PART 1 - CROWN AGENTS UK

CROWN AGENTS UK

PART I

SUMMARY REVIEW OF ACTIVITIES 1967-1974

History

The Crown Agency was opened, under another name, in 1833, and remained practically unchanged for over 100 years.  Its main function was to look after the practical end of the Empire - arranging for supplies for colonial governments and later for public authorities, railway and harbour boards, broadcasting authorities, currency boards and central banks around the world.    These organisations were their “principals” for whom they simply acted as “agents”.  Then, as demands arose, they extended their services to include stamp issues, marine insurance, inspection facilities, and recruitment and other personnel services.

The Crown Agents were created by administrative act.  They had no legal or corporate status.  They were described by constitutional lawyers as “an emanation of the Crown”.  They were subject to “general supervision” by the Secretary of State for the Colonies (and later to the Ministry for Overseas Development) but the office of the Crown Agents was a public service, not a Government department: and although Crown Agents were paid a salary in line with Civil Service rates, they were considered Crown servants, not civil servants.  In practice the Crown Agents were not actually answerable to anybody and nobody ever took any initiative in order to make them so.  In this they were a unique institution.

Activities 1967-74

Introduction

The financial activities of the Crown Agents between1967-74 resulted in the loss of an estimated £212 million.

The Justice Fay Commission of Enquiry into the activities of the Crown Agents (published in 1977)  and Tribunal Report (published in 1982) demonstrated how ,time and time again, there was no proper consideration of the implications of the change in the Crown Agents’ position from acting as their principals’ agents to acting as their principals’ bankers.  The key people in the Finance Department and on the Board of Directors at the time also appeared to have very little real financial expertise between them and no expertise whatsoever of banking or the control systems normally applied in a banking business.  When the Crown Agents later launched into property development, inexperienced staff was again responsible for huge investments. 

There was also little evidence of consultation between the Finance Department, the Board of Directors or the Ministry for Overseas Development (ODM) before huge investment commitments were entered into.   The Bank of England was also found to be lacking in certain areas where it could have exercised more control over the Crown Agents’ activities.

From agents to bankers

It all began with the move by the Crown Agents from agent to banker status.  This was made mainly on the feeling in the mid-sixties that the Government would be only too happy to see an end of this post-colonial remnant and that if the Crown Agents were to survive they would have to build up reserves of their own.

Several limited companies were incorporated: in 1963, Four Millbank Nominees Ltd (FMN) and another company which later became Four Millbank Investments Ltd (FMI); and in 1967, Millbank Technical Services Ltd.  Four Millbank Nominees was a nominee company which held portfolio investments for principals and subsequently held assets for the Crown Agents themselves.

Finvest

Various different categories of own account activities started in 1967 and 1968.  The most important was what later became known as “Finvest”.  This term was a contraction of “Financial Department Investment Account”.  It was the borrowing undertaken by the Crown Agents on their own account either from the money market or from principals (other than that taken into the “Joint Funds” - being the “Joint Consolidated Fund” - JCF - which took money from governments or the “Joint Miscellaneous Fund” - JMF - which took money from other principals - both Funds being treated as the principals’ current accounts) together with the activities financed out of such borrowing.

The first Finvest transaction took place on 22 March 1967.  Four such transactions took place - with successful results - before the Finance Department even reported the existence of Finvest to the Board of Directors in May 1967.  Although the possibility of loss was recognised whilst undertaking these transactions, assistant Crown Agent, Edward Morris, was of the opinion that the money market operations were only an extension of an activity with which the Finance Department was already familiar and which it was capable of running properly.  In actual fact, as the Crown Agents were now acting on their own account, not as agents, specific rules were needed to ensure the proper conduct of such transactions.

Acquisition of shares

The other form of own account activity which started in 1967 was the acquisition of shares in two companies - E D Sassoon Banking Co Ltd (Sassoon’s) and Television Recording Limited (TVR).  The investment in Sassoon’s was the first occasion on which the Crown Agents took a share in company equity on their account and the first venture into merchant banking.  The primary objective was to offer new services to principals but it was also expected to be a profitable investment.  The Crown Agents’ partners in the venture were Continental Illinois National Bank & Trust Company of Chicago, and a businessman, Mr R Yablon.

Before investment took place, there was much discussion about the proposal to invest.  The Ministry was consulted, who in turn consulted the Treasury, who in turn consulted the Bank of England.  The Bank had serious reservations about the desirability of the Crown Agents investing in what was then a small merchant bank registered in the Bahamas.  Ultimately however, it agreed.

