Great frauds in history: Peter Clowes’s bondwashing scheme

Peter Clowes was born in 1942 near Manchester. He started work in his parents’ hardware store, followed by a stint selling turf, before becoming a salesman for International Life Insurance Company, a subsidiary of the ill-fated Investors Overseas Services. When IOS collapsed, Clowes set up Barlow Clowes. The firm was originally an advisory service focusing on guaranteed income bonds; it quickly moved into investment management, promising that it could deliver a large guaranteed tax-free return through a combination of active management and “bondwashing” (buying and selling government bonds before the interest was paid in order to minimise tax).

What was the scam?

Although bond- washing was legitimate, exploiting it for profit was difficult and costly due to high trading fees. Barlow Clowes then started diverting investors’ money to pay for an expensive advertising campaign. It therefore started relying on the money from new recruits to pay the guaranteed returns of existing members, turning it into a de facto Ponzi scheme. Clowes then stopped buying government bonds altogether, instead diverting investor funds in to a large number of private companies and his own pocket.

What happened next?

The fact that Barlow Clowes had no licence to manage money aroused the suspicion of many institutions, including the Bank of England and the Treasury. However, the Department of Trade and Industry (DTI – which at that time was responsible for financial regulation) repeatedly dismissed these concerns, and even granted Barlow Clowes a retrospective licence in 1985. However, by 1988 Clowes’ attempts to buy a brewery and a bank, as well as (unfounded) police concerns that he was smuggling drugs, prompted the authorities to finally shut Barlow Clowes down. In 1992 Clowes was sentenced to ten years in jail for theft. 

When Barlow Clowes was wound up in 1988, investors were left £190m out of pocket (£500m today). The outcry at the DTI’s inaction forced the government to pay £150m in compensation. It would take two decades for the money to be recovered (leaving a large loss to the government after taking inflation into account). 

Lessons for investors

It’s sensible to minimise your tax bill, but complicated schemes to reduce your obligations rarely end well and are a breeding ground for fraud.