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They're the oldest fraud in the book", said Hywel Jones when Offshore Finance Canada asked him about bank debenture frauds. That book just might be the bible of bank debenture frauds published by the International Chamber of Commerce: Prime Bank Instrument Frauds: The Fraud of the Century. Of course, the skilful and careful investor keeps the gambling instinct tame when unrealistically high returns on investment are promised. Nonetheless, bank debenture frauds are worth a fresh look. Scam artists are growing sophisticated with the times, proliferating over the Internet and trying to tempt institutions, thereby potentially affecting the wisest financiers, if through the back door. Where fluidity and legitimacy are key A bank debenture is an acknowledgement of debt by a bank. Banks do issue debentures which are quoted on the major exchanges. However, other instruments referred to in these schemes like "letters of credit" and "bank guarantees" cannot be publicly traded. Bank debenture scam artists promise high returns in a short period of time. They offer "bank guarantees" issued by "prime banks" (top 100 banking institutions) which through several trades would multiply in value; this is called a "roll program". The goal is to have an investor send money to a foreign bank in control of the con artist. The victim's money is then used by the criminal or is laundered. In the case of bank debentures, scam artists will use the lexicon of the legitimate financial industry to describe quasi-legitimate scenarios. This scam's strength lies in its fluidity. Contemporary scam artists know better than to deliver old tales and their pitch is regularly polished but the investor, or institution, will likely be approached with a scenario containing the following (some old, some new) elements: 1. There are exceptions, not all bank debenture programs are fraudulent: According to Arnold Cornez, author of The Offshore Money Book, no such exceptions exist and he has yet to find one legitimate example: "I have never met anyone who made money off this, only people who they say they met someone who made money in such a scheme." Message boards and posted e-mails alike are peppered with messages from those who have found the Holy Grail. They often begin with "I know there are many fraudulent programs out there, but…" 2. ... and I have a witness: Arnold Cornez is barraged by "witnesses" who know of exceptional cases. In some cases, Cornez says that "ringers" are hired to present a supposed unbiased view. Forbes writer, David Goldman offered an example in the December 16, 1996 issue of the magazine: "The crooks often will have forged references or may have bribed someone. A senior officer of Credit Suisse Fides Trust, an investment management subsidiary of the giant Swiss bank, worked with a prime note gang for two years before management flushed him earlier this year." 3. The industry has been cleaned up: Some promoters now claim that underground investigations have enabled the banking industry to cleanse itself of bad apples and that thousands of brokers have been barred from trading. 4. Only the few are privy to this underground system that banks use to make their money: "People are told this is how banks make their money," says Jones, a service provider who works in the Bahamas and collects information about fraudulent schemes. The goal in telling such a lie is two-fold. First, the victim is led to believe that internationally-renowned institutions are participating in the program. The Federal Bureau of Investigation (FBI) reports that the World Bank, the IMF, the US Treasury and the International Chamber of Commerce are repeatedly brought up as endorsers/backers/participants in such frauds. Second, the underground angle serves as an explanation for the impossibility of checking the legitimacy of the deal. "Obviously, if the programs were true, banks would keep them private," says Jones. 5. Hush now! Confidentiality is an essential part of such schemes. According to Cornez, the con-artists often introduce themselves as professionals who have taken an oath of confidentiality, i.e. a lawyer, and explain that no information can be disclosed. Investors are required to sign non-disclosure agreements, which in certain cases (illegally) prevent the investor from even verifying the registration of the trade. The FBI warns investors to be wary of non-disclosure agreements. Legitimate bank debentures are always registered with a securities commission and are not underground. Investors are told they should always be able to confirm that a debenture has been registered. Even private placements must be registered with the SEC. If non-disclosure agreements mark the strength of bank debenture frauds, they are also their Achilles heel. Dean DeBuck of the Comptroller of the Currency, the US agency that administers national banks, explains that scam artists are very mobile these days: "We have no prosecutorial powers and by the time we pass on a suspect entity to the Justice Department, that entity usually has disappeared." Cornez agrees, "it's all underground now. Several years ago, scam artists would actually take out ads in the Wall Street Journal." "They’re on the alert," adds DeBuck. "We put advisories on our websites. We warn our banks and we warn the public at large but we believe we are closely monitored by those fraudulent entities nowadays.” Hence the ever-evolving details and new nuances to the non-disclosure clauses. In one case, Cornez was approached by a promoter who, admitting that non-disclosure agreements can make things difficult, added that in his scheme some information may be made available to the investor after a non-disclosure agreement has been signed. 