Ian Fraser: Corruption allegations, major fraud inquiries, links to pornographic magazines … and a luxury yacht. Welcome to the world of banking

By Ian Fraser, a financial journalist who blogs at his web site and at qfinance. His Twitter is @ian_fraser.

Yves here: this is a more detailed and complete version of an article published in the Sunday Herald on July 22nd, 2012.  Six months on, the police are still “poised to press charges”. They must be wanting to get on with it: where’s the hitch? More background on the grindingly slow HBOS fraud investigation here and on the HBOS fiasco in general here.

Police are poised to press charges against several HBOS bankers and consultants after a two-year investigation into large-scale fraud, money laundering and corruption involving the Edinburgh-based bank.

Thames Valley Police has already handed evidence to the Crown Prosecution Service. The papers have since been reviewed by the director of public prosecutions, Keir Starmer and Attorney General Dominic Grieve. The Sunday Herald has learned that the charges – expected to include corruption and money laundering – are due to be pressed within weeks.

The probe, code-named “Operation Hornet“, is described by one of the police officers involved as “the largest fraud investigation of its type in the UK”. Under way since June 2010, it has been led by Thames Valley Police and the Serious Organised Crime Agency.

An initial nine suspects, including two HBOS bankers, were arrested and put on police bail between September and December 2010. The former HBOS senior executive Lynden Scourfield and his wife, Jacqueline were among those detained.

Others arrested included David Mills (pictured left), a former NatWest banker who co-founded “turnaround” specialist Quayside Corporate Services in 2002, and other former Quayside consultants including Mills’s wife Alison, Michael Bancroft, Tony Cartwright and Marcello Alessi. Quayside, which was wound up in March 2010, was never a member of any professional institute and was not even contracted to the bank. None of the suspects have yet been charged.

The alleged crimes occurred mainly between 2002 and 2006, when Sir James Crosby was chief executive and Lord Stevenson was chairman of the Edinburgh-based HBOS, which has been owned by Lloyds Banking Group since its September 2008 near demise. At the time, a common business practice involved Bank of Scotland Corporate, sometimes arbitrarily, transferring business customers’ accounts to its “high-risk” division, overseen by Lynden Scourfield.

Based in BoS Corporate’s Reading office, Scourfield is said to have forced between 50 and 200 customer firms who were referred his way to appoint Quayside consultants as directors with full fiduciary powers on their boards. Many of the directors of affected firms say he threatened to “shut down” their businesses unless they complied.

Some of the consultants that HBOS imposed on its mid-corporate customers had colourful histories. In 1991, two Quayside consultants – Tony Cartwright and Michael Bancroft – misappropriated some £1.5 million from Ritz Design Group, a listed supplier to Marks & Spencer at which they were finance director and chairman respectively. The matter was investigated by accountants Deloitte, but it is understood they repaid the funds, and the pair were not prosecuted.

Within months of Quayside taking control of the firms, Scourfield and BoS Corporate provided generous additional facilities and loans, even though some of the firms were near technical insolvency. At textiles group Magenta Studios, it is claimed that Quayside prepared a phoney business plan with a view to persuading Scourfield’s superiors at Bank of Scotlnd Corporate that additional lending was appropriate. Quayside consultants put several of the companies concerned at risk for example by delaying critical payments to suppliers while prioritizing payments to themselves.

Overall, BoS loaned an estimated £1bn plus to Quayside-controlled firms. A significant portion of the additional funding was squandered on inappropriate acquisitions or removed in fees and disbursements to Quayside and its consultants. Ownership of some of the Quayside-linked firms’ prized assets – including most of the top-shelf titles of pornographic magazine empire Remnant Media, publisher of Asian Babes – were transferred to off-the-shelf companies linked to Mills and his Quayside colleagues.

