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| Advance
Fee Frauds: What’s the Problem Now? |
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| Whether
we receive a too-good-to-be-true e-mail offer or glance at a mysterious
get-rich-quick ad in the newspaper, most of us encounter scams on a daily
basis. "No one would fall for this," you might think as you delete
an e-mail entitled Hot Stock Tips! from your inbox without even opening
it. But what keeps these scams going is that someone else out there
does open it and gets reeled in. |
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| One scam that
has become particularly successful is the advance fee fraud. Such
schemes operate by requiring the investor or business person to pay money
up front in order to receive a product or service. |
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| The fraud
may be as simple as an offshore professional charging outrageous fees with
no work actually being done, or involve an elaborate investment structure
with the money being laundered offshore. "For the past few years, the highest
number of calls have been about advance fee fraud," says Helen Czerniak,
an investigator with the Ministry of Consumer and Commercial Relations
in Toronto. |
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| "The
number of complaints always increases around Christmas, when people are
desperate for money. It's really sad." The United States Secret
Service estimates that advance fee fraud swindles hundreds of millions
of dollars every year, and that losses are on the rise. Two major
examples–a Florida-based venture capital scheme, and the Nigerian advance
fee fraud–have snared people worldwide and cost them millions of dollars.
Both cases also demonstrate how difficult it is to find the perpetrators
and put an end to the scheme. |
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| Risky business |
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| In January
2000, several people will be tried in connection with the ongoing investigation
of US Customs and the Federal Bureau of Investigation into a venture capital
loan scheme, which swindled an estimated 400 victims out of more than US$600
million. |
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| This is the
fourth round of indictments related to the investigation, and 25 people
have already been charged. |
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| Named Operation
Risky Business (ORB), the investigation began in October 1994, with
the advance fee fraud being uncovered two years later. |
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| One of the
fraud victims approached the US Customs Service in Tallahassee, Florida,
for assistance in finding a lawyer who was purportedly helping him obtain
venture capital. "The victim had already lost US$100,000, and wanted
to find the lawyer's office and see what was what," says Mickey Pledger,
a senior special US Customs Service agent on the case. When they
began investigating, it turned out that a number of other people had come
forward to various agencies, including the Federal Bureau of Investigation.
The scheme began to unravel when they started searching the homes and files
of people believed to be involved in the scam and uncovering their client
lists. "One of the mid-level syndicators had 3,502 names on his client
list." |
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| "We still
don't know who all the victims are," says Pledger. |
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| Among the
international group of victims of the fraud are singer Dionne Warwick,
professional athletes and a number of Canadians. They responded to
advertisements for venture capital loans in publications like USA TODAY,
the Wall Street Journal, the Robb Report, Barons and the New York Times.
Brokers, or first-level members of the scam network, interviewed victims
to assess their needs and ability to pay various fees to start the loan
process. They based their assessments on photocopies of actual cashiers'
cheques in the amount of the fee, which the brokers verified with the bank
involved. The fee ranged from US$40,000 to US$2 million, depending
on the victim. |
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| The victims
then discussed the deal with a syndicator who provided them with a contract.
Under the contract, victims would be provided venture capital on the condition
that they pay the processing fee associated with the transaction. The scam
hinged on a clause in the contract which required victims to obtain a letter
of credit in an amount between US$2 million and US$20 million to guarantee
the board of investors that the venture capital loan amount would eventually
be repaid. |
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| The catch
is that no bank would supply such a letter without an equal amount
of collateral, and the victims would probably have no need for venture
capital if they had such collateral. |
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| When the victims
returned to the syndicator without the letter of credit or bank payment
guarantee, the syndicator explained that the victims would forfeit the
processing fee because they had not upheld their end of the contract. |
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| The syndicators
then offered to help the victims avoid losing the processing fee by introducing
them to a facilitator and an underwriter. |
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| These people
charged victims another fee on the pretext of helping them get the letter
of credit. The facilitator and underwriter also charged a fee for
supposedly helping in the sale of offshore stocks to repay the venture
capital loan in one year. The scammers had put the victims in a position
where they believed they were not upholding a legal contract. At
this point, each victim had paid them up to six times, amounting to as
much as US$2 million, says a US Customs Service report. |
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| None of them
ever saw any of their venture capital loan, and Pledger says it is unlikely
victims will recover anywhere near what they lost, as much of the money
has been spent. During a search of the 80-acre ranch of Larry Sangaree,
who pled guilty to involvement in the scheme, there was a "state-of-the-art
security system, the likes of which Customs agents have never seen before,"
states a US Customs report. |
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| They also