Some key staff changes were also taking place around this time.  Sir Stephen Luke retired in 1968 (although he remained on Board of Directors) and on doing so recommended that his replacement should be a banker.  The Treasury and ODM were not enthusiastic however, and instead Sir Claude Hayes moved from being principal finance officer at ODM to Senior Crown Agent.  At the same time, the former director of finance, Kenneth W Barley, was replaced by Allan Challis - a person who apparently tolerated no criticism or interference.  The Justice Fay Report states that “Mr Challis was now in the saddle and above him there was no effective restraint”.

When the investment into Sassoon’s finally took place, Sir Stephen Luke, Sir Claude Hayes and Allan Challis joined the Board of Directors.  In 1969, Sassoon’s arranged for the share issue in Gramco Management Ltd.  Sir Claude Hayes and Allan Challis were offered shares due to them in their positions as directors of Sassoon’s.  There is a fundamental principle that public office must not be a means of making a private profit and the Justice Fay Inquiry found that the directors’ taking up of these shares was an example of the low ethical standards within the Crown Agents at this time.

The equity interest in TVR was acquired in December 1967.  The Crown Agents had become involved in the provision of broadcasting facilities and considered TVR to be a suitable vehicle for expanding their services.  They went ahead with this investment (despite a discouraging report by Price Waterhouse & Co, chartered accountants), but with no success - the company failed to even get a programme franchise.

The growth of Finvest

Meanwhile, Finvest had grown fast and by this time investment was no longer confined to the money market.  The sources of money invested were subsidiaries of London clearing banks, London branches of international banks and various financial institutions such as industrial pension funds and insurance companies.  Total borrowing was estimated at around £50 million.  The nature of the investments were described as money placed short-term with institutions of the same kinds as those which provided the money, in the form of bank deposits and loans, including loans to selected finance houses and merchant banks, and investments in British government short-dated securities, UK equities and Australian equities.

Expansion from 1969 onwards

The first half of 1969 saw a major expansion in the Crown Agents’ own account activities.  This was due to losses still being forecast for 1969 and 1970.  The Crown Agents Board decided that an expansion of the finance business by moving even further into the merchant banking function could, in the short term, balance the office budget and in the longer term provide the means of building up reserves.  They also started to intensify investigation into investment in real property on a world-wide basis.  Examples of the Crown Agents’ expanded activities during this period are as follows:-

1. Abbey Orchard Property Investment Pty - a large property developer in Australia - to which a total investment commitment of A$310 million had been made by the Crown Agents.  The Crown Agents held nearly half of all shares in this company.
2. English & Continental Property - a joint property venture in the UK between the Crown Agents (51% holding), their property solicitor and a small estate developer.
3. Sterling Industrial Securities Ltd (SIS) - a financial institution in London set up with capital from the Crown Agents and in which they had a 33% interest.  Originally designed to encourage support for small businesses and industries, this organisation firstly spent a large sum on developing its own very plush offices in the West End and speculated on the property market before eventually settling down to more conventional banking activities.
4. First National Finance Corporation (FNFC) - large amounts of shares were purchased by the Crown Agents in this UK-based company and loans were also supplied to them, totalling the Crown Agents’ lending to this company of over £12 million by the end of 1969.  The losses incurred to the Crown Agents by their lending to this company were relatively small, but the evidence of secret commission being paid to the Agents on their acting as sub-underwriters for a new issue of FNFC shares - actually a breach of the 1948 Companies Act - is another indication of the dubious way in which the Agents’ financial affairs were conducted during this period.  The company has since gone bankrupt.

The Crown Agents also started foreign currency operations at around the same time as the own account operations began.  Apparently these were initially regarded by the Crown Agents as being undertaken by them as agents for their principals.  The operations started by payments in foreign currencies made by the World Bank to be expended on the purchase by principals of supplies procured through the Crown Agents.  Initially these payments were made in US dollars, but later other currencies were also used.  The Crown Agents credited their principals’ accounts in the JCF in sterling at the exchange rate prevailing when they received the foreign currency, which they then retained as a source of investment.  It was then either banked abroad or invested in European or US bonds.

Investment portfolios were also set up in various countries including the US (managed by Continental Illinois National Bank & Trust Company of Chicago), France, Holland, West Germany and Canada.

In late 1968, the Crown Agents began to borrow abroad, notably from the US and Canada, in order to help finance their overseas investments.  The size of the overseas portfolios increased substantially, although the performance of these portfolios was disastrous, in particular on the US portfolio, the value of which fell to about half the value of the borrowing supporting it before steps were taken to wind it up.  Later, such foreign currency funds were also used to make to commercial loans abroad.  (More information on how Crown Agents breached exchange control laws whilst carrying on the above operations can be found in Part II of this report).

