Operation Rico reminds us to warn the vulnerable about boiler-room frauds

Martin Scorsese amused us with the recent movie, "The Wolf of Wall Street," based on Jordan Belfort's memoir of the same name. But the reality of "boiler-room" frauds leaves victims destitute and devastated. This column examines the result of the largest global investigation so far of these schemes. In February 2013, Operation Rico — a collaboration of international law enforcement groups — simultaneously arrested 110 organized criminals in Spain, the U.S., Serbia and the U.K.

WHAT IS BOILER-ROOM FRAUD, AND HOW DOES IT WORK?

Typical boiler rooms are small offices filled with desks, phones and computers staffed by telesales workers who, guided by scripts, make call after call to try to foist worthless or fictitious commodities on unsuspecting victims. Obviously, the name of the crime is derived from the sizes of the rooms and the high-pressure sales techniques.

The commodities are limited only by the criminals' imaginations. "Rare" Peruvian artifacts, company shares, precious metals, vintage wines, carbon credits, maturing whisky or diamonds are just a few. The common denominator is the commodities' fictitiousness, or they're worth just a fraction of what they're sold for.

The frauds work because of the callers' art of persuasion. They say that they're offering investment opportunities too good to be missed, demand is outstripping supply and any investment will make money. Importantly, there is always some truth in the fraudsters' confident and in-depth patter. Victims can verify on the Internet many of the callers' "facts."

I once investigated a fraudster selling shares in a gold mine in the U.S. He had aerial photos, a lawyer's letters confirming he had the rights to mine etc. The one small detail he didn't include in his pitch was that the mine had been unused for some 70 years and was now three feet under water!

These crooks constantly revise and update the detailed telesales scripts based on the successes and failures of dealing with non-responsive and uninterested recipients. Sales staff work to meet targets so they can keep their jobs and earn lucrative bonuses.

'No1 GEMS' IS A GOOD EXAMPLE OF BOILER-ROOM FRAUD

Let's see how a boiler-room operation ripped off a retired police officer of thousands of pounds in a diamond investment scheme. (I've drawn from the article, Fraudsters used ‘sucker list' to sell fake diamonds to victims with marks-ups of 2,800 per cent to fund luxury lifestyle in Marbella, by Anna Edwards, Aug. 21, 2013, MailOnline. I also include details I learned from the City of London Police.)

The victim says he received an unsolicited telephone call in March of 2012, purportedly from a gem broker, asking if they could send him a brochure on colored diamond investments. The victim agreed, and a few days later a glossy brochure arrived. He then received a call from "James" who explained that diamonds were valued on their clarity, cut, carat and color (all quite true). James said that the green diamonds were rare; blue, rarer still; pink, very rare; and red, extremely rare.

James said the price of diamonds hadn't fallen since 1920, and one colored diamond was mined to every 100,000 clear diamonds, which made the colored diamonds an exceptional investment. He also mentioned that the Argyle Diamond Mine in Australia was due to close (another checkable fact), which would inevitably increase demand for these rare diamonds. The victim said James was quite sociable and friendly. He would call two to four times per week and talk not just about investments but many other interesting topics.

The victim decided to buy a diamond. The company sent him an invoice for £5,598 plus terms and conditions. He paid the bill and promptly received his diamond by regular postal service; regular postal service for a £5.5K diamond is a clear red flag!

In a subsequent telephone conversation with James, the victim said the diamond was small and looked like stained glass. James told him to have the diamond independently valued, which reassured the victim. James then sent the victim a thank-you bottle of Jack Daniels to make him more amenable to future offers.

Now that the victim had "invested," the criminals knew he would be susceptible to further approaches. So, James kept calling with more special offers and promises of bigger returns. The victim says James persuaded him to buy a larger green diamond of 1.14 carats and told him that the company would sell it for him at Christie's in December 2012 as part of a collection because "collections sold better." James said the victim would get a profit of 22 percent to 25 percent — about £1,000. James also told him that diamonds weren't affected by inflation and weren't taxable because they were investments.

James then told the victim that he had a 1.14 carat "Marquis-cut, fancy, dark-orangey brown diamond," for sale at £15,692, but he could give him a discount of £3,000 because someone paid this amount as a deposit but hadn't completed the deal. James told the victim that the profit would be 7 percent per quarter or 29 percent in a year. The victim was persuaded and bought that diamond and several others after more phone calls from James.

Ultimately, the victim owned diamonds that were worth a fraction of what the company said they were worth. He eventually lost his entire life savings — £140,140.

Sadly, sophisticated boiler-room operations rip off thousands of victims every year —some of those are placed on "sucker lists" because they might be elderly and retired and susceptible to friendly voices on the phone and have already "invested."