found an extensive gun collection, two power boats, jet skis, five all-terrain
vehicles, luxury cars, a pool and two satellite dishes. Sangaree
is a high school dropout who spent about 15 years in prison for murdering
a high school teacher in 1970. |
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| "The scheme
started out with domestic advance fee fraud and then went on to money laundering
through Antigua, because one of the scammers had spent time in Antigua
and had connections there," says Pledger. The US Customs report
says the money was transferred offshore through bank accounts in Canada,
Switzerland, Germany and elsewhere, ultimately ending up in an Antiguan
bank. "With all the fees paid by the victims going to and through
a foreign bank, it made it impossible for their victims to take any meaningful
legal action to retrieve the funds, in the event they even tried," says
the report. Although the scheme was sophisticated, Pledger says the
short time frame victims were given to provide loan information is a technique
that should raise a red flag for anyone seeking a loan. |
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| In Canada,
it is illegal under the Criminal Code to lie over the phone with the intent
to defraud someone. It is also illegal in Ontario and a few other
provinces to charge a fee before giving a loan. Czerniak says Canadian
loan scammers get around this by advertising their services in US publications,
and having the money rerouted back to Canada. This makes it very
difficult for US authorities to track down the scammers. She also says
there are always about 40 to 60 of these "boiler room" operations going
on, usually located in Toronto, and that the scammers prey on vulnerable
people who need money–often the elderly or perhaps someone trying to pay
a large hospital bill. "Lying and stealing is what these people do
best, so anyone can be sucked in," she says. |
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| The most successful
fraudsters may send their money offshore, where authorities often find
luxury homes and cars. Czerniak says penalties for fraud are light–a
CDN$25,000 fine and/or one year in prison for an individual–so the scammers
often return to the boiler room after they have been charged. Anyone who
thinks they may be a victim of advance fee fraud can call the Ministry
of Consumer and Commercial relations at (416) 326-8600 or Phone Busters
at 1-888-495-8501. |
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| The 419
fraud |
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| Another version
of advance fee fraud, and perhaps one of the most notorious, is the Nigerian
advance fee fraud, also named 419 fraud after the section of the Nigerian
Penal Code that prohibits such scams. Section 419 was signed into
law on April 1, 1995 by then military leader Sani Abacha. International
observers say it is not mere coincidence that the legislation came into
force on April Fool's Day. |
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| "It is one
of the most successful, longest-running, global, direct mass marketing
campaigns in history," says Charles Pascale, coordinator of the 419 Coalition,
a Web-based organization of people fighting the Nigerian scam. The
international community is pressing for a solution to the 419 fraud, which
has bilked victims worldwide in excess of US$1 billion since it was first
reported in 1989. |
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| The RCMP
estimates that 40 Canadian victims have lost CDN$30 million to the 419
fraud and that at least 10,000 suspected Nigerian letters have circulated
in Canada since 1989. "I get phone calls several times a week about
the scam," says Pierre Carrier, a staff seargent in charge of the fraud
at the Royal Canadian Mounted Police's Commercial Crime office in Montreal.
The US Secret Service has a task force working on the scam, which has succeeded
in breaking down some of the networks, but the fraud still goes on. |
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| The 419 fraud
takes the form of an unsolicited letter, fax or e-mail from someone who
claims to to be an official of the Nigerian Government or a Nigerian agency.
The letter offers to transfer substantial funds–usually in the range of
US$10 million to US$65 million–into the target's bank account. The
author of the 419 letter often alleges that the sums to be transferred
are from a source such as an over-invoiced government contract. The
sender gives the impression that they need the target's assistance to deposit
the money in a foreign account, because of the corruption that supposedly
runs rampant in Nigeria. The letter also promises the target a return
of 10% to 30% of the total sum that is to be funneled to their bank account.
Other scenarios the fraudsters use to explain the provenance of the funds
typically fall into the following categories: |
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- contract
fraud
- currency
conversion scams
- purchase
of real estate
- sale of
commodities, such as crude oil, below market prices |
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| Carrier says
the victims generally respond to the letters because they are enticed by
fast money. "When they see the possibility of getting so much money
in such a short time, they become blind to reality and jump on the offer."
But inevitably, certain "problems" surface which hinder the smooth transfer
of funds that was promised in the initial letter. The advance fees
that are required of the victim in order to combat these problems are also
attributed to supposed corruption within the Nigerian bureaucracy.
For example, the victim might be told that officials at the Central Bank
of Nigeria will not release the funds until a bribe is paid. The
victim is solicited on an ongoing basis for additional funds in order to
assist in overcoming the various "problems." The scam may be dragged
out for several months after the victim has responded to the letter and
has expressed a genuine interest in the proposal. |
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| Victims are
also asked to go to Nigeria to complete a transaction, and told that a
visa is unnecessary. In fact, it is a serious offence to enter Nigeria
without a visa, which gives the fraudsters even more power over the victims.
The US Secret Service says an American was murdered in 1995 while pursuing
the scam, and numerous other foreign nationals have been reported missing.
