A claim regarding losses has been classified as a Ponzi scheme rather than a scam. While it is recognized as fraud and remains a criminal matter, the investigation will not proceed as a traditional scam.

This information was relayed during a recent phone call between Ruth Fretwell and a fraud investigation representative at Barclays.

Fretwell, aged 63 and residing in Brighton, had inherited £190,000 from her late mother, which she invested in a property development scheme from November 2020 until July 2021.

Following the scheme’s collapse in 2022, Fretwell anticipated reimbursement under a voluntary banking code that previously aimed to protect fraud victims by refunding funds transferred to scammers. This code was recently made mandatory, introducing a cap of £85,000 on reimbursements.

However, Fretwell was taken aback when Barclays informed her that her investment would not be refunded, as they classified the investment as a Ponzi scheme. This type of operation misuses funds from new investors to pay off earlier ones, often without any legitimate business existing.

Understanding the Issue

Introduced to the scheme through a friend, Fretwell was among approximately 140 investors who collectively poured £30 million into the venture between 2019 and 2022.

The unnamed scheme, currently under investigation, focused on residential property in Kent and promised annual returns of 10% over three years. With marketing materials that boasted two decades of experience and “secure returns,” Fretwell invested £100,000 on November 12, 2020, and an additional £60,000 shortly thereafter. Pleased with her returns, she reinvested and added another £30,000 in July 2021.

However, on New Year’s Eve 2021, a message from the company owner indicated that all withdrawals would be halted for three months to stabilize the business moving into 2022. Fretwell remarked, “It came completely out of the blue. Just weeks earlier, I was encouraged to invest further and received a holiday greeting that showed no signs of trouble.”

A few weeks later, the company entered administration. Reports indicated that the funds were frequently diverted to cover operational costs instead of being invested in the promised property projects, resulting in significant and sustained financial losses. The report noted that multiple companies were part of the scheme, complicating the tracking of funds since many had not submitted financial statements for over two years.

Worried they had been ensnared in a complex scam, Fretwell and other investors reported the situation to their banks and to Action Fraud, which referred the issue to Kent Police. After investigating Fretwell’s complaint, a Barclays representative reached out on March 28, 2023, explaining the reasons for the denial of her refund. A recording of this conversation was shared with The Sunday Times.

The Call from Barclays

In the call, a representative from Barclays confirmed that while Fretwell’s investment was identified as a Ponzi scheme, it did not fall under the category of scam victimization.

Barclays indicated it had been waiting for clarity from UK Finance, a banking sector body, regarding the classification of the scheme. The conclusions indicated that the scheme was indeed a Ponzi.

When addressing Fretwell, Barclays acknowledged it could have communicated more effectively. They clarified that while her case was not considered an authorized push payment (APP) scam, which typically involves transferring money to a fraudster, it was rather an investment scam that does not always guarantee refunds under new regulations.

Barclays advised potential investors to thoroughly verify the legitimacy of any entity before transferring funds and suggested obtaining independent financial advice if there are uncertainties.

They added, “In this particular case, the Financial Ombudsman Service is examining the claim, and it would be inappropriate to comment further until its review concludes.”

Defining a Scam

Fretwell believes she has been a victim of APP fraud. In the previous year, £460 million was reported lost to APP scams, which have grown more sophisticated. Criminals frequently impersonate legitimate businesses or investment firms registered with official bodies, increasing the challenge for police, banks, and the Financial Ombudsman Service in distinguishing between scams and poor investments.

While banks maintain that Ponzi schemes do not always fit the definition of scams, the ombudsman has disagreed multiple times, directing compensation to victims.

Mark Palmos, another victim who lost about £400,000 to the same scheme through NatWest and Nationwide, reported that while Nationwide refunded him £65,900, NatWest did not.

The Payments Systems Regulator stated it doesn’t exclude Ponzi schemes from refund regulations, but a successful claim must comply with its definition of an APP scam.

Guidance released in September stated that in various investment scams, returns to consumers originate from new investors’ funds. Consequently, banks should analyze such cases comprehensively rather than dismiss them as civil disputes.

UK Finance has stated its role is to facilitate discussions among its members on challenging cases but does not dictate how they should handle fraud refund requests.

What’s Next for Fretwell?

Fretwell has submitted a claim to the ombudsman and is awaiting the determination on whether the Ponzi scheme is considered a scam under APP fraud guidelines. Investigations by the administrators are ongoing.

In correspondence to investors, Kent police acknowledged receiving over 120 fraud complaints related to this scheme but mentioned that they had to cease their investigation due to resource constraints.

The communication noted, “Investment fraud cases are notoriously challenging to prosecute, given the thin line between improper business practices and fraud.”