Taking AIM: London’s Wild West Stock Market


The London Stock Exchange’s history and reputation is one reason the city is viewed as a great global financial centre. But while the main market may be famous, the UK’s junior stock exchange has largely remained under the radar.

London’s Alternative Investment Market (AIM) has a record of attracting small oil, gas and mining companies hoping to raise money to fund their business, and has been denounced by critics for its weak regulation and lack of means of enforcement.

This second article in Desmog UK’s three-part investigation outlines how AIM creates a grey area that allows extractive industry outfits to operate with minimal oversight while at times putting vulnerable communities at risk.

The investigation shows:

  • A history of scandals and company collapse on AIM, and a lack of public sanction and enforcement;
  • A “light touch” regulation system behind which companies are rarely named-and-shamed for abusing the system;
  • Problems with AIM’s regulators, known as nomads, that can also act as company brokers and can have vested interests in the companies they oversee;
  • How oil, gas, and mining companies can potentially mislead investors about assets in politically unstable regions, and how the reliance on the nominee advisor (nomad) system encourages weak verification and oversight.

DeSmog UK does not allege that any of the AIM companies featured in the investigation have acted illegally.

Alternative Investment Market (AIM)

AIM is the little sister of the London Stock Exchange, and was set up in 1995 to help growing companies raise funds. A senior US stock market official once talked about the market and its “light touch” regulation system as a “casino”, and the term has been widely used since to describe AIM.

Others in the financial sector have referred to the junior exchange as “the wild west”, with the Financial Times pointing out that AIM’s cowboy reputation has become something of a cliché.

Tax breaks on inheritance tax and stamp duty were implemented to encourage individual investors to buy shares on AIM, with many finding it an attractive place for self-invested pension pots.

Anneke Van Woudenberg, director of Rights and Accountability in Development (Raid), an NGO that advocates for corporate accountability on the issue of human rights, told DeSmog UK that AIM’s structure has led it to host many small and mid-sized oil, gas and mining companies that are particularly exposed to the risk of fraud.

She said investors were often unable to check the legitimacy of assets acquired in conflict zones and unstable areas where human rights abuse are rife and environmental standards minimal.

She described AIM as “a haven for perpetrators of the worst corporate misconduct in some of the world’s most conflict-prone regions”.

The London Stock Exchange Group, which runs AIM, did not respond to DeSmog UK’s repeated requests for comment.

The first part of DeSmog UK’s Empire Oil investigation shows how London acts as a hub for the extraction industry, with myriad oil and gas companies headquartered in the capital carrying out frontier exploration across remote and unstable regions in Africa.

This second part of the series shows how AIM plays a key role within this wider oil hub. It shows how oil, gas and mining companies use their London listings to boost international credibility, while capitalising on a concentration of established financial services, brokers and investors with the City.  

AIM claims its “unique regulatory framework is “based around balancing the flexibility a growing company needs”, adding it provides “an ideal environment for these ambitious businesses to access the capital and liquidity of the London markets”. But critics say the market’s record shows its system of self-governance has failed to tackle cases of fraud and corruption.

Nomads and AIM’s ‘Light Touch’ Regulation

On an October morning last year, AIM woke up to some unusual news. The financial advisor Zai Corporate Finance, which specialises in advising frontier market ventures in Africa and China, was stripped from its status as a nominee advisor, known in the industry as a ‘nomad’.

Nomads are the pillars of the market’s regulatory system and are expected to carry out due diligence on each new listed company and provide guidance and oversight throughout a company’s listing.  

Under this arrangement, regulatory work is outsourced to the nomads, which are private companies paid by the listed companies they regulate. This system, unique to AIM, is the reason why regulation on the junior market has been described as “light touch” — a term associated with Gordon Brown’s efforts to reduce the regulatory burden on the City and capital finance during his time as Chancellor.

There are currently 31 companies acting as nomads on AIM. Not all nomads are involved in enabling corporate malpractice, but there are numerous examples of wrongdoing that illustrate the issues critics have with AIM’s regulatory system.

There are few disciplinary actions available to nomads in cases of wrongdoing. Nomads are expected to put pressure on companies to be transparent and put the record straight, sometimes by threatening to resign as the companies’ advisor. Under AIM rules, companies are forced to leave the market if a nomad resigns and they are unable to secure a replacement.

In July, a study by accountancy firm UHY Hacker Young found that record numbers of nomads were resigning from the company they were advising, “with many brokers and investment banks reducing their exposure to riskier parts of the junior market.”

The London Stock Exchange can fine a nomad if it or a company it advises breaks any AIM rules, putting the burden of accountability on the nomad.