In spite of their financial losses, many are too embarrassed to come forward,
making investigation more difficult. |
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| Air of
legitimacy |
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| Pascale blames
the Nigerian Government and the Central Bank of Nigeria for the success
of the scam. "It is not possible for the scam to have functioned
at current and historical levels . . . without at least the tacit cooperation
of successive governments of Nigeria and of the Central Bank of Nigeria,"
he says. Pascale is not alone in his condemnation of the Nigerian
authorities. Jay Adkisson, an American lawyer and editor of the Adkisson
Analysis, says he believes "that in the past, both [the Central Bank of
Nigeria and the Nigerian Government] have tacitly approved the scam as
a source of hard currency." |
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| The government
and its agencies have fiercely denied any connection to the fraud, arguing
that they are the scheme's biggest victim and have tried to quash it.
The Nigerian Government and various Nigerian institutions have taken to
publicizing their concerns in major international newspapers. In
1997, a 16-page advertising supplement featured in the Wall Street Journal
lauded Nigeria as a problem-free land of opportunity. And more recently,
the Central Bank of Nigeria took out a half-page notice in a national Canadian
newspaper, the Globe and Mail, warning potential victims of the ongoing
scam. |
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| But these
measures have not silenced criticism of the 419 Coalition. "We
see no evidence of the scam's decline. Our Web site still averages
over 60 hits per day, every day, just as it has always done," says
Pascale in response to the Globe and Mail notice. The coalition takes
the position that "these ads represent nothing more than a cynical public
relations ploy to get the heat off while the scam continues unabated." |
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| Adkisson,
who also operates Quatloos.com, a Web site on common scams, sees no evidence
of decline either. He points out that as recently as October 1999,
"the Nigerians conducted another large mailing, which increased the traffic
on my Quatloos site by more than 10,000 visits per day to our Nigerian
scam page–which should give you some indication of the sheer size of their
mailing." |
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| Oluseun Abimbola,
a partner with the Nigerian law firm Prime Solicitors, is critical of the
penalties for infractions under Section 419. According to Abimbola,
the sentences may not be an adequate deterrent to some offenders.
"While seven or even three years may be adequate for frauds for which the
amount involved is minimal, the same cannot be said in respect to the more
elaborate ones involving millions of dollars," says Abimbola. |
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| Nonetheless,
he supports the measures taken by the current government in Nigeria to
combat the 419 fraud. He says the government set up a task force
on financial crime, abolished unlicensed commercial telephone and fax service
centres, and the president has sponsored an anti-corruption bill that is
pending before the senate. "What perhaps seemed to give an impression
of Nigeria having a particularly high rate of white collar crime was the
corrupt government of the country in the past 10 to 15 years. Corruption
in government circles . . . painted an unhealthy image for the Nigerian
business environment and encouraged the perpetration of other crimes including
the letter scams," says Abimbola. |
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| Olusegun Obasanjo,
the country's new president who took over in May 1999 and is the first
civilian president in 16 years, has been applauded by international observers
for his unexpected and ambitious efforts to stamp out corruption.
The Obasanjo government has extended its campaign to all levels of society,
seizing property belonging to retired military officials, investigating
senior civil servants for fraud and prosecuting high-ranking officers. |
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| Although Obasanjo
has surpassed most expectations, some critics say he has not yet undertaken
the level of reforms that are necessary to clean up a country that was
one of the most corrupt in the world. Other skeptics say some of
the government's own practices are questionable and undermine the clean-up
efforts. Perhaps an exercise of due diligence may be the best advice
for international investors. |
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| Spotting
scams |
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| While it is
clear that avoiding scams of the 419 variety are as simple as ignoring
any suspicious unsolicited letter you receive, the fraud uncovered by Operation
Risky Business demonstrates that not all advance fee frauds are as overt.
You may find yourself involved with an individual or company that initially
seems legitimate, but continually charges for "services" not rendered.
Given that the stringent privacy laws in offshore centres can be used to
mask unsavory activities, particular consideration is necessary when dealing
with unknown offshore professionals and companies. Even if
you realize you have been scammed after the fact, foreign judgements may
not be recognized in the offshore jurisdiction, and you could be in for
a lengthy and expensive legal battle. |
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| Bahamas-based
International Trade and Investments Ltd., suggests you ask the following
questions in order to get a better idea of who you are dealing with:
- How long
has the operation been in business and who are the principals? |
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| - If it is
an investment program, ask for audited accounts of previous years' performance.
If you have not heard of the auditors, pursue them. If the company
says it conducts "internal audits," don't deal with them.
- Find out
if the accounts are "co-mingled." If the money goes into a collective
fund, you have no recourse if someone takes it and runs. But this
is not a concern if you are dealing with an internationally-recognized
company. |
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| - Does the
organization have basic information like an address, fax and telephone
number on its Web site? Try calling to make sure it is a real office.
- In the case
of an investment program, are you as an investor excluded from knowing
the identity of the "top international banks" supposedly involved?
This is a strong indication of a scam. |
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| - Don't be
fooled by prestigious-looking Web sites featuring phrases like "dedicated
professionals." The business may be operated from an office, computer
and answering machine onshore, where their records may be the subject of
search and seizure by the authorities, and where you're name might show
up. The best way to ascertain who you are dealing with is to show
up at the office unannounced, if you can find it. |
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