Does the current legislation work for all new scams?

Investment scams are going like a tsunami all over the world. In just one of these scams that have now been revealed - Omega Pro - there are up to 3 million victims of crime, and when my associates and I Lars Olofsson look at all the thousands of clients we have from this fraud, it is often a question of having lost over 100,000 US Dollars, and in many cases far more than that.

The big challenge for the police and prosecutors is to be able to prove, as the law says; 'beyond reasonable doubt', that there was criminal intent from the outset.

Most startups don't survive

Statistics show that of all startups, less than 10% survive more than two years. A new investment concept can be likened to a startup company where you have a business concept and then a business plan. If the concept doesn't succeed and investors lose their money, the people behind the concept can always claim that "we tried, but it didn't work out, and see how most new companies do". It is at this point that a prosecutor must finally be able to prove in a court of law that the founders of the company, the concept, did not have a legitimate purpose, and that they planned from the beginning to defraud the investors. It is against this background that few prosecutors prosecute because they almost never have sufficient evidence of criminal intent.

Is there something wrong with the legislation?

Legislation around the world is similar when it comes to criminalising fraud. The law states that there must be an intent to deceive and not do the right thing. This intent basically requires the police to find some form of unambiguous evidence that the founder, or founders, of the business knowingly and with clear intent started the business to defraud a financier or investor – you need what is called a Smoking Gun.

Of course, it is very rare that the planner of a fraud does not provide any evidence that could prove the fraud. Does this mean that the legislation is wrong, or the standard of proof is too strict? No, there must be high standards of evidence, and if all failed business concepts could be judged as suspected fraud, this would have hit the entrepreneurial spirit hard, as well as placed too low demands on an investor to do a proper analysis and investigation before investing their capital.

What in the legal system needs to be changed?

If the legislation is for the most part good and correct, but business concepts are suspected of being fraudulent, and investors have actually lost money and there are many things to suggest that there has not been a legitimate purpose, then how do you close this gap between reality and the legislation? In my opinion, this is done by adopting new practices, and requirements, on how a business concept is assessed in a court of law and on what requirements are imposed on those who launch a business concept that presupposes that there are external investors and that the concept involves either giving financial advice or receiving money to manage them.

Right from the start, a business that provides financial advice, or manages capital, must have a license - a license issued by the country's financial authority. In addition to this requirement, there should be a requirement that the founder(s) of the business can from the beginning present a business plan that contains the most basic parts such as a description of which customers you have or are aimed at, what the division of responsibilities looks like in the business, how to report to the financiers how the business works and its financial status, that you have a risk analysis and that you have identified the regulatory requirements that exist for the business.

If you do not have these basic things done and can show that these were done from the beginning before you start the business and receive financiers' capital, or customers' investments that you have to manage, then you are not serious in your intentions and a fraud has occurred. The fact that a court imposes these requirements would not cause problems with people not daring to invest in starting a new business or dampen the entrepreneurial spirit.

Lars Olofsson, lawyer from Sweden