of the Sarbanes-Oxley Act of 2002. This Act, among other things, increased criminal and civil penalties for breaches of securities law, extended maximum jail sentences and imposed significantly larger fines on corporate executives who knowingly and wilfully misstate financial statements.
A prompt legislative response to fraud has been the practice of responsible governments, and the public in the US and UK has demanded no less. As far back as 1958, for example, the UK Government in response to public pressure introduced “The Prevention of Fraud (Investment) Act,” which prescribed severe penalties for wilful deceit and criminal “recklessness,” not involving fraud. In other words, under the provisions of that Act, one’s recklessness could be determined as criminal depending on the circumstances of the case. Sounds like something we can use, doesn’t it?
THE BELIZE SITUATION
In fact, the entire area of our Company Law (Ch 250, of the Laws of Belize) can do with major revision. We have lagged seriously behind the modern world, perhaps all too willingly. Our extant Company Law, which is patterned on the UK’s original model ordinance for colonies, is much like the UK Companies Act of almost a century ago. And while our brilliant legal minds see no objection to a Companies Act that hardly considers the present needs and times, the reality is, this is the Act on which we must rely to regulate and keep companies and their, too oftentimes crooked, directors in check. Hopefully, it does not prove to be the proverbial “basket to carry water.”
THE NEXT STEP
So what is the next step following the Senate SSB hearings and DFC Inquiry? Logic dictates that the country requires an investigation of the companies that were the beneficiaries of the millions of dollars in loans. Those are the companies on whose behalf either the public purse or our institutions must now bear the burden of repayment. Not to investigate these companies is tantamount to ignoring in a major bank heist the getaway vehicle and the destination of the loot.
Any Government that would wish not to appear in complicity with what has taken place would be obliged to use whatever means (including legislative) within its power to confirm the final destination of the DFC loan proceeds. In particular, how did the recipient private companies disburse the funds? For all the public knows, unscrupulous directors in one or more of the companies could have placed most of the funds loaned in some personal account. Did directors disburse funds in a manner consistent with their statutory and other duties? More specifically, did the directors behave in the best interest of the companies they managed, or did they wilfully or through their negligence allow the companies to suffer losses by subtle theft of cash and other assets of the companies? The answers to these questions are of critical importance.
COMPANIES ACT
In terms of the investigation of the affairs of a company, the Companies Act places all authority in the hands of the court. Under section 110, the court may appoint inspector(s) to investigate the affairs of any company in response to “an application of members holding no less than one-tenth of shares issued.”
This section was applied two years or so ago to allow for the investigation of Prosser’s period of control of BTL. Such a scenario as occurred at BTL, however, is unlikely, as it is doubtful that members of a private company (BTL is a “public” limited liability company) would apply to have their company investigated. This then, for all practical purposes, eliminates section 110, the only clear-cut section under which an investigation may be carried out.
The other relevant sections of the Companies Act are the sections relating to winding-up. Under the provisions of the Act, the court may wind-up a company and as a consequence of this, the receiver appointed may request through the Court an investigation if the receiver is of the opinion a fraud has been committed in the promotion or formation of the company. This, however, hinges on the action of the receiver and at any rate would not be applicable in the present situation, bearing in mind that there is no justification for the court to order a winding-up of a company if the debts of that company are guaranteed, or better still, publicly guaranteed.
LEGISLATIVE ENACTMENTS
So where does that leave the public in terms of an investigation? Well, there are always legislative enactments. The Government has shown a willingness to pass enactments within a few days where it is a matter of public interest. In particular, attention is drawn to the Public Utilities Commission (Amendment) Act, 2005 relating to Belize Telecommunications Limited, the introduction to the bill of which interestingly reads:
“… to address the matter of any entrenched rights in the constitution of a public utility provider which may be detrimental to public interest; to provide for the appointment of an inspector by the Minister to investigate the affairs of a public utility provider; and to provide for matters connected therewith or incidental thereto.”
Now several hundred million dollars outstanding to DFC, is a matter of public interest and, like the Belize Telecommunications Limited case, warrant the appointment of inspector(s) to carry out an investigation of the debtor companies. So Honourable Government, let us investigate these private debtor companies. And while so engaged in that investigation, Honourable Government, why not make public some details of the Government guarantees? Answer a few questions for us:
How many companies out there are publicly guaranteed? Which Government Departments maintain records of those guarantees? In the absence of a policy, what requirements did those private companies have to meet to have their debts guaranteed by the Government? Which Minister(s) initiated and committed the Belizean public or Government in respect to those guarantees? When did ratification of each commitment take place? Did any Minister dissent at those times? Who were those Ministers, and what were the grounds for their dissent?
The “paying public” wants to know. We all wish to know, Honourable Government, to what extent we have been suckered and by whom?
South Sea Bubble
South Sea Bubble, plan originated by the English statesman Robert Harley, 1st earl of Oxford, in 1711, for the retirement of the floating national debt of Great Britain. Under the plan, the debt was assumed by merchants to whom the government guaranteed for a certain period annual payments equal to $3 million. This sum, amounting to 6 percent interest, was to be obtained from duties on imports. The monopoly British trade in the South Seas and South America was given to these merchants, incorporated as the South Sea Company, and extravagant ideas of the riches of South America were fostered. In the spring of 1720 the company offered to assume practically the whole national debt, at that time equal to more than $150 million. Companies of all kinds were floated to take advantage of the public interest in obtaining South Sea Company stock. Speculation soon carried stock to ten times its nominal value. The chairman and some directors sold out, the bubble burst, and the stock collapsed. Thousands of stockholders were ruined. Parliamentary investigation revealed complicity by some company officials. Two members in the royal court of George I were also implicated in the scandal. However, a political crisis was averted through the efforts of Sir Robert Walpole, 1st earl of Orford, who at that time was serving as the chancellor of the Exchequer. About one-third of the original capital was recovered for the stockholders.
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