Disciplinary action is decided by AIM’s executive panel or disciplinary committee. However, critics have accused AIM of failing to name companies being fined for wrongdoing and of allowing people with a record of malpractice on AIM to list new companies.

In December 2016, for instance, AIM announced it had fined a nomad £75,000 for breaching its rules — but it never named the company.

Controversial businessman Frank Timis has also been allowed to float several companies on AIM after being handed a record fine of £600,000 by AIM regulators for failing to ensure information he provided “was not misleading, false or deceptive”, and for overstating the oil reserves of his earlier AIM-listed ventures, Regal Petroleum.

In a statement, Regal Petroleum said it was “disappointed at the outcome” but added there was no suggestion that its management team had “conducted their responsibilities in anything other than a proper and professional manner.”

Timis later listed mining company African Minerals on AIM. One of its subsidiaries, Tonkolili Iron Ore limited, has been accused of being “both complicit and involved in violence” as “villagers were unlawfully assaulted and imprisoned by the Sierra Leonean Police” while contesting the mine’s activities. The case is being heard in the British high court.

Tonkolili Iron Ore Ltd denies liability and claims that it has no “vicarious responsibility” for the actions of the police. African Minerals eventually went into administration in 2015 for failing to repay its lenders.

In some instances, nomads can also act as brokers for the same companies they regulate and earn a commission for the work. This means nomads can potentially have a vested interest in their clients doing well, creating a conflict of interest.


So what became of Zai?

In a statement, AIM said Zai had been struck off because it breached standards that require nomads to have performed “at least three relevant transactions in the last two years and employ at least four qualified executives”.  

Zai said the company had its nomad status removed “for failure to meet, on a continuing basis, nominated adviser eligibility criteria”.

The company served as the nomad of Chinese sportswear company Naibu Global International. Naibu was floated on AIM in 2012 as part of a cohort of Chinese companies joining the London junior market.

Three years later, the company’s UK-based non-executive directors told investors they had lost all contact with the China-based chairman Lin Huoyan and executive director Lin Congdeng and that “shareholder funds amounted to approximately £150 million in September 2015, now appear to have been dissipated”.

In an announcement to shareholders, the company’s remaining directors said “numerous attempts” were made to contact Huoyan and Congdeng “without success”.

In June, the company’s non-executive advisors announced they were considering bringing a lawsuit “for professional negligence” against the City advisers who were involved at the time the company was listed on AIM.

Zai also acted as a nomad for a range of AIM-listed oil and mining companies. This included GCM Resources, a London-based company that wants to exploit the Phulbari coal mine in Bangladesh — a controversial project opposed by local communities and repressed by a paramilitary force of the Bangladeshi government that opened fire on protesters opposing the mine.

Two NGOs, International Accountability Project and the World Development Movement, filed a complaint to the OECD against GCM Resources alleging it had breached OECD guidelines by “adversely affect[ing] human rights by displacing large numbers of people … and having widespread, severe and lasting impacts on the local environment, food security and water supply for the population in a large area surrounding the mine”.

Protesters outside the AGM of GCM Resources in December 2012. Image credit: Global Justice Now/Flickr/CC BY 2.0

The complaint added the opening of the mine could “lead to further protests and violence” and “further human rights violations”.

An OECD investigation found that GCM Resources had breached its guidelines on multinational enterprise by failing to “foster confidence and mutual trust” with the people who would be affected by the mine.

At the time, GCM Resources said the project was “compliant with international standards” and that it “planned to enhance the human right for the people of the area as well as the Bangladesh population”, adding the investigation findings were “almost entirely in favour of the company”.

Paul Gilbert, a lecturer in international development at the University of Sussex who has researched corporate activity on AIM, told DeSmog UK the market enabled major oil, gas and mining companies to rely on junior companies with no public reputation to do work major companies will not. He said: 

AIM still enables exploration in completely unregulated parts of the world with very little oversight. Junior companies can therefore carry out the dirty work for the big companies which have a public reputation to uphold. 

You will see majors and mid-cap companies get together to talk about corporate responsibility and transparency but the juniors are never part of these conversations.”

Both sides of the deal’

Civil society groups and NGOs have repeatedly warned about conflicts of interest surrounding nomads and fear their dual nature as sometimes both regulators and brokers can obstruct proper due diligence.

In 2012, Raid published a detailed report into the fraudulent activities of the Central African Mining and Exploration Company (CAMEC) in the Democratic Republic of Congo (DRC) and its nomad Seymour Pierce.

