THIS TRANSCRIPT WAS TYPED FROM A RECORDING AND NOT COPIED FROM AN ORIGINAL SCRIPT. BECAUSE OF THE RISK OF MISHEARING AND THE DIFFICULTY IN SOME CASES OF IDENTIFYING INDIVIDUAL SPEAKERS THE BBC CANNOT VOUCH FOR ITS COMPLETE ACCURACY. FACE THE FACTS Payment Holiday Presenter: John Waite TRANSMISSION: 11TH FEBRUARY 2010 1230-1300 BBC RADIO 4 Waite Over the past two years four UK airlines have gone bust. Two months ago there was a fifth casualty to report. News clip It's 8 o'clock, this is Good Morning Scotland with Gary Robertson and Aasmah Mir. And coming up in the next hour. A Scottish airline - Flyglobespan - goes bust. We're live at Glasgow airport. Gary, good morning, yes, this of course one of three airports in Scotland that Globespan used to fly from - Glasgow, Edinburgh and Aberdeen. If you log on to the website this morning instead of the glossy brightly coloured offers there's a simple black and white statement telling you that all flights have been cancelled and all planes grounded. Waite Eight days before Christmas listeners to BBC Radio Scotland woke up to news of the loss of Scotland's biggest airline. Flyglobespan had gone into administration, taking with it the travel agency business Globespan. Six hundred and fifty jobs had been lost, 4,500 UK holidaymakers were left stranded abroad and thousands more were not going to get the holidays they'd booked with a company that had been very popular according to the Scottish Finance Secretary John Swinney. Swinney Flyglobespan were a strong Scottish company and I'd used Globespan, my family and I had a great experience with them, they were a first class company, great operation and I know many people who've used Flyglobespan. Waite So what had happened to what Mr Swinney calls "a strong, first class company"? It had survived spiralling fuel prices, the worst of the recession, the terrorist attack on Glasgow Airport which grounded half its fleet, to post a modest profit last year of just over a million pounds. Well enter E-Clear, a little known firm, performing a behind the scenes but vital role at the heart of the banking system. An unregulated company processing millions of pounds in card payments from Globespans's customers but instead of passing that money on to the very company providing flights and holidays, E-Clear was keeping back vast sums. Meanwhile, we've discovered that E-Clear's sole director, Elias Elia, was managing to find millions of pounds to prop up another travel firm in which he had a majority stake. And it's believed at least some of that money came from E-Clear itself. Maguire I loved it, I really, really did love my job and I'm really going to miss the company and that job. Waite Tom Maguire is 27 and from Prestwick in Ayrshire. He'd worked for Flyglobespan for five years, latterly as manager of a cabin crew. Maguire When I started with Globespan they had 34 cabin crew, so things were in the very early stages. The company had came from being a travel agent to having its own aircraft. And just everybody working together, I think, everybody was really keen to see Globespan succeed. And that passion really made the company grow I believe. My life was Globespan, it revolved round that, it revolved round the fact I was on standby so couldn't do much when I was in standby to being away for weeks, sometimes months at a time, you ended up socialising with the people you worked with, flying shifts were about minimum 13-14 hours, so you spent a lot of time there. Globespan really - it was predominantly my life. Globespan advert We're Flyglobespan - Scotland's low cost airline to the sun. Waite Flyglobespan's history, however, was not totally without blemish. In October 2007, for example, it had its licence to fly directly across the Atlantic suspended after concerns from the Civil Aviation Authority. That year Globespan made a loss of £19 million pounds, and, early last year, it stopped operating services from Durham Tees Valley airport. Indeed, occasional newspaper reports questioned its financial health, including a flurry, in mid-December suggesting that Flyglobespan was…. quote…"on the cusp of collapse". Denied by the company, which wrote to employees with reassuring news. Flyglobespan letter We have successfully secured a financial investment package that will see us continue to prosper and grow Maguire We had had an e-mail from the company director at the beginning of December just to say they'd secured investment and that the company was hoping to expand in the next year and it was going to be a really exciting year for the company. So that allayed any fears that we may have had that Globespan was going through a troubled time and to find out on the news and then have people on Facebook telling you that the company just went into administration just completely and utterly stunned me. Cartwright My name is Bruce Cartwright, I'm a partner at Price Waterhouse Coopers and I'm joint administrator of Globespan Plc Group. Waite So what went wrong with it? Cartwright Well the company had had a difficult