Financial foul play: Kicking goals using emails and other data sources in forensic investigations

Thursday, 27 February 2020

Last week UEFA fined big-money club Manchester City GBP25 million and banned it for two years from the Champions League. The club was banned for breaching UEFA’s Financial Fair Play Rules (FFP Rules), for attempting to hide the amount of investment that an owner can provide.

This means that financial misstatement in sport has again seen the need for forensic accountants (one of the authors of this article has worked on a football-related investigation).

Forensic accountants used the potential goldmine of data of emails and accounting records to understand whether Manchester City had been misleading UEFA. It is alleged that the club offset the huge losses it made on player signings and wages with ‘commercial revenue’ from large sponsorships from Abu Dhabi companies. Those sponsorships are alleged to be additional funding from its owners, rather than a true commercial sponsorship arrangement. This is not allowed under the FFP rules.
 

In European football, UEFA’s FFP rules aim to prevent wealthy clubs from causing an uneven playing field. The rules prevent excessive spending on player salaries and transfer fees for new players which can lead to unsustainable levels of debt or unprofitability. This is the case even if a wealthy owner is willing to bankroll those losses – something former Arsenal manager Arsène Wenger controversially dubbed ‘financial doping’, in reference to Chelsea’s Premier League win in 2005. The specifics of FFP are as follows:

- Over a rolling 3-year period, a club’s spending can’t exceed its revenue such that the losses exceed EUR30 million

- This aims to prevent wealthy club owners bankrolling huge spending to buy up the best players

- The largest clubs offset their spending with their high revenue, usually through big sponsorships. However, if that ‘sponsorship revenue’ was from a related party of the owner, this would breach the FFP rules.

Background

Manchester City (Man City) is one of the biggest football clubs in Europe. It is owned by Sheik Mansour from Abu Dhabi via the City Football Group, who also own Melbourne City FC.
 

An investigation into Man City’s sponsorship arrangements was first undertaken in 2014, when a settlement agreement was reached between UEFA and Man City in 2014, that according to the BBC included a GBP49 million fine. A few years later in November 2018, internal Man City emails were leaked to a German magazine, shedding more light on those sponsorship deals and making public Man City’s attempts to hide their arrangements. This led to a second investigation into compliance with UEFA’s FFP, focusing on the following concerns:

• One of the emails included two key sponsor invoices, one for GBP8 million allegedly to be paid by Etihad, and the other for GBP59.5 million to be paid by the company associated with Sheik Mansour, the owner of the club. 

• Other emails referred to backdated sponsorship deals.

• A sports consultant was asked to consider whether the sponsorship deals represented ‘fair value’

UEFA’s forensic accountants determined that a significant proportion of commercial revenue allegedly came from the owners of Etihad, and that two of the sponsors of Manchester City were actually ‘related parties’ (as the owner of the club was Chairman of both entities). It is alleged that Etihad itself could also be a related party because of family relationships involved in the airline.

This led to UEFA determining that Man City did not comply with its FFP requirements, and the significant GBP20 million fine, and Champions League Ban. The latter could be even more costly than the fine itself.

You can read more about what happened here: How 'leaked' emails and invoices led to Manchester City's ban from Europe

Key themes seen in many forensic investigations

Despite the high-profile nature and the huge sums of money involved, this exhibits three key issues and a classic pattern we regularly see in investigations of all scales and sizes:

 

A key email attachment leads to the area of focus

As forensic investigators, the starting point in many investigations is financial information attached to an email. This could be an invoice, an excel schedule or even just copied and pasted tables from an accounting package.

Examples we have seen recently include an excel schedule at odds with other accounting records which indicated falsification of sales prices, and another which showed the beneficial ownership of assets not recorded elsewhere.

Where key emails have not already been identified, we use our e-discovery platform’s AI abilities to narrow down our search, and to help us find key terms and risks for the organisation.

Notably, as KordaMentha has written about before, a forensic audit is not the same as a statutory audit for the purposes of financial statements. Rather, UEFA’s forensic accountants would have used the evidence in the emails to focus on specific issues, rather than give a ‘true and fair’ view on the financial statements.

Focus on potential related parties

Relationships between colluding parties occur regularly in our work, whether these are family, business or other social connections. Understanding such dynamics are vitally important to our work, and may include the use of social media data, or company ownership/director data. For example, many of our investigations have identified fees paid to family members or to companies owned by related parties, which we identified using a combination of email, social and financial data.

A business valuer provides important insight

Involving business valuers can assist to identify whether a business, shares, or asset may have been bought, sold or entered into for an inflated (or deliberately low) price. Inflated prices paid for businesses and assets could mean the ‘additional’ (non-market) amount was paid to a ‘consultant’ or to someone involved in the deal as a backhander. Deliberately low prices suggest that we should also look for other ‘off-book’ payments or transfers of assets to related parties.

Conclusion

The UEFA investigation will have a significant impact on Man City financially, on their ability to retain or attract players, and in terms of PR. Such an investigation could not have been possible without those key emails. Similarly, most of our forensic accounting investigations would not be possible without the vital insights from emails, company ownership, social media data, and business valuations. When planning an investigation we think about all possible sources of data we can combine and use.

So how would UEFA identify this at other clubs without a series of similar investigations? A normal statutory audit may not be able to identify such non-compliance with the FFP, and perhaps controversially, in our opinion it could be almost impossible for a statutory audit to uncover certain issues without email, metadata or other ‘non-accounting’ information. Should auditors be provided with access to a company’s emails to enable them to do a more complete audit?

In Part 2 of this article, we consider more about forensic accounting in sport – a more common occurrence than you may think – and how overseas investigations could impact Australia.