An accountant, a real estate agent, a property developer, a lender and a Self-Managed Super Fund administrator walked into a bar …. and ordered one drink.
“I’ll tell you the truth and its up to you to live with it.”
— William Goldman, “The Princess Bride”
More than a punchline
For all the warnings about eggs and baskets, the convenience of a one-stop shop holds enormous appeal – mostly for the shopkeepers but, occasionally, for those customers who might not appreciate the costs, risks and restricted choices.
For one accountant, this combination provided an opportunity for misconduct and misappropriation that resulted in 10 years’ incarceration.
I appreciate the oft-quoted advice to ‘start with the end in mind’, but there’s value in setting the scene properly before you dismiss it as an unrepresentative example. It’s a story about SMSF, conflicts and fraud involving George Nowak, a 61-year-old accountant and founder of Charterhill Group, who with no prior misconduct or convictions, misappropriated $1.2 million in client funds.
Mr Nowak clearly had a lot on his mind. He ran a group of companies including Lending Solutions International Pty Ltd, Nova Real Estate Pty Ltd, EJ Property Developments Pty Ltd and Financial Wellness Pty Ltd.
It was an ambitious, and outwardly sensible, conglomeration. This Charterhill group of companies provided financial planning; accounting; taxation and general business advice and promoted itself for establishing self-managed super funds for investors seeking to purchase property through their self-managed super fund.
Unfortunately, and ignoring the obvious compliance issues, this combination created the opportunity for Mr Nowak to deceive 16 victims over a 12-month period. His conviction, for some, was a fair result for unconscionable conduct and his abuse of a position of trust.
This case is, if you needed one, another compelling reason why ASIC are focusing their surveillance activities on businesses that they suspect may have a similar risk profile.
Superannuation, conflicts and fraud
“We’re accountants. We do enough, and, realistically, ASIC’s never going to notice us.”
— RM of Self-licensed business (2019)
Superannuation fraud is a large and growing area, with $3 trillion superannuation assets in Australia, it’s not surprising that according to the Australian Criminal Intelligence Commission (ACIC) it’s ripe for fraud. Of course, ACIC aren’t just worried about superannuation fraud, they’re equally focussed on serious and organised investment fraud, mass marketed fraud, revenue and taxation fraud, financial market fraud, card fraud and identity fraud. But they are worried enough about superannuation fraud that they’ve established a serious financial crime taskforce whose remit is to target superannuation and develop a strategic threat assessment relating to superannuation fraud methodologies.
At this stage it is helpful to remember that fraud involves the use of dishonest or deceitful means to obtain some unjust advantage. Without getting too lawyerly, it’s dishonesty that distinguishes fraud from other misconduct including innocent misrepresentation. In the case of fraud, there’s an intention to commit a crime, where dishonest and deceitful means are employed.
Worryingly, the Australian Institute of Criminology suggests that anybody, present company excluded, can be a target of fraud.
In our industry, the access you have to your clients, the trust and reliance inherent in the relationship between a client and their adviser, particularly those clients who are vulnerable or dependant on their advisers, makes theses acts of fraud so heinous and so damaging to our emerging profession.
In the Nowak case, opportunity provided the only motivation required for the misconduct to occur.
In this case, the adviser’s professional relationship provided a convenient and accessible source of money, to, in the words of Judge Sophie David: “fund a grandiose lifestyle”.
While financial planners are often demonised in the popular press as ‘unethical’ and ‘unprofessional’, there have been several cases involving accountants’ in the provision of financial services, falling foul of the law. For example:
- In October 2019, we saw a NSW accountant and financial adviser, Nicholas James Ellis , sentenced to three years imprisonment. Mr Ellis made false and misleading statements to obtain money from clients and fraudulently misappropriated client funds. Mr Ellis was a trusted financial advisor and accountant, who misled his clients and misused their funds for the benefit of his own business.
- In yet another case, Mr Yingjie Wang (also known as Jay Wang), a lawyer and accountant from Sydney, was permanently banned from providing financial services. In August he tried to appeal which was dismissed by the Federal Court of Australia. In this case, as is with many of these cases, Mr Wang acted dishonestly and used investor’s money for unauthorised purposes; sent emails to investors that were misleading and was also found to not be of good fame and character.
Ethics, misconduct and reputation
“He’s such a nice person. We don’t want to cause him any trouble”
— Defrauded client, 2005
Financial advisers, who are also accountants, are required to maintain the professional standards underpinned by the Financial Adviser Standards and Ethics Authority, but they are also bound by the Accounting Professional and Ethical Standards.
Working in compliance you often hear, “but the person is such a nice person”, we didn’t suspect for a moment that they would be capable of doing this”. In fact, when you read the sentencing transcript for Mr Nowak’s case, character references attest to a high regard, with a reputation for generosity, knowledge and trust.
At the risk of attracting institutional ire, reputation, amiability and generosity should not be the basis of a monitoring and supervision framework.
If you are a Licensee, the effective monitoring and supervision of your representatives is critical and neither your ignorance nor your misguided trust will provide you with an adequate defence.
A representative found to have committed a fraud may face individual action, but you, as a licensee, have an obligation to monitor and supervise your representatives and ensure they comply with the financial services laws.
ASIC expects you to have adequate compliance measures to allow you to determine whether your representatives are complying with financial services. We’ve addressed effective monitoring and supervision frameworks and ASIC’s expectations elsewhere, however we’d emphasise that dishonest and fraudulent behaviour is a direct contravention of the fundamental obligations of providing financial services efficiently, honestly and fairly.