Scam of the week: the land banking scam

Investors' losses from land investment fraud could be as high as £1 billion, enforcement authorities believe, well above the official figure quoted as £250 million. The fraud, also known as land banking, involves con artists selling investors plots of land that could never be built on, or which don't even exist.

It is still one of the most prevalent frauds around, keeping The Insolvency Service, the Financial Services Authority (FSA) and the police very busy.

Since 2006, The Insolvency Service alone has closed down 82 land investment companies that have defrauded investors of more than £60 million. Not one of these schemes has delivered a profit for investors.

"We are shutting down these companies at a rate of one a fortnight at the moment," a spokesperson for The Insolvency Service says. "Recently a woman rang saying she'd lost £120,000 through a land banking fraud, but she was too shocked and upset to go on the record about it. Last year, we came across a family who'd lost £600,000 and one business that had lost £1 million." Meanwhile, the FSA has closed down a further 13 land banking schemes, frozen £27 million of assets and is trying to recover another £32 million. However, an FSA spokesperson admits that recovering the money would be "difficult" as most of the cash will have been spent.

On 25 July, The Insolvency Service shut down a £2.7 million land banking scheme involving two companies, Berkeley Warbeck Ltd, trading as Berkeley Land, and its successor, Dentam Frost Ltd. These companies marketed residential-sized plots of undeveloped land at six sites across Somerset, Lincolnshire, Warwickshire, Northamptonshire, Gloucestershire and Greater London.

The plots were sold at up to 31 times cost price, with investors being told they could make big returns in two or three years if planning permission was granted. But the authorities found there was little chance of planning permission ever being granted because the plots were on green belt land or had other development restrictions imposed upon them. In any case, the land itself would have had to increase tenfold in value just for investors to get their money back.

Berkeley ceased trading in March 2011 but sprang up again, phoenix-like, under the name Dentam Frost, filching another £500,000 – on top of the £2.7 million it had already blagged – from unsuspecting investors before The Insolvency Service shut it down.

Chris Mayhew, company investigations supervisor at The Insolvency Service, says: "We will continue to clamp down on companies that deliberately mislead the public in this way and potentially ruin the lives of honest people, particularly older investors." Pressure Selling Land investment scams often involve telephone pressure selling techniques, perfected by con artists schooled in 'boiler room' scams where high-pressure telephone salesmen use a potent mix of friendliness, coaxing and bullying to sell worthless, overpriced or even totally fictitious shares to investors looking to make a quick killing. The same people often sell a variety of investments: land, shares, wine, diamonds and carbon credits.

Some of these companies even advertise for sales personnel in newspapers. The Insolvency Service says one advert offered salaries of up to £200,000, declaring: "The salary is only as good as you are." Land investment websites commonly cite government plans to build three million new homes by 2020, with 1.8 million of them having to be built on "green field" sites. This is land that has never been developed before, but should not be confused with "green belt" land, the 13% of UK land protected from development and usually surrounding towns and cities.

The government says green belt land is not under threat. Yet land investment websites often exploit the confusion between the two terms to bolster their investment argument. To take just one example from many, a firm in Greater London claims in its 'About Us' marketing blurb on its website that "60% of the New Homes will be built on Greenbelt. Therefore, the case is strong in stating that investing in Greenbelt land would be a wise move to make in U.K. [sic] for the future".

This is simply a false claim. The government has said green belt land would not be compromised. We tried to contact the company but our calls were not returned. We also forwarded our concerns to The Insolvency Service.

One problem is that The Insolvency Service is not a prosecuting agency and has no authority to claw back money for investors. Another complication is that it can only shut down limited companies. If the fraudsters are simply using a trading name and are not incorporated, there is little it can do.

Meanwhile, the FSA only regulates land banking if the investments are sold as collective investment schemes. This means that investors do not have day-to-day management of the plots; the money is pooled; and the company manages the scheme as a whole.

But many land banking firms deliberately operate in such a way that they do not meet this definition, so avoiding FSA regulation. Unfortunately, this also means investors are not covered by the Financial Ombudsman Service or the Financial Services Compensation Scheme if things go wrong.

It is also worth bearing in mind that selling land isn't illegal in itself. Selling under false pretences and failing to act with "commercial probity" most certainly is. This is propably one of the reasons that only 12 fi rms have so far been prosecuted – not many considering the number of schemes that have been shut down.

Tip of the iceberg All these loopholes add to the suspicion that there are a lot more land banking firms operating undetected and that the fraud losses could be much higher than the offi cial £250 million figure. This is why all the agencies are working hard to raise awareness about land banking and other scams and informing the public about steps they can take to protect themselves.

For example, in April this year the FSA began writing to 76,732 people warning them that they could be targeted by fraudsters selling bogus investment schemes. The targets' names had been found on a 'suckers list' being traded among criminals. Land investment was one of the key frauds mentioned.

Then in June the Metropolitan Police's Specialist and Economic Crime Directorate produced a fraud prevention booklet called 'The Little Book of Big Scams'. An FSA spokesperson says: "All the agencies are constantly talking to one another. If there's a rogue company out there and the public have reported it to us, the chances are we'll all know about it pretty soon." The main message is that the authorities cannot investigate unless investors make an official complaint, so if you've invested in land through this type of company and you have concerns, report it.

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