It took the SFO a decade to charge Barclays with fraud, what chance does it have of policing AIM?

Today saw the Serious Fraud Office (SFO) charge Barclays Bank PLC with ‘unlawful financial assistance’ in relation to a $3bn (£2.3bn) loan it made to the State of Qatar during the global financial crisis (GFC). With the authorities taking an entire decade to catch up with Barclays, a global institution and major player in the UK banking sector, what chance does AIM have of being properly policed against misconduct?

Today’s charges relate to a £12bn loan that Barclays took from Qatar Holdings, owned by the state of Qatar, in 2008 in order to avoid the sort of government bailout seen by rivals Lloyds Banking Group and RBS.

As part of this, Barclays loaned £2.3bn back to Qatar Holdings, which the Serious Fraud Office alleged to have been used either directly or indirectly to buy shares in Barclays.

Much has been written about the effects this fine will have on Barclays Bank and its banking licence to operate in different countries, but AIM investors should really be concerned by the length of time this has taken

Today’s charge is exactly the same one that was levied at Barclays PLC, the parent company of Barclays Bank PLC, and several former executives last June. These charges themselves followed a five-year investigation into the deal.

Given Barclays’s importance to the global banking system and the crippling effects that the GFC had on the public’s trust in the stock market, you would have thought the famously-glacial SFO would have been able to act quicker.

It took a whopping nine years for former RBS boss Fred ‘the Shred’ Goodwin to face court on allegations of misleading thousands of investors in a disastrous rights offering just months before a record £45.4bn government bail-out.

Goodwin’s case is yet to reach its conclusion. With that in mind, the fact that Barclays and its former bosses will not fact trial until 2019 suggests that this particular issue will not be resolved any time soon. Especially given that both Barclays and Barclays Bank have said that they intend to defend the respective charges brought against them.

What about AIM?

There is only a handful of companies on AIM with a market cap of more than £1bn. The rest are tiny in comparison to Barclays’ market cap of £33bn. If it has taken a decade to hold Barclays to account then how long would it take for the SFO to catch on to a small-cap company cooking its books?

It is well known that the SFO has been scrutinizing the controversial goings on at Watchstone (LSE:WTG), formerly known as Quindell Plc. However, even this investigation has taken an aeon for what appears to be, at face value, an open and shut case of outright accounting fraud.

This illustrates the impossible position regulators and investigative authorities have in policing fraud in public markets. The burden of proof to prosecute a case can often be too far onerous. Even if the SFO did pile its resources into investigating an AIM company, would it be able to find enough proof to secure a conviction in court?

With relatively little effort directors of AIM companies can easily produce enough obfuscation to cover themselves. All they need do is create sufficient volume of paperwork, sprinkled with partial professional “advice”, to dissuade even the most tenacious of investigators from gambling resources on pursuing a prosecution.

Given how underfunded regulators and those responsible for policing fraud in the UK are, it is understandable that companies with the most investors are prioritised. However, for AIM to progress something needs to be done to fight its reputation as the Wild West of UK markets. Getting away with fraud at this level is too easy and this has a corrosive effect on growth investing as a whole. For every dodgy company there are plenty of completely legitimate stocks. However, the general impression that AIM is not a safe place to invest is simply putting an unnecessary obstacle in the way of these good firms and their investors from reaching their maximum potential.

 

 

Authors

Ben Turney and Daniel Flynn

Disclosure

Neither of the authors own shares in the company mentioned above.

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