Ernst & Young faces considerable embarrassment if an English ICAe Big Six firm on the island. Phillip Inman reports. investigation supports a judge’s concerns that the firm’s senior partner on Guernsey allowed ‘conflicts of interest’ to colour his judgement when he offered financial advice to an island farming couple.
The institute investigation comes after an unhappy 12 months for E&Y in matters relating to the Channel island, and just as the Home Office has launched its investigation of offshore financial centres.
First, the Inland Revenue raided five E&Y UK offices, including its London HQ, following allegations it marketed schemes transferring tax liabilities offshore via Guernsey and other centres. The Section 20c notices needed to conduct the raids were cleared by a judge convinced a prima facie case of fraud was established.
Then the National Health Service reprimanded health trusts for using an E&Y-devised VAT-planning scheme that took liabilities offshore into Guernsey trusts.
In the latest incident, farmers Bert and Ruby Gaudion alleged in court last year that E&Y partner Stephen Harlow accepted a fee from a company offering a loan to them in return for a guarantee. The Gaudions told the court Harlow was not given permission to offer a guarantee and his decision to accept money from both parties created a conflict.
To make matters worse, they also claimed Harlow, together with a prominent local lawyer, advised them to carry out a series of transactions which plunged them into massive debt and nearly lost their house. The high-profile court case was laid to rest last month when the judge overturned a previous decision giving a third party control of the company that owned the Gaudion’s house.
Richard Southwell QC also questioned the actions of the accountant and the solicitor, and the speed of the investigation by the English ICA a year after the complaints were lodged.
‘It will be incumbent on (the) regulatory authorities to consider how the Gaudions’ need for protection by independent advice … could have been met by professional advisers who seem to have conflicts of duty and interest and who do not appear to have been independent,’ he said.
Harlow told Accountancy Age last week the allegations were not ‘well-founded’ and he was not allowed to dispute the allegations in court. He refused to comment further while the institute investigation was proceeding, except to say he co-operated fully during the process.
In the Gaudions’ case, the judge documented several transactions that used shelf companies or trusts described in court as having been formed or used by E&Y.
E&Y, which refused to comment on its Guernsey activities, brought them into the picture after the Gaudions set about arranging the finance to build guest houses on their farm in 1992, despite owing the island authorities #38,000.
First, the court heard, the Gaudions borrowed #230,000 for three months, secured under a bond and with an annual interest rate of 90%.
The Gaudions failed to pay back the #256,000 demanded and proceedings were started against them. A judgement in favour of the creditor gave him $410,750 with costs and interest at 18% with the power to ‘levy execution on the real property of the Gaudions’.
From then on, the Gaudions took out other loans to cover the original.
One, from a company called Sigmet, resulted in Harlow accepting a ‘guarantee fee of #1,500’ for guaranteeing repayment of the Sigmet loan ‘up to #50,000’.
The Gaudions were also advised to revalue their home at #1.1m and place it in an E&Y-related company called Weardale. The revaluation, for the purpose of establishing an even bigger loan, took the house beyond its true value, said the judge.
The last business to lend money to the Gaudions, Monument Trust Company, moved to take control of Weardale and their home.
Observers claim the Gaudion case should be highlighted in the Home Office review to crack down on loose financial practices and tighten regulation.
E&Y might want to prepare its own submission, said one tax expert.
PUTTING A STOP TO THE SARK LARK
Guernsey financial regulators moved quickly last week to end the so-called Sark Lark, under which nominee directors on the tiny island provide fronts for hundreds of companies to disguise their true ownership.
Peter Crook, director general of the island’s financial services commission, said the new law would outlaw the practice that allows someone to purport to be living or running their business from Sark and defrauding the tax authorities as a result.
The decision follows the announcement last month by the Home Office of a wide-ranging review of financial regulation on the islands of Jersey, Guernsey and the Isle of Man. According to fraud experts, the Sark Lark is one of the major abuses of the island’s special status. Crook conceded there is no business conducted on the island and that to his knowledge they ‘are all accommodation addresses’. UK police forces investigating allegations of fraud have found the practice particularly frustrating.
‘It is impossible to find out who the beneficial owner of funds are once you get to Sark,’ said one senior fraud officer.
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