As part of an ongoing series of articles looking at investment fraud cases or allegations of financial crime, today I am going to look at what happened when a land banking investment opportunity failed to work out for investors; and the steps you can take to prevent this happening to you.
What is land banking?
Land banking is the practice of buying undeveloped land, then holding it for investment purposes, with no immediate plans for its development.
A typical land banking scam involves the purchase of land, quite often in overseas locations or in green belt or nature conservation areas, and dividing that land into smaller parcels to sell to investors.
The idea being that once planning permission to develop the land is secured, then the individual plots will soar in value.
Of course, not all land banking schemes are investment scams, but many investors do lose money as it becomes apparent that there are restrictions over the development of the land; and it will never achieve planning permission.
Investors are then left with plots of land that in effect have no economic value. The Financial Conduct Authority (FCA) estimate that land banking schemes have cost UK investors up to £200 million.
The set up of a land banking scam
One of the most high-profile land banking scams in recent years was investigated by the FCA under the code name “Operation Cotton”. This investigation was one of the largest ever criminal prosecutions undertaken by the FCA.
What was the investment proposition?
Operation Cotton was an unauthorised collective investment scheme* which was operated through three separate limited companies between July 2008 and November 2011.
The companies had bought up agricultural land for minimal sums of money with the intention of selling it to potential investors. They did so on the misleading basis that the land would eventually generate significant returns once planning permission was secured.
The scheme was believed to have raised £4.3 million from 110 investors.
What happened next?
The investment proposition was promoted by salesmen employed by the three companies, cold-calling potential investors using cleverly scripted, high-pressure sales techniques. They used false and misleading promotional material to sell not only the agricultural land the companies had purchased, but also land they did not own. They did all this at a substantially inflated price and then lied about the future value and potential profits.
In order to bring a criminal case against the promoters, the FCA needed to prove that the sale of the land (which is not an activity regulated by the FCA) was sold through a Land Banking Scheme which amounted to a Collective Investment Scheme; and, it was this arrangement that required authorisation.
Where’s the money gone?
It would appear that the £4.3 million has disappeared and none of the investors have received any of their money back. We do know that following their conviction, the perpetrators were issued with Confiscation Orders (CO) in May 2017 totalling £2.2 million.
The court further instructed that any proceeds recovered under the CO should be paid over as compensation to the victims. Should the defendants fail to satisfy the CO, then they will be subjected to further default sentences of up to 5.5 years.
What was the outcome for investors?
As the Land Banking Scheme was not an authorised investment activity, regulated by the FCA, the investors (victims) were not eligible for compensation under the Financial Services Compensation Scheme (FSCS) and were therefore left out of pocket.
However, should the Confiscation Orders be satisfied and discharged, then it is estimated that the investors could recover up to 40% of their original investment.
What was the outcome for the perpetrators?
Eight defendants were found guilty of a number of offences including conspiracy to defraud, conducting investment business without FCA authorisation, providing false and misleading information to the investigating authorities and possessing criminal property. In total, they were sentenced to 32 years and 9 months’ imprisonment.
This included the conveyancing solicitor acting on behalf of the scheme, Dale Walker, who received £900,000 of the proceeds of crime into his accounts. This amount was also subjected to the Confiscation Order, above.
How to deal with land banking scams?
- As with any investment scam, be very suspicious of being approached ‘out of the blue’ by phone, email, letter or even someone at an exhibition.
- Scammers increasingly use social media ads, online testimonials and fake endorsements from well-known individuals to target victims so be alert to this potential risk when clicking through to read more.
- Please remember that land investments are not regulated by the FCA, so you will not be eligible for compensation under the FSCS, should the investment fail.
- However, Collective Investment Schemes* (where land is the main asset of the Scheme) require authorisation and will be regulated by the FCA.
- Check that the operator of the Land Banking Scheme is authorised by the FCA.
- Check the FCA Register or call the FCA’s consumer helpline if you have any doubts.
- Arrange your own independent valuation of the land before committing money.
- Check the Land Registry to confirm ownership of the land.
- Check Local Authority planning portals to ensure no planning restrictions in place.
- Be very suspicious of promoters offering unusually high returns (as a rule of thumb returns over 8% are probably too good to be true).
- If you do decide to go ahead and invest, always seek advice from an independent financial adviser regulated by the FCA before you transfer any money.
*Collective Investment Schemes
- A Collective Investment Scheme (CIS) is sometimes referred to as a ‘pooled investment’ vehicle or it is also known as an Investment Fund.
- The legal structures used to manage the money can include Limited Liability Partnerships (LLPs) or Limited companies.
- The assets being managed can include land, equities (shares), bonds, investment property etc.
- CIS’ are usually comprised of several people contributing money on a pooled (collective) basis to acquire assets and day-to-day management and control is delegated to a Fund manager.