6. Showing the money: A bank account, fund or trust is often set up offshore. Scam artists are given access to the money and are able to do trades. Once this is accomplished, and if the scam artist has not yet disappeared, great returns are reported. A case in point When investors actually want to get their hands on some of their new-found wealth, the investors might receive a letter like the one Offshore Finance Canada obtained. The following was sent to a physician who had invested US$65,000 in a bank debenture program: "In December, our offices were invaded by a multi-national government task force investigating a possible conspiracy to commit tax fraud and tax evasion. As with all such investigations our bank accounts have been frozen until the investigation is concluded. This has necessitated (1) cessation of trading (2) the suspension of honoring all requests for withdrawals. Our bankers, most of who (sic) are personal friends, tell us their hands are tied and they can do nothing to help us. Our attorneys are confident we will be cleared of all charges, however should we not be cleared, it is probable that the individual members of [not disclosed] will be cited as co-conspirators. We will continue to resist all efforts by the investigators to gain access to the membership list. For your protection it is suggested that you refrain from communicating with the Group. Should the investigators intercept the communication, they could construct a list of members." The letter goes on to announce the death of the company/bank's chairman, apparently afflicted by the stress of the allegations. The signatory ends with a further promise that should the investigators release its freeze on the funds, the investor will be refunded his principle and profits. The "I want to believe" syndrome "Greed is what attracts investors," says Debuck. "Greed, with five exclamation marks," jokes Cornez. "Exaggerated claims cause some people to mask their own traditional safeguards," he adds. But the frauds seem to have a magnetic effect upon those with a gambling-like addiction. Cornez says that "they go after people who are looking for a pot of gold; risk-takers. I have heard of people who lost hundreds of thousands of dollars and they still were going to try it again. I also know someone who is convinced that they exist and time after time he tells me 'this is the one'." Jones has harsher words: "It is greed and sheer stupidity. Criminals tell them they are going to make a lot of money and some investors stupidly believe that they are smarter than everyone else and have found a way others have not. But those who are targeted often know little about finances. The criminals tend to go after people with good ideas who are desperate for financing. It may be someone who wants to build a hotel in Mexico or a resort in Antigua, people with good management skills but who know nothing about finance. And they are lured into paying an advance." The newest targets Cornez and DeBuck say that institutions are a new target for this lucrative fraud. As Cornez explained to Offshore Finance Canada, "bank debenture scam artists are going after organizations now. They go after pension funds." He recently met a lawyer from Nebraska who had a client marketing a similar idea to retirement funds and other institutions. "I wonder whether the lawyer was being naive, whether he thought it was legitimate or not." On July 28 of this year, the SEC announced that it had filed a civil action against Alamin Financial Resources, Inc. The company allegedly attempted to sell a prime bank trading program to 23 US municipalities in violation of the securities registration and anti-fraud provisions of the Securities Act. In the defendants' scheme, profits earned from the trading program would fund municipal projects. The municipalities were to deposit liquid assets into a trust to be administered by the defendants who would invest the assets in the program backed by the International Monetary Fund. Returns as high as 130% per month were allegedly flaunted -- without risk of loss. Rule of thumb: follow your better instincts Agencies such as the FBI, the SEC, the ICC and the Comptroller of the Currency say that any scheme that claims to yield more than 20% a year should ring alarm bells. As the saying goes: "If it appears too good to be true, it probably is," says DeBuck. Offshore concerns "The problem is not more prevalent offshore than it is anywhere else. Fraudsters may be attracted to setting up offshore, thinking that there is no regulation," says Jones. Nonetheless, offshore accounts are often part of fraudulent scenarios. Cornez says that there is no hotbed for bank debentures. No jurisdiction is being focused on: "but I know of someone who forms offshore companies and, a few years ago, he was very busy with countless new companies formed by people who laid out a lot of money in such scams. The wealth was lost and investors never repatriated their money. Sometimes people sue and get their principal back after a year or so and they are happy. But meanwhile, the perpetrator of the scam has an interest-free loan to invest in the stock market." DeBuck does believe that offshore centres attract these schemes: "There are no regulations, and the emphasis on confidentiality encourages fraud." Who watches the watchers? Last May, the Royal Canadian Mounted Police warned that the Internet has become a new fertile ground for con artists. Anyone interested in debentures can find sites warning them against such schemes. Some sites were constructed by governmental and international agencies, others by individuals. But the good-hearted, seeking to warn the apprentice investor, seem to inadvertently market the fraud. Message boards
and forums are full of the aforementioned “Holy Grail” finders who have
made gargantuan profits from similar schemes. Some go on to describe
in detail certain schemes that may sound good to the inexperienced investor.
The problem lies in the fact that in the market-place of ideas that is
the Internet, site managers do not necessarily feel the obligation to offer
perspective on and criticism of schemes with a new twist, truly helping
the investor to "beware."
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