Mills spent some of the £113m that was loaned by BoS to executive aviation group Corporate Jet Services, where he was chairman, on the Powder Monkey, a 100ft luxury yacht with a full-time crew of five. The yacht (pictured right) was kept in the south of France and was meant to be for marketing the aviation group, but sources suggest it was predominantly used by Mills, his family and friends. The yacht is currently for sale through Sunseeker London for €2.35m (£1.83m).

People who have been interviewed by Thames Valley Police are said to include a London-based madam and a number of prostitutes who sources claim were hired by Quayside-controlled businesses to “entertain” BoS’s Scourfield. The bill was picked up by BoS-funded porn empire Remnant Media and labelled as “corporate entertainment”.

In many cases, the affected companies’ total borrowings from HBOS increased tenfold within a couple of years of Mills and Quayside becoming involved, with many having their credit lines increased from £3m to £4m to between £30m and £40m by the time of their 2007 collapses.

Other companies allegedly destabilised, maltreated, or asset-stripped by Quayside included the Bristol-based packaging group Bradman Lake, ecological nappy firm Cotton Bottoms, textile business Multi-Sourcing Group, nightclub and restaurant groups Mezzanine Group, sporting goods manufacturer Seoul Nassau and fishing tackle specialist, Speyside Angling Supplies.

In about September 2006, insiders report that Bank of Scotland Corporate’s head of distressed assets Tom Angus “discovered” serious irregularities and “control failures” in the high-risk division. But instead of informing the police, the bank instructed executives Fraser Kelly and Andrew Scott to “hive down” Scourfield’s circa £1 billion loan book.

The bank used leading accountancy firms including KPMG, PWC, Hurst Morrison Thomson and Menzies Corporate Restructuring (now Duff & Phelps) to close down the firms. Days before one of the firms was put into administration, emails suggest that Quayside executives transferred thousands of pounds in cash into their personal bank accounts and, in at least two cases, they destroyed financial records.

In March, KPMG revealed Mills was the biggest individual creditor of collapsed investment firm MF Global, where he had parked £3.65m. From October 2006 to November 2007 Quayside was owned by Parkmead, a boutique investment bank that counted former energy minister Brian Wilson among its directors.

Many legitimate owner/managers of affected firms have lost everything as a result of the alleged wrongdoing. The bank has sought to evict Paul and Nikki Turner, directors of Cambridgeshire-based music business Zenith Cafe, from their home in 22 separate court hearings. The couple argue their financial difficulties are entirely due to egregious wrongdoing by BoS and Quayside. In a bizarre twist, HBOS created a fake bank account in the name of Zenith Cafe Ltd, from which it debited £372,000 of legal costs relating to its failed attempts to repossess the Turners’ home.

Nikki Turner said: “Lloyds Banking Group has always been 100% aware of how bad the HBOS Reading situation was, was – particularly as they have read and agreed to the publishing of the six redacted paragraphs in the ‘Final Notice Public Censure of the BoS’ on 9th March 2012 which specifically relate to HBOS Reading. But the bank continues to be firmly in denial about the severity of this.

“I wonder which part of the Financial Services Authority’s (FSA) principles for business the Lloyds chief executive Antonio Horta-Osorio thinks entitles him to refuse to correspond any further or deal responsibly and fairly with Reading and other matters.”

One director who lost his business as a result of the scandal said: “If these guys are not charged in 2012, we’re going to go nuclear. There a lots of very important people waiting for justice here”

Another director of a victimised company alleged: “The FSA’s main agenda has been to try and cover this thing up, since it exposes the catastrophic failures in its own approach to regulating the banking sector. They fined Barclays £60m over Libor – what have they done about this? Sweet FSA.”

Thames Valley Police spokesman Chris Kearney said: “The nine suspects remain on police bail. They are due to answer their bail in late September. A decision will be taken at that time whether to rebail them, charge them, or release them without further incident.”

A spokesman for Lloyds Banking Group said: “We cannot comment on the detail of this investigation by Thames Valley Police. Bank of Scotland itself is not the subject of the investigation. We have been assisting the police with their investigation.”

An edited version of this article was published in the Sunday Herald on July 22nd, 2012