By Brian Chernett

You need an investor (or an investment) and one comes along that, on the face of it, meets your needs. The message of the Sir Allen Stanford affair (and that of Bernard Madoff before it) is that ‘on the face of it’ may not be enough. Performing Due Diligence remains critical, especially in tough economic conditions.

The ramifications of Sir Allen Stanford’s business affairs and the accusations of ‘tentacles’ of fraud spreading throughout the world by the US SEC (Securities and Exchange Commission) are still being reported across the media as I write this. Sports stars as diverse as Michael Owen and Vijay Singh have lucrative sponsorship deals with Stanford, which may well unravel rapidly as his assets remain frozen. The problems go way beyond sport, with major banks in the Caribbean and South America under pressure from depositors and a black hole appearing in the affairs of some of his businesses.

However, it is Stanford’s involvement with the sport of Cricket that triggered my thoughts this week. Tony Cozier, a respected Caribbean Cricket commentator, began an article in last week’s Independent on Sunday by noting that “There was widespread scepticism from the start that the Texan billionaire’s fanfared entry into West Indies cricket three years ago with his own Twenty20 tournaments was too good — or too bad — to be true.” Yet, for all that scepticism, first the West Indies Cricket Board ($28 million with $130 million promised — according to the Telegraph) and then the England and Wales Cricket Board (£3 million to date) received large amounts of funding from him to promote high-earning tournaments in the shortest form of the game — Twenty20.

It is clear that Stanford’s presentations to both Boards must have been convincing, though there must also have been a lot of pressure upon them to accept what were much needed funds. That, of course, is the volatile mixture that will be seen much more frequently in business in the coming months. Businesses that need money to survive may not always be as discerning about the source of that money. That leaves them vulnerable.

Regardless of whether Stanford is proved guilty, and that is something we may not be able to know for some time, it is certain that difficult economic times will be the ideal breeding ground for scams and frauds of a lower value but which will be equally devastating for the victims.

This current recession came partly out of a Credit Crunch that is, if the feedback is to be believed, still operating. When funding is unavailable from the Banks and other conventional sources, a greyer market can come into play. What if you were in need of funds to keep your business afloat and a businessman, with an apparently good reputation, offered to come in with the money and help you to not only survive but, as Stanford promised West Indian cricket, to take you “back where we belong”. Might you be tempted?

The Office of Fair Trading offers the important advice that if something appears to be too good to be true, then it probably is. If the offer really is critical to your business, then taking the time to do your due diligence is a worthwhile time and cost. According to The Times, the whole SEC investigation of Stanford came about because of just that — a piece of routine due diligence.

The fraud was, the paper notes,
“stumbled upon accidentally late last year by Alex Dalmady, a Venezualan financial analyst, when he was doing a favour for a friend who planned to invest in Stanford International Bank. SIB, based in the former British colony of Antigua, seemed a safe bet. It boasted 30,000 clients in 131 countries, had $8.5 billion in assets and was part of a group claiming to oversee $50 billion in assets. Within hours Mr Dalmady, 48, had warned his friend that there appeared to be a gaping hole in the bank’s account. “I was stunned. First, it looked so simple, so unsophisticated,” he said. No matter how hard he tried, he could see no way in which SIB’s business model could produce the returns that it claimed to or fund the dividends that it was continuing to pay its investors. When his findings were published in a Venezuelan magazine the regulators took notice.”

Fraudsters often depend upon creating a veneer of respectability, knowing that many will be convinced to look no further. Doing the basics, like checking accounts and taking testimonials, can highlight inconsistencies. In the end, the final decision will be yours to make ‘on the balance of risks’ and, if you are unsure of the downside risk of the decision, despite other pressing needs, the safest and most prudent decision may be to decline the offer and keep looking.

[i]References

Tony Cozier: Stanford’s sudden largesse came with a price

Allen Stanford scandal: Cricket not alone in trusting Texan with ‘tentacles’
Allen Stanford ‘fraud’ uncovered by favour

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