time two years earlier when it had run up some losses, so the balance sheet was weakened as a result. But fundamentally this was a business that had returned to profitability. However, having said that during the course of 2009 cash flow became more of a problem because for whatever reason at the time money was being withheld by the agent processing the bookings. Waite So in your view was its failure principally down to E-Clear holding on to that money? Cartwright I think ultimately the failure was down to the money being withheld because the company had made changes, it was returning to profitability, it did need to rebuild its balance sheet and raise some capital but it didn't get the opportunity because it ran out of cash. Waite So what is E-Clear? And why was this company so central to the fortunes of a travel firm that had been trusted by millions of passengers. E-Clear UK plc operated under the slogan "it pays to be clear.." and offered: Promotional blurb ...secure, reliable credit and debit card payment services and risk management solutions to give your business all the advantages it needs when it comes to payment processing. For any business these days, credit and debit cards are crucial as most of us pay by plastic, to the tune of nearly £390 billion pounds last year, according to the UK Cards Association. And every time we use our cards it sets off a behind-the-scenes sequence involving banks and computer systems and that's where companies like E-Clear come in. They manage that process on behalf of retailers but they are not the only ones who do. Many transactions involve something called a 'merchant acquirer'. One I think for Sandra Quinn from the UK Cards Association to explain. Quinn Merchant acquirers act as a backstop and without them the whole system would really go to pot I think it's fair to say. They make sure that all the transactions that a retailer accepts are processed correctly and go to the right destinations so that they're paid. And also they stand behind the merchant and provide an assurance to your card company when you're buying something that they can get the money back - there's cover there, there's a level of insurance being provided - so that they can get the back for every transaction they've made if something goes wrong. As the card schemes currently work you couldn't have an operating system without that model, that's why it's there, it works extremely well and it provides a level of security so that we all know that the piece of plastic we've got in our hand can be accepted anyway and it gets back to our own statement and our account later. Waite And how do they make their money? Quinn Well a merchant acquirer is providing a service so they will charge the retailer for the service they're providing. They're generally worked on a percentage per credit card transaction and debit cards are a flat fee and they're negotiated commercially between the merchant acquirer and the retailer who they're providing a service to. Waite That insurance - that backstop as Sandra calls it - is important because of the strength of consumer legislation. Pay by credit card for something costing more than a £100 but less than £30,000 and if you don't get what you pay for, your credit card issuer has to pay you back. Obviously your credit card issuer then seeks a refund of its own. If the retailer has gone bust, it'll turn to the retailer's bank - or merchant acquirer - to get its money. But because of that risk, merchant acquirers - the biggest in the UK being arms of our major banks - can be wary of small retailers which are viewed as more likely to fail. So those small retailers might have to turn to a middle man to get a better deal. E-Clear was such a middle man - or as Sandra Quinn calls it - more properly known in financial terms as an aggregator. Quinn There are a range of aggregators, they're - some of them are very small, some of them are quite large but they provide a range of services. And the most common types of businesses that would approach them are perhaps very small businesses who don't do a lot of card payments but need some service, so therefore don't want to have a big complicated arrangement perhaps with the banking merchant acquirer, an aggregator can perhaps provide them with a better commercial deal. Waite As an aggregator, E-Clear needed someone else - a bank - to help it get payments cleared. So it worked with another company - Pago eTransactions Services based in Cologne - which has connections with Deutsche Bank. So whenever a Flyglobespan customer bought a ticket online, it was E-Clear and its partners in Germany which processed that payment. That money - minus E-Clear's commission - should then have been passed on to Globespan within a matter of days. But it wasn't. And by the time the Scottish travel firm went under, it was owed a staggering £35 million pounds, tipping it over the edge and into the arms of the administrator, Bruce Cartwright. Who trying to find out where the money was, was frankly baffled by E-Clear's