According to the report, Camec was allowed to trade on AIM and acquire “dubious” assets from Zimbabwe where the company had links to Robert Mugabe’s party, and the DRC where the rise of rebel groups was fuelling conflict and violence, despite “the unsavoury reputation of key business associates”.

The findings were presented to the Foreign Affairs Select Committee in the UK parliament, with Raid calling for AIM rules to be strengthened “to prevent assets of dubious provenance from conflict-affected countries from being laundered”.

Raid warned there is “a pressing need to learn the lessons of the CAMEC case, both in bringing errant or recalcitrant companies and their advisers to account and in reforming the way in which the junior market is regulated”.

Camec was bought by the Eurasian Natural Resources Corporation (ENRC) in 2009, before Raid published its report, and the company’s website has been deleted along with any reference to news announcements or official company responses from the time.

The company previously denied any proceeds from assets in Zimbabwe were paid to Mugabe’s Zanu PF party. It defended its strategy of entering politically risky parts of the world, saying it believed its approach of “making early stage investments in countries in transition is the best way to generate shareholder value”.

The company continued to deny any illegal activities following an investigation by the DRC government.

A later investigation by Global Witness claimed Camec was one of four companies owned by Philip Edmonds and Andrew Groves who ran a complex network of companies registered in the UK and the British Virgin Islands.

Global Witness claimed this network was used to dupe investors by using their money to buy assets at an inflated price that Edmonds and Groves secretly already owned through an offshore account in the British Virgin Islands, with the pair pocketing the difference.  

Responding to Global Witness’ allegations in a joint statement, Edmonds and Groves said they denied any allegations of wrongdoing, adding they are “committed to ensuring that all their business is conducted in a responsible and ethical manner”.

Miners in South Africa. Image Credit: Fifty/ Wikimedia CommonsCC BYSA 4.0

In another case, Global Witness claimed another of Edmonds and Groves’ AIM-listed companies, Sable Mining, was bribing members of the political elite in Liberia to obtain assets and monetise them on the market.  

Edmonds and Groves’ nomad, Seymour Pierce, was later accused of failing to carrying out due diligence and proper scrutiny of its client company.

In October 2009, Seymour Pierce was fined £154,000 by the Financial Services Authority for failing “to properly assess the internal fraud risks… and to implement effective controls to mitigate these risks”. Sable Mining delisted from AIM in September 2016 after its chief executive Andrew Groves was indicted for corruption and bribery in Liberia.

In February, Groves issued a statement claiming all charges against him and Sable Mining were “irrevocably dropped by the Liberian authorities”. The statement added: “Both Mr Groves and Sable Mining strongly refuted any allegation that they had acted unlawfully in relation to Sable’s business affairs in Liberia or indeed elsewhere.”

However, Fonati Koffa, the man who oversaw the Liberian task force charged with investigating allegations of bribery against Sable Mining and Groves told Global Witness that Groves’ statement was a “blatant and utter lie”.

There is no comprehensive investigation I am aware of that exonerated these people. As former chairman of the task force I would have been notified,” he said.

For critics, these cases demonstrate the conflict of interests that can be apparent in AIM’s nomad system, and are the reason some financial advisers in London failed to identify abuse and fraud.

Extractive Industry: A ‘Particular Risk’

AIM’s regulatory weaknesses, coupled with the lack of transparency in the international financial system that allows for offshore entities to remain anonymous, have been identified by corporate accountability campaigners as providing a favourable environment for dubious deals to be made.

Daniel Balint-Kurti, head of investigations at Global Witness, told DeSmog UK that oil, gas and mining companies seeking assets in developing countries with known corruption or a lack of information about geological resources were “a particular risk” .

Civil society has repeatedly warned about the weakness of AIM’s regulation, which allows junior oil, gas and mining companies to seek business opportunities in areas where bigger companies may be reluctant to operate, while benefiting from the prestige of a London listing.

These companies’ activity “is often not to mine or extract oil,” Balint-Kurti said. “The risk is that they then take that [supposed intention] up to the exchange and exaggerate or lie about what they have so they can attract a lot of investors.”

The UK is one of 51 countries signed up to the Extractive Industries Transparency Initiative (EITI), a global scheme that compels oil, gas and mining companies to disclose any payments made to governments.

A spokesman for EITI said “hidden ownership of companies is wide open to abuse” and this is “a particular challenge in the extractive sector”.

Natural resources belong to a country’s citizens and the benefits of oil, gas and minerals should reach them. Sadly, particularly in countries with weak organisation and governance rights, to extract oil and minerals are sometimes given to incompetent and irresponsible companies that do not intend to benefit the people that live in the country,” he said.

