Trusted Advisors are integral to HNWI and Family Offices doing successful business: sourcing deals, advising on investment strategies and using their specialist experience to guide and support a range of business and personal matters. The vast majority are indeed trusted and are invaluable, experienced, and provide an independent and strategic perspective. However, Victoria & Sarah are shining a light on instances where lack of oversight and thorough due diligence has led to some of the most egregious examples of trusted advisors taking advantage of clients to defraud and harm their reputations.
What kinds of fraud have you seen involving trusted advisors?
Sarah: Unfortunately we’ve seen many matters which originated in situations where a trusted relationship has floundered – or where trust has been abused with a deliberate act of fraud carried out by a trusted employee or advisor within the family office. Quite often the advisor would be employed through word of mouth via a trusted family member but where the individual has no relevant experience.
This may be related to an investment, acquisition, or deal which has been fraudulently managed where the individual employed has set out to defraud the principals. It could be related to funds that have been misappropriated, or the result of a so-called trusted investment advisor, who simply doesn’t have the necessary depth of experience or skillset to advise on investments.
Most often it’s because enhanced due diligence has not been undertaken and they have been engaged merely on trust.
Victoria: Once an employee is trusted they are frequently promoted into a role that they do not have the experience or qualifications to carry out. Quite often a fraud can start with simply a mistake – which is then covered up – and then continues to take on a life of its own. We’ve seen several cases of excessive expense claims by trusted advisors that go unchecked for years and can amount to hundreds of thousands of pounds.
Sarah: Mission creep is another vulnerability. One recent example exemplifies this, involving our client’s driver who enjoyed a good rapport and trust with our client. He was elevated to Head of Security despite lacking any apparent relevant experience. Subsequent surveillance footage from the Family Office building revealed his frequent unauthorised entry during overnight hours, often accompanied by others. Swift investigation quickly identified that in fact, he was using the premises for illegal activities and, because he had access to the security systems, had stolen cash over an extended period.
What should you do if you suspect a fraud?
Victoria: The priority is to prevent further fraud, protect your data – and then work out precisely what has happened. Ensure you take proper legal advice so that your own investigations don’t compromise any police investigation if you wanted to go down parallel civil and criminal routes.
Sarah: Typically, our team would be engaged by Victoria to investigate the fraud. We tend to work as part of the multi-disciplinary team supporting the legal strategy. Depending on the specific situation, there are several options available depending on the matter. These include providing litigation support, conducting investigations to trace and recover misappropriated assets as well as utilising social network analysis to identify individuals involved in defamation or blackmail against the client.
In a recent e-discovery case involving the phone and computer of an investment advisor, compelling evidence emerged of their long-term involvement in defrauding our client, This was a particularly shocking example of a Trusted Advisor exploiting our client, a non-English speaking HNWI with refugee status, who had been encouraged to engage the investment advisor by a relative. Both parties were implicated in defrauding our client of millions by allegedly diverting investment funds into their personal accounts. Fortunately, through litigation, we achieved a successful outcome.
How do you protect yourself if you have been defrauded by a trusted insider?
Sarah: As a matter of course, you should conduct regular risk assessments for your properties and IT, as well as reviewing the security measures in place. It is equally important to conduct due diligence and vet individuals who have access to your data or property including subcontractors and trusted advisors. You should do this regularly: people and circumstances change.
How has the fraud landscape changed recently?
Sarah: The risk landscape has become increasingly complex due to various factors, such as the pandemic, the war in Ukraine, and China’s assertive behaviour on the international stage. These factors, along with changes in the regulatory environment, and new Sanctions regimes, have further exacerbated the challenges. The emergence of highly sophisticated e-fraud which was incubated during the pandemic, and has been industrialised over the last 18 months, was partly influenced by the war in Ukraine.
Victoria: We have certainly seen frauds targeting the UHNWs increase in frequency and sophistication over the last few years. Fraudsters will quite often invest considerable time and money into essentially grooming their victims i.e. becoming friends and inserting themselves into their lives via Instagram or other social media accounts, appearing ‘by chance’ at events they happen to be at, applying for jobs within family offices/homes in order to get access to the inner circle. With high rewards at stake, some of these frauds are extremely complex and take years to come to fruition.
What are the challenges of investing directly into new businesses, especially instead of through a PE or established-managed fund?
Victoria: Many family offices want to invest directly in businesses, and in particular, businesses with a strong ESG foundation or philanthropic element or emerging high tech. This is laudable but also has potential risk. To avoid getting involved in a venture or investment which is essentially fraud, ensure that there are compliance and governance controls as well as using established specialist sector and investment advisors with good reputations in the market. Always double down on due diligence before investing; you should never be rushed, it should never be a secret – and if it feels too good to be true, it usually is.
To avoid being defrauded, when might you want to engage Victoria and Sarah?
Victoria and Sarah: When a family office client has an unexpected crisis event, Victoria and Sarah can provide invaluable strategic advice and unbiased insight from an independent and agnostic standpoint. With their extensive expertise in this domain, they can develop a practical and proportionate response strategy. This strategy may involve litigation or an investigative approach to understand the underlying factors contributing to the crisis, identify the responsible party, mitigate any reputational damage, assist in asset recovery, and facilitate the prosecution of the perpetrator.
Top Tips when considering a new trusted advisor
Victoria: When identifying a trusted ideal advisor, be very clear about their job description, what their role is, and who they will report to. Avoid overcompensating them and strive to maintain a balanced compensation structure. Try not to become too reliant on one person – everyone should be replaceable.
Sarah: You should also consider how you heard about the advisor. Was it through a reputable search consultant or someone you met at a social event or a recommendation from someone you vaguely know? Even if the introduction is made through a formal search process, it is crucial independently to assess their reputation, integrity, and discretion. Determine if they have relevant connections and hold a respected position within their sector. Most importantly, ensure that their commitment lies in working in the best interests of the family office.
Victoria Pigott, a Partner at the law firm Mishcon de Reya LLP, has many years of experience advising and providing legal strategies for family offices and HNWI.
Sarah Keeling, a Partner at StoneTurn, has advised numerous family offices and high-net-worth individuals (HNWI) supporting them in their risk management strategies for deals and appointments by providing enhanced due diligence and business intelligence. When malfeasance has occurred, she works with their counsel supporting their legal strategy to trace and recover assets with human source intelligence.
