Types of Common Fraudulent Ttransactions

In the previous article, I briefly discussed on how to detect potential frauds. Now, I describe two of the most common fraudulent transactions: Bank Guarantees and Discounted Bank Instruments.

A. Bank Guarantee Scheme

This is a very simple fraud. A businessman or investor requires access to capital for his own purposes. Let us say that the individual wants a line of credit of $50 million or more. That individual or business discovers that to obtain such a line of credit means paying significant fees, commissions and possibly providing huge quantities of security. That the other party will say that all you have got to do is pay a one off sum and you will have a guaranteed bank facility can make the offer seem hard to resist.

The individual will commonly be told that an AAA bank will provide a guarantee for, say, $50 million subject to a payment of $1 million as a fee. Obviously the businessman says he is not going to pay until he has seen the facility from the bank. Arrangements are therefore made for the $1 million dollar fee to be lodged in an escrow account, usually either with a solicitor in London or with a fiduciary in Switzerland . The solicitor or fiduciary has clear instructions that he is not to release the monies until such time as the facility letter is to hand.

In due course a facility letter from a major bank does arrive appropriately signed at the bottom guaranteeing the $50 million facility. The fiduciary releases the money. The investor then calls upon the bank to honour their facility. It is at that stage that the investor discovers that the two people who signed the facility either never existed or if they did exist had no authority to grant the facility and have left the bank, or there is some other fraud involved.

The investor quickly attempts to hold the fiduciary or solicitor to account, whose excuse for his role in the transaction is that he simply followed his client's instruction in releasing the monies on delivery of the facility letter. The investor then attempts to trace the monies and discovers they have moved through various different bank accounts and have ended up either in Lithuania , The Virgin Islands, or another location where it becomes increasingly difficult to either trace the monies further or to recoup them.

B. Discounted Bank Instruments

Many senior lawyers, accountants and businessmen continue to believe that there exists a secret market in bank instruments. Fraudsters play upon this continuing belief by persuading individuals and companies that they should make investments in prime bank guarantees. The documentation relating to the investment talks about prime banks, discount houses and cutting houses. The documentation is produced so that at first sight it appears hugely complex and obviously beyond the understanding of anybody who is not actually involved in this very specialised market.

Typically individuals are asked to participate in a block of something like a $100 million investment. It is usually explained that individuals are excluded from this market and the only way they can possibly join is by contributing $100,000 or so to a pot that is being built up by the generous individual who is giving them the opportunity to participate in this secret market.

The lure into this investment is the phenomenal profits that will be generated, sometimes described as being in excess of 100% in one year.

It is worth repeating that there is no such market.

It is never explained to anybody how the profit is generated or why the banks feel that it is necessary to trade in this market.

Usually what happens is that the hugely complex documentation is delivered to the person who is going to make the investment, for typically between $1 million and $10 million. He is required to sign a certificate to say that his money is clean and then sends the money to nominated bank account. From there the monies pass into the hands of the investment manager or his nominee. Shortly after that, the excuses start.

Usually some other contributor has not paid on time his due contribution to the $100,000 block and therefore it has not been possible to roll the money at the first stage. After that, there is an incessant string of excuses ranging from my wife is having a baby to the banks are on holiday or difference in time zones make it difficult to communicate with banks to just straightforward silence. Sometimes the fraudsters are able to keep the investors at bay for years with excuses.

One has to ask why this fraud persists. The answer quite often is that individuals who make such investments have quite often parted with all of their spare cash and are no longer in a position to finance assistance from lawyers and accountants to recover the monies. Quite often the monies are so well hidden that it is difficult to recover them, even when still available. There is also the embarrassment factor of an otherwise sensible businessman or investor not wanting to admit that he has been the victim of financial fraud.

Ioannis John Neocleous NCI Law Group info@ncilawgroup.com T: +357-22-680670

Author: Ioannis John Neocleous

http://www.ncilawgroup.com

About The Author John A. Neocleous is the founder and Managing Partner of NCI Law Group , Neocleous & Neocleous law firm and NCI Finance Group. John has over 14 years of professional experience in the areas of international tax, corporate and criminal law, both as an academic and also as a practitioner in over 50 countries worldwide.