Board’s role ‘off limits’ in police probe of alleged £1bn HBOS fraud

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

Richard here: Ian’s been covering the shortcomings of the HBOS 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 executives and board directors in the scandal.

Thames Valley Police, working in conjunction with the Serious Organised Crime Agency, has confirmed in a series of emails seen by the Sunday Herald that the Operation Hornet investigation will not cast the net all the way up to the top of the bank. This is despite allegations as to the extreme irregularities concerning the lending of large sums of money.

The allegations concern money-laundering, corruption and fraud activities between 2002 and 2007 involving Reading-based bank executives and consultants from a corporate turnaround specialist called Quayside Corporate Services. There have been seven arrests over the past year, including Lynden Scourfield, a Bank of Scotland Corporate director who was responsible for a circa £1 billion loan book. Scourfield is understood to have been fired by the bank in April 2007 after a period on sick leave.

Whistleblower Paul Moore, who was ousted as group head of regulatory risk at HBOS in 2005 after he sought to alert its board to self-destructive behaviour in its retail sales arm — plus many of the owners of the 50-plus companies that got sucked into the fraud and were put into administration as part of an alleged cover-up — believe that board-level directors at HBOS including former chairman Lord Stevenson, former chief executive Andy Hornby and former head of corporate Peter Cummings ought to be investigated.

They claim that senior executives at the firm failed to notify the whole HBOS board and the Financial Services Authority (FSA) about the criminal nature of the activities. Senior sources from the impaired assets divisions of other leading banks claim that at their organisations, it would be inconceivable for large numbers of loans worth many millions of pounds to be extended to companies with debt problems without board-level executives being aware.

Moore said: “There are inferences from the evidence of the involvement of senior executives and board members either in the fraud itself or in a conspiracy to pervert the course of justice – in other words in a cover up.”

HBOS senior managers have always denied any knowledge of wrongdoing.

In emails between Moore and detective superintendent David Poole of Thames Valley, who is leading the investigation, Poole wrote that Thames Valley’s remit is to “focus on criminality originating from HBOS in Reading whilst Lynden Scourfield was employed there” — a view apparently endorsed by the Crown Prosecution Service. In one email the police did indicate that they might investigate beyond the immediate Reading activities at some later date, but appeared to contradict this later in the exchange. Although they sent a statement to the Sunday Herald, they declined to clarify this point.

Moore is also disappointed that the FSA’s handling of the scandal is not being investigated. The regulator has been aware of the matter since at least early 2007 but waited for three years before alerting the police.

Moore said: “The FSA appears either to have been complicit in the cover up, which would be extraordinary, or so incompetent that it might amount to wilful blindness on their part.”

Many of the allegations are from companies that were forced to use the services of Quayside and were then loaned large sums of money, much of which was removed in Quayside fees. From 2007, after fraud allegations surfaced, scores of companies were put into administration. The suspects, which include numerous Quayside consultants, then allegedly expropriated physical assets worth scores of millions and, in administration deals from April 2007, were permitted by the bank to take ownership of many surviving assets.

Moore added:

I have even been told by very reliable sources that Lloyds Banking Group is not voluntarily offering to help the police with the inquiries. If this is so, it is scandalous. This alleged fraud is a matter of the extreme public importance and interest and it is vital that parliament keeps very close eye on how the police and the FSA are doing their jobs and working together and what is going on through the Treasury Select Committee and the Justice Committee.

The FSA may well have a serious conflict of interest here, so independent review is critical. We already know this in relation to the investigation of RBS.

Paul and Nikki Turner, whose Cambridgeshire-based music publishing business Zenith Café was among the scores of corporate casualties of the alleged fraud, wrote to Poole in February to express their frustration at the narrow parameters and remit of the police inquiry.

They said: “If there is evidence that any of the board of Bank of Scotland or HBOS or Lloyds have acted dishonestly in this matter, then the banks have acted dishonestly and should be thoroughly investigated with a view to the senior executives being held accountable.”

They have also written to Lloyds chief executive António Horta-Osório, who recently appealed to Lloyds and former HBOS executives to stop hiding the truth from him. The Turners wrote: “It has been a continual source of disappointment that, faced with incontrovertible evidence, representatives of the bank have remained steadfastly in denial and knowingly compounded the losses and distress for the victims.”

Lloyds’ risk director Neeta Atkar responded to this letter by repeating the bank’s previous line that it is not being investigated by the police, adding that the only matters being considered by either the police or the bank relate to: “the Bank of Scotland’s Reading branch (impaired assets) prior to 2007”.

A Thames Valley Police spokesman said: “This remains an open and active investigation and a number of complex enquiries continue. The direction of the inquiry is based on the evidence available to us.”

The FSA told the Sunday Herald: “Following a skilled persons report during 2009, the FSA commenced a formal investigation under section 168 of the FSMA in late 2009 to early 2010.”

A spokesman for Lloyds, which now owns HBOS, 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 under the (somewhat misleading) headline “Police halt probe into HBOS money laundering scandal” on Sunday July 10th, 2011.