Complex fraud scheme

Law enforcement eyes are on at least another former executive of Stocks & Securities Limited (SSL) over the billion-dollar fraud which impacted several clients including sports legend Usain Bolt. Yet others are reportedly on the radar of investigators.

The situation has also thrust into the spotlight, the oversight of the Financial Services Commission (FSC) of a securities industry that earned a “medium” risk ranking for money laundering in the 2021 National Risk Assessment Report.

It said a medium ranking means that while there is a “robust” anti-money laundering framework in the sector, “there are, however, some deficiencies in staffing at the competent authority and in terms of the compliance frameworks for smaller securities firms”.

Three days after news emerged that more than US$10 million was missing from the accounts of more than 20 high-value clients, investigators are yet to give any further information as they try to untangle the fraud and ascertain the total sums involved.

A wealth advisor who was fired last week is yet to be questioned in the matter being investigated by the police fraud squad, the Financial Investigations Division and the FSC.

“The investigation is still active,” were the only words from the police unit yesterday which declined to confirm whether any other current or former employee was linked to the “sophisticated” operation.

A former senior official was reportedly questioned by private investigators but “strongly” denied any involvement in the scheme that went on for more than a year.

An investigator said the complexity of the scheme included the bypassing of controls through forgery, manipulation of SSL’s IT systems and email addresses, and interception of disbursements for accounts in commercial banks.

“A single individual could not have done this. The skill set and knowledge required were immense,” the official, who was not authorised to speak, told The Sunday Gleaner.

The former employee was under investigation since August 2022. The woman was reportedly sent on leave in September over the discovery of “non-cash” discrepancies linked to information sent to clients.

A failure to satisfactorily explain the issue resulted in the initiation of disciplinary proceedings that dragged out until early January.

Attempts at an amicable settlement covered by a non-disclosure agreement for both sides were dashed after the discovery over two weeks ago of the millions of dollars missing from accounts belonging to clients managed by the advisor.

‘ENHANCED OVERSIGHT’

Bolt reportedly did not appear on an early list until the woman reportedly called the 100m world record holder’s management on January 11 and “confessed”.

Bolt had been receiving statements from SSL that indicated that all was well with his portfolio, his manager Nugent Walker told The Gleaner last Thursday.

Bolt has been with the company for more than 10 years and his entire portfolio is being reviewed, he said.

Bolt’s portfolio, which is linked to a holding company, has reportedly been defrauded of approximately US$6 million in stocks and bonds, while other clients lost a total of approximately US$4 million, preliminary estimates indicate.

An additional J$40 million in stocks and bonds was also reportedly misappropriated.

In February 2016, now Prime Minister Andrew Holness said he used money from accounts at SSL and Jamaica Money Market Brokers to finance the purchase of a property in Beverly Hills, St Andrew on which his house is now built. 

It's not clear whether Holness still has accounts at SSL, and if so, whether he's among the clients affected by the fraud. Holness' declaration of income and assets for 2020, the latest available, shows him with securities worth with $16.4 million. 

SSL’s chairman Jeffrey Cobham, who carried the duties of group chief executive officer after Zachary Harding left the job last June, did not confirm when the company learnt of the fraud, but said a statement was obtained from the employee on January 7.

That date is consistent with Sunday Gleaner’s understanding that the woman was questioned on January 6 and 7 by SSL’s private investigators and lawyers. A letter was sent to the FSC, which regulates non-deposit taking institutions, on January 10.

The FSC issued directions on January 12, essentially taking over the operations of the 50-year-old entity under what it called “enhanced oversight”.

“This enhanced oversight reflects the need for the FSC to have a full view of the integrity of the transactions being conducted, including the movement of funds, and of securities into and out of SSL,” the regulator said.

‘Securities’ refers to tradable financial instruments used to raise capital in public and private markets.

The regulator said SSL can still conduct business on behalf of its clients but with its oversight and approval.

‘UNSAFE AND UNSOUND’

The SSL is not unfamiliar with the FSC having to intervene in its operations.

In October 2013, the regulator announced it had curtailed the activities of SSL after the FSC-approved disposal of SSL’s repo business to JN Fund Managers (JNFM) that July.

The FSC said then that it was seeking to protect “a small number of select sophisticated investors who hold bonds issued by SSL”, the portfolios which remained after the transfer of most of SSL’s clientele to JNFM.

In March 2020, the FSC blocked SSL from accepting some new funds from customers, the Jamaica Observer reported. It said that move followed the FSC’s sanctioning of SSL over what it deemed were “unsafe and unsound” practices.

Harding, the company’s then boss, said corrective actions were being taken. “SSL is in safe hands and we have nothing to hide,” he told the Observer.

“It is no secret that there were challenges in the recent past. My role now, as group CEO, is to fix them and ensure we have a stable thriving business,” he added.

Harding took over as CEO of SSL Group in October 2019 after his own company, Hyperion Equity Inc, acquired a stake in SSL Group.

