Borrowers beware - tips to ensure your lender is good for the money

Some of you may have read about the recent travails of the London-listed oil company, Lekoil, which has been left heavily out of pocket having been fooled into thinking it had successfully lined up a US$184m loan from the Qatar Investment Authority (the “QIA”) only to discover that the individuals with whom it had been negotiating had no authority to represent the QIA.

The facts of the case and individuals involved are slowly emerging following an investigation by independent non-executive directors assisted by Kroll. Fingers have also been pointed at Lekoil’s professional advisors on the transaction. A recent Lekoil statement available on its website[1] contains the comment that “The fraud, whilst relatively elaborate and sophisticated, should have been capable of being detected by parties engaged to advise on the facility agreement, internally or externally, prior to its execution”.

But should it?

We cannot comment on the rights and wrongs of this particular case. But the case does make one pause and think – acting for borrowers on loan financings, there is often a mad rush in the run-up to closing when conditions to funding need to be satisfied. Rarely does a borrower stop for breath to consider whether the lender itself is good for the money.

So in the cold light of day, what can borrowers do to prevent them from finding themselves in the same position as Lekoil? Here are six suggestions which spring to mind:

1. Pay arrangement and other transaction fees at closing, ideally from the proceeds of utilisation, rather than at signing with one’s own funds. This can increase the cost of funding but can save a borrower having to fund transaction costs before it has closed.
    
2. Undertake KYC on funders. This sounds a bit back-to-front, but there’s no reason why it shouldn’t be done. Indeed, if closing takes place with funds moving between solicitor client accounts, the relevant solicitors will themselves need to undertake KYC on their clients to verify the source of those funds unless sourced from an established client who they have previously completed such checks for. Similarly, with syndicated loan facilities, agent banks will ordinarily undertake KYC in respect of participating syndicate members.
    
3. When scouting out potential sources of funding, only use intermediaries who are already known to you or have been personally recommended by someone you know or trust. We often work with specialist debt advisors who know the debt finance market well and can recommend suitable funders to clients. Whilst the Lekoil scam was brokered by a supposed representative of the QIA, some have raised eyebrows that no concerns were raised at an earlier stage about an intermediary apparently based in the Bahamas but with an office in Ghana, and with a website littered with spelling errors, without any details of its company officers and established via an outfit called Wild West Domains LLC.
    
4. Consider existing methods of financing where available instead of relying upon funding from hitherto unknown sources. Existing loan facilities can often be stretched in amount, purpose and on other terms either by amending and extending them, through re-financings or the use of accordion loan facilities. Sometimes it’s better to rely upon a tried and tested approach with a familiar source of funding rather than flirting with a new funder on terms which might prove to be too good to be true. A balance needs to be drawn between prioritising commercial terms (including price) and the practicalities of deal execution.
    
5. Escrow accounts can be set up with third party escrow agents for the purpose of closing transactions. There are many well-known institutions which will provide this service for a fee. The idea being that no monies move until the parties are satisfied that all funds are in place to close a transaction.
    
6. We recommend that directors take time as a board to properly consider the merits of any significant transaction, and that they meet in person with the principals at the potential funders as early as practicable in the negotiations so as to test the genuine appetite of the funders for the loan in question. Intermediaries have a critical role to play in matching borrowers up with lenders, but only the lender will decide whether to underwrite the loan.

Sadly not just for Lekoil but for all of us, fraudsters are devising ever more elaborate ways to con us out of our money. Borrowers need to be cautious when it comes to negotiating financings with third parties, especially where the individuals involved are unfamiliar to the borrower. It’s often easier said than done, but more haste and less speed can sometimes have real advantages, even if to others it can cause frustrations. The legal market is fast adapting to new technologies which can enable transactions to be completed more quickly and remotely, but with great technological prowess also come new and unforeseen risks.