Secret intelligence

Financial scandals have brought into focus the work of private investigation companies.

Jeremy Fleming profiles Bishop International and looks at the ins and outs of corporate misfeasance

One by-product of the financial scandals of the past year has been an increase in the activities of private investigation and intelligence companies, those shadowy figures lurking behind big corporate deals and mergers.

Or maybe not so shadowy.

Jeff Katz is chief executive of Bishop International, a niche investiga-tion company in London.

As he points out: 'Nowadays, when investigations concern deals relating to emerging markets, investigators are involved in a professional capacity.

An old-fashioned investigator would not get invited into a boardroom.'

Perhaps this explains why Bishop has three former lawyers as part of its five-man manag-ement team.

Richard Pailthorpe, a trained barrister who joined Bishop in 2001 and is now director of strategic intelligence, says the legal tradition goes further than the fact that 40-50% of the firm's work is done with or for law firms.

'The information we acquire must be evidentially correct.

We have to think of the background to acquiring the evidence and the way that it is presented, so that it will stand up in a tribunal or in the High Court,' he explains.

Paul Lund - a solicitor working as Bishop's director of corporate investigations, who joined from the Serious Fraud Office where he was a case controller - says this is particularly important in cases involving asset-freezing orders.

'The accent is now very much on obtaining these in ex parte applications to the court, but when the other party becomes aware of the order, it will examine the evidence and the means by which that evidence was obtained.

'A number of recent cases have shown examples of misfeasance - especially in parties going beyond their jurisdiction - so in order to do the job you need some awareness of what you can and cannot do legally.'

Mr Katz explains that many of the law firms that use Bishop may be acting for financial institutions which have suffered a loss: 'Usually it's a fraud by a client.

Last year, there was a spate of trade finance frauds which ranged between 2 million and 20 million.'

Mr Lund says these happen where banks' clients arrange a line of finance in order, for example, to diversify their businesses.

But invoices provided by the client to the bank as evidence for its activities are in fact 'fresh air invoices' relating to nothing, and the bank may be based in the UK while the client is in a foreign jurisdiction where it is difficult to carry out due diligence.

In these circumstances, Bishop's job would be to trace the assets, but Mr Katz says that prior checking of clients is the best way to ensure probity on deals.

He says much of the work involves an overseas element: 'One bank we act for pulled out of Moscow last month because information we acquired led to them having a concern about various people being involved in criminal activities over there.'

Apart from Enron and Worldcom, growth of the investigations industry has also been fuelled by several domestic factors, Mr Katz says.

'These range from the introduction of new anti-money laundering legislation, with its more onerous "know your client" obligations on firms, and the dreaded fear that financial dealings may involve some form of terrorist connection.'

Mr Lund adds: 'A client company recently sent two businessmen on a plane to London to meet a couple of Saudi businessmen about a deal.

When we made some checks, we discovered that there were rumours connecting these two to Osama Bin Ladin and our clients had no idea about this, but they reacted quickly by pulling out of the deal shortly afterwards.'

Mr Pailthorpe says Bishop was asked by an international investment bank to carry out a profile of a company's management team.

The company had a turnover of $1 billion and a $1 billion payment had arrived in the bank from the team, seemingly from nowhere.

He says: 'When we looked into the company, questions were asked about the quality of one of the managers.

We discovered he had had warrants for his arrest for fraud issued in different jurisdictions.

He had also lied in interview about which university he attended.'

Even with this much to go on, Mr Pailthorpe says the compliance officers at the bank had 'a fight on their hands' against others who wanted to continue the deal.

Eventually they won and the company - which subsequently became involved with other banks - duly went 'belly up'.

Apart from investigations like these, Bishop works closely with litigators.

Mr Katz emphasises the danger of companies allowing due diligence to become a 'box-ticking exercise'.

He says: 'In England, corporate law partners are thinking far more carefully about due diligence and regulatory issues now.

Unlike in the US - where lawyers drive deals - in the UK this is largely still the job of the financial institutions.

My belief is that the law firms are missing a trick here.

They should be taking on the mould of being the principal advisers of the company, and this way a more detailed due diligence can be easily attained.

In the States, this is de rigueur.'

This budding industry of investigators is currently something of a grey area for regulators.

Mr Katz says the Private Security Industry Act 2001 stipulates that anyone in this sector should be licensed.

But this is not yet fully in force, and is aimed more at those involved in the surveillance and process-service business.

He says that although none of Bishop's staff actually would do this in an investigation, the company may use people who offer surveillance and process service.

So it will probably fall within the remit of the Act as a licensee once it is fully in force.

But Mr Lund says there is plenty on indirect regulation that they have to deal with: 'We do have to be very aware, for example, of the Data Protection Act 1998 and the Regulation of Investigatory Powers Act 2000.

We take a view - much in the way that litigation partners of a City law firm might - about the grey areas, after examining the law.'

Bishop's subsidiary company Farncombe deals specifically in intellectual property issues.

Graham Robinson who works for Farncombe - and who formerly worked for City law firms Nabarro Nathanson and Olswang as an IP litigator - says: 'These are generally grey market cases, where clients may be losing money, although there may not be a technical illegality causing the loss.' The grey market is where retailers and others buy branded goods from another jurisdiction at low prices and resell them in their own country, where the goods have a higher price.

Mr Robinson says this is a case of identifying where the goods are coming from, what the pricing structure is, and who the third parties are.

The market in investigators is currently buoyant, with about eight London players, including big names such as Kroll.

A parallel in the rise of such investigations can be drawn with the increasing influence of the National Criminal Intelligence Service (NCIS), whose budget doubled last year from 40 to 80 million.

Indeed Bishop's chairman, Paul Lever, is the deputy chairman of the NCIS Service Authority, the statutory overseer of the body.

So does working as an investigator top being a lawyer? Mr Pailthorpe says: 'The size of the company is good.

It's small and it means there is a good esprit de corps.

There are no timesheets, and there is more scope for creativity as a result of the procedures and scope of the work.'

Mr Lund says he does not miss being involved in all-embracing cases which lasted for ages: 'It's great to operate in an environment where you don't know what the next case will bring - there's more variety.'

He points out that one of the exciting aspects is being part of a profession which is evolving fast.

Mr Katz adds: 'What we can do is limited only by the imagination of our clients.'