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Joined: Oct 1999
Posts: 84,395
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Please, Honorable Government, let us move to investigate
"our" special private companies

Posted: 30/03/2007 - 03:05 PM
Author: Stanley Gibson

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."


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


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?


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."


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.


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.


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?

A colleague of mine was one of the team auditing Enron before the "revelation", and he reported up the line that he had found what he believed was fraud, possibly on a massive scale (this is in the very early '80s). He was ordered by the partners of our firm to "keep his mouth shut", and it was clear to him that they either already knew about it or expected it and were being paid to rubber-stamp the company. Our firm wasn't AA but I know their team also knew about it, so I guess the partners did as well. They deserved penalties much harsher than they finally received.

Whilst auditing a medium-sized that dealt with the middle east I uncovered evidence of bribes paid to officials of governments there, to the tune of many millions of dollars. I was also instructed to keep quiet.

An audit report is rarely worth as much as the paper it's printed on.

Joined: Feb 2005
Posts: 5
While I don't doubt the veracity of your statement. I was under the impression that Enron did not become an entity until some time in the mid 80's. Would make it difficult to be audited years before they were in fact an actual company, no?

You may be right, in which case it was a predecessor to Enron. I really don't remember now, and in any case I wasn't involved myself. But it was certainly that business.

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