FMA Report: Lessons Learned From Barry Kloogh Ponzi

The FMA today published a report on the findings of its inquiries following the Barry Kloogh fraud. These inquiries focused on the services provided to Kloogh by third party market participants.

Barry Kloogh was investigated and brought to trial by the Serious Fraud Office (SFO). Kloogh was found guilty, convicted, and sentenced to eight years and ten months imprisonment after admitting the following charges:

· false accounting;

· false statements by promoters;

· theft by person in special relationship;

· obtaining by deception; and

· forgery.

The FMA carried out further inquiries into how Kloogh was able to exploit the trust and goodwill of his clients utilising services provided by FNZ Limited and FNZ Custodians (collectively ‘FNZ’), Consilium NZ Limited (Consilium) and Bank of New Zealand (BNZ). The FMA did not find contraventions of the law by any of these service providers.

The report records the FMA’s views and findings on the conduct that was the subject of these inquiries, the law that applies to that conduct, and its response and actions. The FMA has identified a range of actions that market participants can take to strengthen protection for consumers.

The FMA identified opportunities for custodians to improve how they meet obligations to provide custody reports to end investors under the Financial Advisers Act 2008 (now repealed, FA Act).

The FMA found that Consilium did not receive or hold client money or client property on behalf of advisers or their clients, and therefore did not have obligations under the FA Act and was not a reporting entity under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act).

The FMA provided information to BNZ's AML/CFT supervisor, the Reserve Bank of New Zealand, around concerns about BNZ’s review of transaction behaviour on Kloogh's account. No evidence was found to suggest that BNZ knew, or should have known, that Kloogh was operating a Ponzi scheme.

Regulatory responses and improvements include:

• The FMA is producing a guidance note that clarifies custodians’ responsibilities for custody reporting direct to clients.
• The FMA has already enhanced its monitoring and risk framework to increase scrutiny of client money handling processes and to better identify risk factors that may indicate misconduct. Recent legislative reforms to financial adviser regulation have also bolstered the FMA’s resources for regulation of financial advisers.
• Potential law changes that would support consumer protection relating to custodians have been identified and referred to the Ministry of Business, Innovation and Employment (MBIE).

FMA General Counsel Liam Mason said: “We acknowledge the losses and harm that investors have suffered from Kloogh’s criminal conduct. Wilful fraud like this is sophisticated and preyed on the trust that clients placed in their financial adviser. History shows that such fraud is difficult to detect. However, regulatory settings, regulatory oversight, and vigilance on the part of market participants can create layers of protection that make such fraud more difficult to commit and more likely to be detected.

“We encourage, and expect to see, increased vigilance in the systems and processes financial service providers, and their support services (e.g. wrap platforms), deploy to detect and monitor fraud. The surge in fraudulent activity experienced around the globe recently shows that this vigilance continues to be paramount.”

Background

In 2019, the FMA became aware of Kloogh’s fraudulent activities and referred matters to the SFO. Kloogh used companies he controlled, Financial Planning Limited (FPL) and Impact Enterprise Limited (IEL), as a “front” for his Ponzi scheme.

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