Monday, 2 March 2015

Revaluation fraud using sham internal transactions

If fraud is tolerated, it will inevitably spread across an economic system, crowding out actual enterprise until there is none left. This is the true systemic cost of allowing fraud to fester, and comes in addition to direct costs in terms of money lost and lives destroyed. In Australia, circular investment and revaluation scams have been allowed to gradually take over the entire economy. The only viable form of business in Australia now involves fraud, as only fraud schemes can promise sufficient returns. Pie cannot be sold profitably in Australia, only pie in the sky need apply.

One form of revaluation fraud uses sham internal transactions between related parties to enable revaluation of an underlying asset. The upwardly revalued asset is then used to raise money from investors or lenders. This form of fraud has spread literally everywhere in Australia, from almond farms to restaurants to funds management. All that is required is an asset, the value of which is derived from a payment stream, and two related parties controlled by the criminals.

Let's say a criminal cartel has attained control over defunct almond farmland, which is valued with reference to how much it can be rented out for. The cartel creates two entities, A and B, with A paying B for the privilege of using the farmland, and with B owning the farmland in question. Since both A and B are part of the cartel, the cartel is essentially paying itself. Crucially, the more the cartel pays itself in sham transactions, the higher it can revalue the farmland asset. The fraudulently revalued asset is then used to perform capital raisings or for borrowing, with the proceeds used for even further fraud and to pay off the criminal cartel operators.

Of course, wealth can't really be created by paying yourself. If that were the case, you could become rich by sitting at home sipping Brawndo, paying yourself a million dollars for every batin'. But in the idiocracy of Australia, such farcical fraud schemes are hailed as the height of innovation. No journalist or analyst dare call it for what it is, namely fraud. In the example above, the longevity and success of the almond farm fraud is completely independent of actual operational performance, and instead solely relies on the cartel's ability to raise neverending funds from victims based on fraudulent performance metrics. In reality, it is but a poorly disguised Ponzi scheme.

The Blue Sky Alternative Investment fraud is organized in exactly this way, with the Blue Sky "fund manager" getting inflated payment streams from various "alternative funds" under its control, and then "investing" in these funds circularly. The Rural Funds Group is another recently listed fraud scheme using this method, deriving almost all its "income" by paying itself, as shown in its fraudulent financial statements. Another perhaps more bizarre example of this scam involved a presenter of the Australian cooking show MasterChef.

In August 2014, an article in The Age newspaper about the struggling MasterChef restaurateur revealed what was euphemistically labelled an "unconventional property-based business model". According to the article, the restaurateur and his business partners acquired the properties which their restaurants occupied. The group then charged "its own restaurants high rents, which increased the value of the buildings and subsequently allowed the company to secure more debt." Sound familiar?


  1. Hi Dr Benway - could you further explain the RFF case? It says in the notes to the financial statements "Almond orchards and water licences held by the group are leased to tenants who make regular rental payments." Select Harvests being one and the remainder "RFM Funds". In this case are you saying RFM (the responsible entity) are paying cash out of the funds as rent without having farmers use the land? I think it would be pretty difficult to increase the rental yield for farmers in each fund in order to revalue the investment properties, as it will probably send them broke.

    1. The RFF cartel "leases" its orchards to itself, and values its assets with reference to those "rents". The RFF cartel can charge itself inflated "rents" and still have 100% occupancy rates, with these fraudulent performance metrics then used for revaluation. The number of almonds grown is entirely irrelevant.