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January 1, 2010updated 12 Apr 2017 4:28pm

Action needed over scams

In a 12 months rocked by increasing numbers of telecoms and repro scandals, the leasing industry needs to unite in a fight against wrong-doing in 2010, reports Brendan Malkin.

By Brendan Malkin

In a 12 months rocked by increasing numbers of telecoms and repro scandals, the leasing industry needs to unite in a fight against wrong-doing in 2010, reports Brendan Malkin

Around Britain, thousands of organisations, including schools, charities and doctors’ surgeries, as well as small and mid-sized businesses, claim they face significant losses as a result of being falsely induced into signing up to telecoms and reprographic leasing deals.

Such is the scale of the scandal that it has now become one of national concern. The police, the investigations arm of the UK Department for Business Innovations and Skills, anti-fraud organisations and criminal justice prosecutors have all been drafted in to sort out the mess and bring the perpetrators to justice.

Given the recent emergence of a string of cases linked to these scams, the scale of the problem appears to be unprecedented in UK leasing.

This month, four directors of a Norfolk-based telecoms supplier, Business Telecom, are due to appear in court for the start of a four-to-six weeks’ trial. Charged with conspiracy to defraud, they are accused of inducing businesses to enter into lease agreements through use of false representations.

In another case to hit the industry, a company sued by Investec for failing to keep up with lease rentals won its legal action against the lessor. The case, heard at Worcester Crown Court last month, is now a leading case in the law of lease assignment (see comment piece on opposite page).

Telecoms supplier, BC Telecom, has become the subject of an investigation by Hertfordshire trading standards, it emerged last month.

A significant number of BC Telecom customers claim they were induced into signing up to lengthy and expensive lease agreements which they were originally told would be free of charge. Besides small businesses, other alleged victims of BC Telecom include schools, doctors’ surgeries, and even a care home.

Debacle

Most UK lessors will be familiar with the Global Telecoms & Technology debacle. After Global’s collapse in February, hundreds of customers stopped making their lease payments, claiming they had been led to believe rental of their line connection, which had been stopped, was part of their lease agreements.

CCTV

A watching eye: with scams on the rise, the industry needs to be vigilant

Last month, Leasing Life learned that the Finance & Leasing Association (FLA) had been tipped-off by Leeds-based independent audit company, Leasechecker, that “a number of reprographic supplier companies have allegedly mis-sold reprographic lease contracts”.

In a letter to Stephen Sklaroff, the FLA’s director general, Leasechecker’s legal department wrote that these companies “knowingly represented to those organisations that machinery installed at their premises in accordance with a lease and business finance agreement were new when in fact the machine(s) were either not new, second-hand or refurbished and represented the same to funders in order to secure borrowing.”

The major anti-fraud unit in Malton, north Yorkshire, which has received details of the claims, is said to have told Leasechecker that the suppliers’ actions potentially “amount to criminal deception”.

Leasing Life has also learned that an alleged leasing fraud by a photocopier salesman has resulted in the bankruptcy of Clifford Bartlett, owner of Huntingdon-based music publisher and seller King’s Music.

The case involved “irregularities in the leasing of successive photocopiers by an individual to King’s Music over several years”. At least one leasing company is understood to be pursuing Bartlett for a total sum of around £1.5 million (€1.7 million). Bartlett, a distinguished early music scholar, declined to comment on the case while investigations continue.

The backlash against these alleged scams is not just being led by law enforcement bodies.

Hundreds of customers have stopped paying their lease rentals and, faced with breaches of contract claims from their leasing companies, some have launched litigation of their own, directed at either the leasing companies, brokers or, more usually, the suppliers.

Keen to clean up the image of their industry, some telecoms suppliers have taken matters into their own hands. One of them, O-bit Telecom, issued a statement in recent weeks warning customers to “never, ever lease telephone lines and calls” and to “always pay for these as per your normal monthly use”.

O-bit’s CEO, Dave Breith, who also warns customers to better “understand the cost of equipment”, is in discussions with a large lessor with experience in telecoms to advise customers on alternatives to leasing.

The scale of the losses arising out of these scandals for both customers, as well as leasing companies, is said to be significant, with individual leasing contracts linked to reprographic and phone scams each totalling in excess of £40,000.

Due to the effects the scandals have had on the leasing industry, the FLA has responded by launching a new code of conduct outlawing the use of side agreements in leasing deals.

Too little, too late

Given that the worst of the problems have already occurred, these reforms might be too little, too late, however.

Many in the industry feel the scams should have been stopped months ago. There are some grounds for this belief, particularly given the fact the scams are fairly similar and, therefore, could have been identified and clamped-down upon much earlier.

For example, it was common in many of these deals for suppliers to use alleged false inducements to convince customer victims to sign up to lengthy leasing contracts. One such inducement, used to add legitimacy to their deals, involved suppliers’ sales agents pretending they were agents of British Telecom (BT).

The defendants in the Business Telecom case are accused of “falsely representing that Business Telecom was connected wi th, or the business arm of, British Telecom PLC”.

Similarly, customers of BC Telecom also claim the supplier’s sales representatives pretended they were acting as agents of BT. This was confirmed in a letter sent recently to one customer of BC Telecom from Bernadette M Mee, a senior IP lawyer and head of trade marks at BT’s legal department.

It stated: “A salesman from a company called BC Telecom Limited, was misrepresenting his company’s relationship with BT and thus infringing BT’s trademark rights.”

Another common inducement, allegedly used by sales agents of both BC Telecoms and Business Telecoms, was to tell customers their telephone lines and equipment were about to be made obsolete due to digitisation of the network and therefore had to switch over to the new systems by law. Finally, suppliers also falsely claimed to customers that they would not have to pay for their lease agreements.

The suppliers would then give their customers a cheque to cover the first year of the agreement, only for them to disappear soon afterwards into administration or liquidation, leaving customers lumbered with lengthy lease agreements. In response, many disgruntled customers have stopped paying these rentals.

Despite evidence showing customers were clearly induced into signing up to the lease agreements, lessors in many cases are still observing the letter of the law and pursuing claims against non-paying customers.

For instance, ING Lease UK is understood to be seeking to enforce a £33,000 lease contract linked to BC Telecom with Martins House, a residential care home in Stevenage run by a charity. As in the case of other customers allegedly swindled by BC Telecoms, the home believed the phones would be free.

Another common feature of many of these phone deals is that the real value of the equipment bore little relation to the customers’ liability under the lease agreements. In the Global Telecoms case, for instance, equipment worth less than £2,000 was sometimes leased for in excess of £40,000 over seven years.

The fact the useful working life of these assets is far shorter than seven years makes these deals seem particularly bizarre.

Complex web

Another bizarre feature of these phone deals was the complex web of companies and transactions that were involved in what was otherwise the relatively simple matter of leasing phones.

For instance, one customer who thought its supplier was BC Telecom later received a letter from Siemens Financial Services, his leasing company, stating that in fact a company called Clearcall 2000 was the supplier of the equipment.

Nonetheless, as part of its agreement of providing free phone equipment, it was still down to BC Telecom to pay the customer “£3,600 per annum [to] cover the cost of all the telephone equipment [including installation]”. Exactly who paid BC this £3,600 was not made clear, however.

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