response. Cartwright Well it was a rather unusual position because in the normal position we would contact them and say we've got records that say £35 million, what do your records say. We just really didn't get a response on this because they didn't think it was important to tell us what they held. When we asked the question why, we were told because the money's going back to the customers so it doesn't belong to Globespan so it's not relevant for the discussion. Waite What did you make of that? Cartwright I think it was an unusual conversation that I've never had with someone before, to be told that we may or may not be holding your money but it's not relevant to you. Waite It's none of your business almost. Cartwright Yes it's - I suppose it would be the equivalent of going into the bank with your passbook, asking for your balance and being told that actually it's not relevant to tell you what's in your passbook and actually, by the way, there's likely to be some charges coming through, we're not going to tell you what they are but you might as well hand back your passbook now because - because it's of no relevance to you. Not been in that situation before. Waite And what baffled Bruce Cartwright even more was how much money E-Clear was holding back just in case customers who'd paid wanted a refund. Twenty million pounds of that £35 five million was from flights or holidays that had been and gone, so very few refunds if any were likely. What's more the man brokering the extra investment in Flyglobespan which you'll remember was supposed to help the company "prosper and grow" was none other than Elias Elia - the man in charge of E- Clear. In the end, that money didn't come through either. The millions of pounds missing from Globespan's accounts and the job losses which followed have outraged members of the Scottish Parliament here in Edinburgh. John Swinney is the Parliament's finance secretary. Swinney E-Clear has certainly contributed significantly to the collapse of Flyglobespan. When you strip out the risk possibilities of difficulties with flights and other issues, which will affect the airline industry, £20 million of that £35 million should have, without dispute, have been in the bank account of Flyglobespan and it wasn't. And in this time when cash flow is almost the king for many businesses having £20 million out of your cash flow at this very, very sensitive economic time is enough, as I think it was in this circumstance, to tip a company into administration. Waite But I mean it would be sensible, would it not though, for a company in E-Clear's position to withhold a quantity of money to protect itself against any future liabilities and that's what it says it was doing? Swinney I think that's a fair point and I think that's what E-Clear were clearly doing. What they were doing however, was holding on to the money for far too long. The point that I make about £20 million of the £35 million having been - should have indisputably been in the bank account of Flyglobespan - what I mean by that is there was no recurring risk attached to that £20 million - the flights had gone, the people had come back, everything was done and dusted. So the issue was the fact that E- Clear were holding on to resources that were rightfully Flyglobespan's for far too long. And in this financial environment, where there is such pressure on cash flow, to be without that size of resource is an enormous problem and that's undoubtedly affected Flyglobespan. Waite The thing is, E-Clear was not always in the habit of holding money back. So let me introduce you to Hugh Boyle. He was chair of an airline called, Zoom, which also used E-Clear UK Plc. In August 2008, Zoom went under, blaming high fuel prices for its demise. But back then, Mr Boyle only had praise for the prompt way E-Clear had processed his customers' payments. Boyle We didn't have any problems getting any payments, they came seven days after the transactions were made, which is more or less to the contract that we had. So we didn't have any problem in that - there at that time. Waite And the reason why payments were following swiftly with nothing held back? Well Mr Boyle says E-Clear did have credit insurance on his business, meant to offer protection in the face of massive refunds. When Zoom did actually go under, Mr Boyle reckons refunds would have totalled £25 million. But what he doesn't know is whether E-Clear's insurance policy would have covered all of that. Boyle They could well have only had £10 million cover and then had to fork out £15 million themselves, that I don't know - what percentage, if at all any, they had to pay themselves. Waite Two weeks after Zoom's collapse, another major E-Clear client and Britain's third largest tour operator, XL, also failed. Did E-Clear take a hit again or did its insurance pay out? All we can say for sure is that in the months which followed, several other E- Clear customers began complaining that they weren't getting their money. In October 2008 SkyEurope - a Slovak airline - switched to a different payment processor. It's not known when its problems with E-Clear began, but around 14 million euros of its money had been retained by E-Clear and it started legal action to get it back. By the time SkyEurope filed for bankruptcy last year it was still owed 6.3 million euros. And it's not the only one with a claim. Reading Sunwing - a Canadian tour operator based in Toronto.... Which we understand claims it's owed even more money than Globespan - almost £50 million. Reading YouTravel.com - a holiday company based in London... Which says it's owed around £150,000. Reading Bridge Group International - an online investment club.... It told us it's missing a "six figure sum". Reading Swimming Nature Licensing Limited - which provides children's swimming lessons mainly in London and Scotland.... And is now seeking the return of over £230,000. Then there's Hugh Boyle - as we've heard - when chair of Zoom he was happy with E-Clear. But as the man in charge of another holiday company, Go Travel Direct, based in Canada, Mr Boyle was far from happy. Boyle Go Travel Direct was owed at the end £300,000. But what we have to understand is that £300,000 is of clients who have travelled, returned over six months, nine months, they're back from their holiday, so it's not like - in the situation with Globespan - where they were for advanced bookings of people who hadn't travelled, they had actually travelled, they'd been on vacation and there was still £300,000 outstanding. Waite And how much of a headache was this for you? Boyle It was a major headache because it went on and they made a lot of excuses - they said that people could have charge backs. They went to six months and then we had to start taking legal proceedings against them. They said they had paid the money, the money mysteriously got lost in the system. We chased it up from the banks only to find that it had never been paid in the first place. So we did get a lot of false information from them. Waite Bruce Cartwright knows how Mr Boyle feels. As the joint administrator of the Scottish travel firm, Globespan, he has to sort out the company's tangled state of affairs. It's his understanding that by January 2009, Globespan was owed £6 million by E-Clear. The credit crunch meant credit insurance was harder to get and at that point there was no such cover on Globespan's business. E-Clear justified withholding all those millions until holidays had taken place and any risk of refunds had gone. Fine in principle but in practice it held on to money for far, far longer than agreed. Cartwright It's normal for the money to be transferred after say five days, so there is inevitably always a slight backlog of cash, normally five to seven days. What happened at that stage is the five day delay became more like three or four weeks. Waite And what effect did that have on Globespan? Cartwright Well clearly if you're dependent - and this is common in the travel industry - you're actually dependent on the customer's cash coming to you before you incur some of the costs flying the planes etc. and as you build up to the summer months, particularly in Globespan's position, you are taking more and more bookings. So E-Clear would, I suspect, have said we need to hold back some more money because you've clearly got a lot of bookings for the summer. Now that works for so long, then over the course of the summer these flights are delivered and it seems to me at that point the monies should certainly have been released. Waite But far from being released, E-Clear held on to even more money from Globespan's customers and for even longer. An agreed delay of 30 days became an unauthorised delay of more than 70 days and by August 2009, Globespan was missing £32 million. In fact, today the amount owed by E-Clear to all those companies we've mentioned is thought to total around £100 million. So where has all that money gone? Well sadly the sole director of E-Clear, Elias Elia, has not responded to our various requests for an interview. A pity as he and his company had been a bit more talkative with the hiring of the former editor of the News Of the World, Phil Hall, as their spokesperson. That deal has now come to an end, as has E-Clear itself - forced out of business by a High Court action brought by Globespan's administrators seeking to get some of its missing thirty odd millions back. Bruce Cartwright of Price Waterhouse Cooper's has been trying to find out what's in E-Clear's coffers. Cartwright When we went back to court we had statements from E-Clear showing their bank statements and I have to say it didn't take a lot of adding up. Waite There was no £35 million? Cartwright There was no £35 million, there was a series of bank accounts - some overdrawn, some with different currencies in but it was quite clearly less than £100,000. Waite Yet less than a fortnight before E-Clear was forced out of business and revealing so few funds, Phil Hall, came on to You and Yours maintaining that the company was holding £35 million of