TARGETING BOILER-ROOM KINGPINS

In an interview I had with Detective Inspector James Clancey of the City of London Police, he explained that the leaders of Operation Rico didn't set out to arrest the "foot soldiers" — the telemarketing staff recruited by fraudsters to pursue high-pressure sales. Instead, the operation focused on the "generals" who organized and controlled the boiler rooms.

Beginning in February 2012, the City of London Police and Spain's Policia Nacional began forensically examining "reports of investors worldwide being sold bogus shares in carbon credits, gold, renewable energy, forestry, eco projects, wine and land," according to a City of London Police release.

The advanced intelligence gathering by the City of London Police's National Fraud Intelligence Bureau and the National Crime Agency identified a number of prolific boiler-room fraudsters in Barcelona and made 110 arrests (84 in Spain, two in the U.K., two in the U.S. and four in Serbia) after executing 35 warrants at private addresses and in buildings at which boiler-room operations were allegedly being conducted.

Operation Rico led to the closing of 14 boiler rooms in Spain, two in the U.K. and one in Serbia. The investigation is ongoing. Other members of Operation Rico include the U.K. Serious Fraud Office, the U.K. Crown Prosecution Service, U.S. Immigration and Customs Enforcement (ICE), U.S. Homeland Security Investigations and the U.S. Secret Service.

"These organized criminals [caught in Operation Rico] spent the money on cars, drugs, property and fast living," said Clancey. "The use of drugs such as cocaine, cannabis and ketamine was endemic within the criminal groups. This was all part of their lifestyle. They were earning tens of thousands of pounds a week from their criminality."

Police seized luxurious houses in Spain and such cars as Mercedes, BMWs, Ferraris, Aston Martins and Audis plus designer clothes, watches and more than £500,000 in cash.

Clancey explained the sophisticated boiler-room operation. "Let's [say] an accountant and company formation agent … facilitates the activities of various organized crime groups within Spain," Clancey says. "His company is in Barcelona, and his part was to consistently form legitimate companies and corresponding bank accounts that could be used as the vehicles of fraud by the boiler-room managers. In this way, a boiler room could be set up and running in 24 hours, and similarly it could disappear without trace in the same amount of time.

"Key also to the operation was the provision of IT," Clancey says. "One company supplied all the hardware with preloaded software to ‘manage the investments' and installed VOIP [voice-over-Internet protocol] phone services to keep the costs down! Every few months this hardware would be removed and cleaned as that particular boiler room shut down and re-installed in a new [boiler-room] location. … We currently have 500+ computers to be forensically examined in Spain."

Conducting law enforcement investigations in foreign jurisdictions involves a time-consuming and complicated judicial process referred to as Mutual Legal Assistance Treaties (MLATs). (See the Global Fraud Focus column in the March/April 2011 issue of Fraud Magazine, for a detailed explanation of MLATs.)

However, with the cooperation of Europol and Eurojust (a European Union agency) European countries can now enter into a joint investigation, which a temporary Joint Investigation Team (JIT) will manage. This cooperation removes the complex MLAT process and allows law enforcement from one jurisdiction to carry out their activities — within specific terms — in another jurisdiction.

"This is the first time [for Operation Rico] Spain has signed up to a JIT, and had they not our operation would only have been partially successful," says Detective Chief Inspector David Manley of the City of London Police. "The Spanish police have their own protocol for the deployment of covert policing methods, and they decided to place telephone taps on our main suspects, which as you might expect, led to the identification of numerous other key suspects and so to the extent of the organization.

"Evidence of conversations among gang members is extremely valuable and enlightening. As a result, some 40 suspects are likely to be extradited for trial here in the U.K.," Manley says.

"The nature of this operation is global," he says. "Our intelligence identified Naadir Cassim to be a significant boiler-room owner in Barcelona. But he hasn't stopped there. An investigation by the U.S. ICE has led to his indictment in Tampa, Florida, along with three others involved in targeting U.S. citizens to invest in gold." (See Grand Jury Indicts Four Individuals For International Fraud Scheme Involving The Sale Of Gold, March 3, The U.S. Attorney's Office, Middle District of Florida.)

"The intelligence gained about those involved in organized crime, and in particular boiler-room frauds, is unprecedented and will assist law enforcement for years to come," Manley says.

WARNING THE VULNERABLE

The City of London Police has coordinated a successful global operation against organized criminals who are cunning, deceitful and skilled and have absolutely no consideration for the devastation of their victims.

As Certified Fraud Examiners, we need to warn the vulnerable in our society — the elderly and retired who might have small nest eggs and are particularly susceptible to enthusiastic and friendly voices on the phone. We need to tell them to not invest in anything until they discuss their intentions with friends, relatives, financial advisors or bankers.

Tim Harvey, CFE, JP, is director of the ACFE's UK Operations and a member of Transparency International and the British Society of Criminology.