He led a restructuring which included offloading of the real estate arm SSL REIT Limited to Kingston Wharves Limited, and before that the sale of microfinance company Dolla Financial Services Limited to First Rock Capital Holdings.

He also sold SSL Ventures, a failed rebranded version of SSL Venture Capital Limited (SSLVC), which was acquired by MFS Acquisition Limited, an entity formed in 2022 by shareholders of microlender and cambio Micro-Finance Solutions Limited.

SSLVC first came to the stock market in 2012 as a music publishing start-up called C2W Music Limited, a business that ultimately failed, racking up losses amounting to US$1.5 million up to December 2017, based on audited statements.

The auditors, Baker Tilly Strachan Lafayette, said since inception the company never achieved the level of projected revenues required “to sustain operations”.

In 2018, SSL, which had brokered C2W’s listing, took over the loss-making operation, revised its business model and relisted it as SSL Ventures. But that effort also failed.

There are questions about the IPO’s take-up and SSL’s investment in the company that sought $129 million.

COMPANY FOUNDED IN 1973

Cobham, along with executive director Hugh Croskery, heads the current SSL leadership team. Croskery founded the company in 1973.

Cobham directed Sunday Gleaner questions on the integrity of the company’s operations and its internal controls, among others, to the FSC, citing the “enhanced oversight” now in effect.

Responses have been sought from the FSC about its own oversight, and concerns it may have had surrounding SSL before last week’s development. Former Financial Secretary Everton McFarlane is the executive director of the FSC, whose chairman is John Robinson, a former deputy governor at the Bank of Jamaica.

Harding resigned from the SSL Group in June 2022 to focus on Delta Capital Partners Limited, which was formed out of a partnership between him and Croskery. Delta is a subsidiary of St Lucia-registered Delta Capital Holdings Limited.

Croskery’s son Mark led SSL from May 2007 to March 2018, according to a report that 20/20 Global, Inc filed with the United States Securities and Exchange Commission in December 2020.

The report, which noted that Mark was to be appointed a director, said he led the sale of SSL’s repurchase agreement book of business in November 2013, totalling in excess of J$2 billion in assets and liabilities.

After Mark shed his executive responsibilities at SSL and its affiliates, he founded Croskery Capital Limited in September 2019, a boutique financial consulting company in Jamaica offering financial consulting and related services.

CONCERNS IN THE GENERAL SECURITIES INDUSTRY

SSL’s financial difficulties and questions about its internal controls in light of the recent report of fraud come amid broad concerns in the general securities industry and vulnerabilities to money laundering.

Jamaica’s 2021 national risk assessment for anti-money laundering and counterterrorist financing (AML/CFT) flagged a number of concerns, including oversight deficits at the FSC up to 2019.

The report noted that despite the creation of a specialist AML/CFT department in 2018, and the adoption of a risk-based supervisory framework, the number of on-site examinations being conducted by the FSC was assessed as low.

This was attributed to staffing concerns, as the AML/CFT department was staffed with only four officers and conducts examinations for both the securities sector and the life insurance sector, the report noted.

Troubling findings of a 2017 evaluation of the sector using a global framework were also noted.

Among them was the underreporting and defensive reporting of suspicious transaction reports, given the asset size of Jamaica’s securities sector.

“Filings were sometimes influenced by their intermediary relationship with banks as well as the existence of overlap in filing (where persons with multiple licences file as one entity and not separately based on activity),” the report noted.

The report pointed to the then inability of the FSC’s licensing regime in identifying the ultimate beneficial owner(s) of securities companies, owing partly to the absence of this requirement in the Securities Act.

Jamaica changed its laws in 2021 to address difficulties in identifying beneficial owners.

The asset base for the securities dealers sector totalled J$650.6 billion, while the Funds Under Management portfolio for the then 39 licensees in the market totalled J$1.9 trillion up to December 2019, according to the assessment that was spearheaded by the Bank of Jamaica, FSC and the Financial Investigations Division.

Up to December 2019, the FSC categorised 28 of the 36 securities dealers it regulated, as having either low or moderate risk profiles.

The 28 entities accounted for 85 per cent of the market. One entity was ranked as high risk. Seven were in the ‘above average’ category.

The risk profiles served as a guide to the frequency of FSC on-site examinations; low risk – five years; moderate – four years; above average – three years and high risk – one year.

Throughout the 2016 to 2019 review period, the FSC conducted 93 off-site examinations and 15 on-site examinations, the report noted. Over that similar period, there were 133 suspicious transactions reports filed by securities dealers.

“The level of reporting by securities firms was low, relative to the DTI (deposit-taking institutions) sector. This observation is corroborated by FSC’s examination findings which identified weak systems for the detection, monitoring and reporting of suspicious transactions,” the reported concluded.

jovan.johnson@gleanerjm.com

Some failures in 2021 national risk assessment for securities sector:

1. Inadequate or improper risk classification of high-risk customers.

2. Inadequate record-keeping practices.

3. Weak transaction monitoring practices.

4. Failure to appoint a competent nominated officer at a senior management level who reports directly to the board.