Other important developments in 1969 included the start of trading in commodities and investments in various overseas merchant banks.

Other unsanctioned behaviour during this period

As mentioned above, the Crown Agents were a unique institution.  And the situation concerning the Crown Agents’ dealings in Treasury Bills was also a unique one.   To enable the Crown Agents to invest balances received from their overseas principals promptly without loss of interest, they had for years been privileged to buy Treasury bills from, or sell them to, the Bank later in the day than was allowed to other customers.  In return, they were supposed to give the Bank advance warning of late transactions so that the Bank could take them into account in its operations in the short-term money market at the end of the day.  Large late transactions of which the Bank had not been forewarned could upset its calculations and result in its operations having a different effect on the money supply in the market than it had intended.  However, in 1969 the Crown Agents were regularly carrying out substantial late transactions without previous warning to the Bank.

Another privilege enjoyed by the Crown Agents was the right to tender for Treasury Bills and buy them direct from the Bank, rather than through the usual channel of a discount house.  Early in 1970, however, it came to the Bank’s notice that the Crown Agents were buying newly issued bills from the Bank and then selling to three particular discount houses.  In effect, they were acting as a secondary supplier of bills.

Both this and the above practice were eventually given up after requests from the Bank to do so.

1970-74

By the end of 1970, the financial situation was even more out of control with £400 million having been borrowed and invested by the Crown Agents.  Also the extent to which they used short-term borrowing to fund long-term investments was also a cause for great concern, with the Australian property development being the most marked example of this.  The vital question of who would be ultimately liable if the new activities resulted in losses, still remained unasked - but one thing was certain and that was that the Crown Agents could never meet these from their own resources.  They had no share capital as back-up and although the ODM was notified by the Bank of England that there could be cause for alarm here, no steps were taken to do anything about the situation.

A well-documented article written by a Mr Charles Raw, in the Guardian in 1971, also tried to draw attention to the Agents’ accountability and use of principals’ funds.  It also mentioned the share dealing of individual agents including Sir Claude Hayes and Alan Challis - a serious allegation in view of the civil service rule that public office must not be a source of profit.  This prompted some action, although it was actually quite inadequate.  A committee under Sir Matthews Stevenson was set up to report to the Conservative minister of overseas development, Mr Richard Wood.  The report was inadequate due to poor information and the lack of it provided by the Crown Agents, and also because the implications of the Crown Agents’ position was not fully and properly appreciated by the committee carrying out the enquiry.

In autumn of 1973, the Yom Kippur War took place and was followed by a world oil crisis.  These developments accentuated trends towards an economic recession.  In November of that year interest rates soared and a secondary bank, London & County Securities Ltd, ran into trouble.  A number of other secondary banks announced that they were in difficulties.  The Bank of England began to mount a support operation and on 17 December, the Government announced its intention to impose a development land tax.  This all led to an almost complete standstill in the property market in 1974.  Altogether these events were disastrous for the Crown Agents.  An example of just one disaster for the Crown Agents in the property market involved Mr William Stern, whose property group collapsed in 1974 taking £41 million of the Crown Agents’ money with it.

Financial crisis and subsequent action taken by Government & Bank of England

In May 1974, a meeting between Bank, Treasury and ODM officials was held, when it emerged that the Agents were in dire financial trouble because of the collapse of secondary banking and property.  Even then however, neither the recently-arrived minister at ODM, Mrs Judith Hart, nor the civil servants at the ODM and Treasury (despite the Chancellor of the Exchequer being told of how the investment in the Stern Group could pose “political problems with the Third World”), nor the Bank of England, appear to have felt any sense of urgency about appointing investigating accountants, finding a replacement for the retiring Sir Claude or putting an experienced man in the finance directorate.  In fact, it was actually believed that the Government thought that the Crown Agents should “work their own salvation” and that they should seek to trade their way out of trouble.

Conclusion

Evidence shows that the Crown Agents’ financial operations between this period were carried out by inexperienced staff and that no consideration was ever given to the implications of entering into such transactions whilst having the status of a public body.

Individual agents were shown to have used public office for their own private gain and the Crown Agents appeared as a whole to be answerable to nobody with neither  the Government or the Bank of England assuming any real interest in making them so.

“All-in-all it was a quite remarkable financial scandal and one of great embarrassment to all concerned.”- Sir Matthews Stevenson