Van Woudenberg, from Raid, agreed: “AIM’s light touch regulation is of particular concern for the oil, gas and the extractive sector because the assets that companies bring to the market frequently come from conflict-prone regions or parts of the world with weak legal systems”. 

She added: 

AIM regulators conduct little or no scrutiny of such deals to ensure assets of dubious origin are not laundered on London’s markets. To date, regulators have shown they have little concern for human rights violations unless there is an immediate impact upon market value and share price.” 

Andy Whitmore, from the London Mining Network, shared the concerns over “AIM-listed junior mining companies whose track record in terms of human rights and social impact are highly questionable”.

Reform of Collapse?

Despite warnings from campaigners, AIM has implemented few reforms.

ShareSoc, a not-for-profit organisation that aims to promote investors’ rights has been running a campaign for “necessary reforms” to improve AIM regulation enforcement and clarify the role of nomads.

The campaign describes AIM as a “minefield” for inexperienced investors, warning them of “the numerous oil and gas or mineral exploration companies, some of which were of course simply fraudulent businesses”.

ShareSoc’s Director, Mark Bentley, told DeSmog UK “too many scandals and frauds continue to be perpetrated on UK investors”.

Bentley called for “public sanction” against fraudulent companies and decried how “still today” these “can act with impunity” and that “bad behaviour is incentivised”.

The London Stock Exchange Group, did not respond to any of DeSmog UK’s requests for comment.

On its website, the London Stock Exchange describes AIM as “the most successful growth market in the world”. It adds AIM has listed more than 3,600 companies from all over the world and that the junior market is “powering the companies of tomorrow”.

Screenshot of the London Stock Exchange’s website. Image Credit: The London Stock Exchange

In a 2015 report, the London Stock Exchange said AIM had supported more than 430,000 jobs and contributed to £14.7 billion to the British economy in 2013 alone.

Last year, AIM called for submissions around proposed changes to its admission rules. AIM’s discussion paper included “consideration of further supervisory powers and sanctions to ensure consistency of standards across the market”.

Responding to AIM, Raid called for “urgent action to halt the laundering of assets” and warned that the light regulation system needed to be scrapped in order to stop London attracting “dirty money”.  

Raid’s submission, seen by DeSmog UK, stated: “It is highly doubtful that self-regulation, relying on private firms with vested interests as gatekeepers and designed to be ‘light touch’ will ever eliminate or even significantly reduce the use of AIM to launder assets and dirty money through London.”

With nearly 950 companies listed on AIM and a market worth more than £100 billion, the junior market has seen more investors lose money on the market than have made profit, according to research by the Financial Times.  

For Balint-Kurti of Global Witness, the host of large scandals that have involved some of the most highly valued companies on AIM suggests the problem is endemic, and could threaten the future of the junior market.

Global Witness’ submission to AIM, also seen by DeSmog UK, warned officials they were “burying their heads in the sand” while “providing a base for outright criminality” and were unable to ensure the junior market “is not at the centre of large-scale money-laundering”.

Balint-Kurti said: 

If an exchange has a history for such scandals of these magnitude then one has to wonder whether the exchange will continue forever or join other junior stock exchanges in the graveyard.” 

AIM announced a series of minor changes regarding its listing process, none of which addressed the structural reforms needed to transform its regulatory system.

Anneke Van Woudenberg, of Raid, said the consultation was as “a missed opportunity” to reform AIM’s regulatory system.

She denounced the “narrow scope” and “flawed approach” of the consultation, which did not take into account alleged widespread fraud and criminal behaviour on AIM.

The consultation fundamentally didn’t deal with the problems of AIM. It is disappointing that the consultation did not look more broadly at why so many companies have gone bust on AIM and why,” she said.

She argued that an inquiry by a parliamentary select committee was required in order to compel AIM to better regulate its listings and ensure robust oversight.

With MPs and Lords working on a new anti-money laundering bill, Van Woudenberg said “the mood in the UK was changing” over tax havens’ and secrecy laws that allow dirty money to be moved around.

AIM needs to respond to these concerns as much as any other British entity,” she said.

Read Part One — ‘Black Gold’: Mapping London’s African Oil Hub

Read Part Three — Exposed: The Elite ‘Boys Club’ Running London’s Opaque Oil Network

Got a tip or story? Here’s how to contact us securely.

Editors: Mat Hope, Mike Small, Kyla Mandel, & Christine Ottery; Graphics: Sam Whitham; Other multimedia: Jill Russo

Main image Credit: London Stock Exchange celebrates AIM‘s 20th anniversary in 2015. Image Credit: London Stock Exchange

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