Globespan's customers' money. In the light of subsequent events, we asked Mr Hall why he felt able to make such a statement. Reading My position is I am an advocate for clients. I take instructions and pass those on. If you feel I should check the accounts and do a due diligence on the company before representing them, I am sorry that is simply not practical any more than a lawyer can do in court when advocating his client's position. Waite Well Mr Hall may not have been checking the accounts of E-Clear but now others definitely are. The High Court appointed Malcolm Cohen from the accountants BDO as joint administrator of E-Clear. Cohen We went straight from the court to the company's premises and we found ourselves locked out by the landlords and it required some lateral thinking on our behalf to worm our way in, which we subsequently did and we spent a large part of the first two weeks of this assignment trying to get books and records of the company - some of which have gone missing, some of which are not available - into some semblance of order. Waite Mr Cohen has told us that by the time E-Clear ended up in the High Court it had lost all of its clients. Every single company which had used it had either gone out of business themselves or started using a different payment firm. Promotional music from Elian Developers Elias Elia - E-Clear's sole director - has been involved with a number of other businesses. This music is from the website of Elian Developers, a firm which has described itself as "one of the biggest construction companies in Cyprus". And who was named as boss of its parent company, the Elian Group no less? Why Elias Elia - the boss of E-Clear. Then there's Allbury Travel Group Limited which was based in Hertfordshire and used E-Clear to process its customers' card payments. Its accounts name its parent company as Allbury Limited based in the British Virgin Islands. And who is its boss? Why, Mr Elia again. In fact Allbury Limited loaned Allbury Travel Group almost £12 million during 2008 and 2009. Loans which enabled the company to continue trading. But Allbury Travel still went into administration in December - the very same month remember that Globespan went under. And the reason? Well according to a report by Allbury Travel's administrators, the company's major shareholder Allbury Limited could no longer provide any more money and: Reading As a result of the sudden loss of financial support which was previously provided by the shareholder, the company had no alternative but to cease trading The administrator's report also states in relation to those loans: Reading It is believed that some of these funds were provided by E-Clear (UK) Ltd Indeed it lists a loan of over £1,700,000 as coming jointly from E-Clear and Allbury Limited. Back in Scotland, where we began, Finance Secretary, John Swinney, says he's particularly troubled by the fact that E-Clear, which was registered in the UK and handled hundreds of millions of pounds every year, went unregulated by the Financial Services Authority. Swinney The performance of E-Clear has been wholly unacceptable, it's been very, very damaging to the prospects of Flyglobespan, it's affected people's jobs and livelihoods and this has been able to be undertaken without any impediment whatsoever from the authorities in this country and that is wholly unacceptable. And from this there must be clear lessons learnt about how behaviour has to change and intervention has to change to make sure that companies are properly protected in this circumstance. Waite Well in a statement, the Treasury told us: Statement The UK government recognises that certain payment services need to be regulated and alongside other member states in the EU has passed legislation to ensure that all providers of electronic payment services will be subject to a prudential authorisation regime…..These new rules came into effect in November 2009 and will cover all such businesses by April 2011 With E-Clear not part of its remit, the FSA was not looking into its affairs. But German regulators did when, in early 2008, E-Clear bought a majority stake in a bank there. We understand that regulators there felt E-Clear was not transparent enough to be involved in a German bank. Surprising, perhaps, for a firm with that marketing slogan - "it pays to be clear". Mr Elia's voting rights were removed and another investor is being sought to buy the shares. It's a potential asset likely to be of interest to Malcolm Cohen - E-Clear's joint administrator - who is left looking now for all those missing millions. Cohen We are following up many leads in respect of assets, some which may rest within the UK, some which we think may reside in different countries. Waite Like Cyprus? Cohen Like Cyprus and Germany and other countries. I've put together a team of top people who have spent many hours busily imaging the computers, looking at the software and the hardware trying to understand where the black hole is, where the money has gone and it’s a challenging assignment.