1. A very rich fellow has €100 million. He wants to create a standby letter of credit (“Standby”). He deposits €100 million in the bank that is going to issue the Standby (“Issuing Bank”). This fellow requesting the issuance of a standby is called the “Applicant”. With this money as collateral the bank will issue the Standby
(NOTE: Bank will not issue standby without collateral from the Applicant.).
The terms of the Standby should allow the Beneficiary of the Standby to borrow €80 million using the Standby as a guarantee of repayment to a lender (“Lender Bank”).
2. A second gentleman (called “Lessee”) wants to lease the Standby for €3 million for 365 days and use it as collateral for the €80 million loan. The Lessee pays the Applicant €3 million. Next the Lessee borrows €80 million from the Lender Bank using the Standby as collateral. The Lessee defaults on the repayment of that loan. The Lender Bank calls on the Standby for payment by the Issuing Bank of the defaulted loan. The Issuing Bank pays the Lender Bank €80 million. The Issuing Bank wants to be reimbursed for the €80 million it paid the Lender Bank when the Standby was called for the default of repayment of Lessee’s loan. The Issuing Bank now goes to the €100 million deposit made by the Applicant and takes €80 million from that deposit and reimburses itself for the draw down made on the Standby. The Applicant has now lost €80 million (plus fees, interest, brokers’ fees, etc.).
3. Here is the deal: The first gentleman, the Applicant, with the cash backing of €100 million to issue the Standby risks €80 million in exchange for a payment of €3 million leasing fee (less x% broker fees). I repeat: The Applicant risks €80 million in exchange for a payment of $3 million leasing fee.
4. Now, who would make that deal? Would you put up €80 million at risk to make €3 million? Who would risk €80 million for a return of €3 million? Does this meet the “smell test” of making business sense”? If it doesn’t make business sense, then there is a problem. This should make no business sense to anyone. You can see by this example that instrument leasing cannot be what it is purported to be.
5. So what is the real reason someone would invest €100 million to buy a standby letter of credit and allow someone to lease the Standby for €3 million a month (3%) and borrow €80 million using the Standby as collateral? The answer is: The standby letter of credit is set up so that there is no possibility that the instrument will ever be called on; i.e. it is set up so that there is no risk, and that is why the Applicant puts up his money. Further, if the Standby cannot REALLY be used as collateral for a loan, no LEGITIMATE lender will make a loan against it; i.e. it cannot be monetized with a real lender. Cut to the chase: The Lessee has leased a worthless instrument.
6. This process is also used with other instruments such as certificates of deposit, bank guarantees, cash deposits, etc. The story is the same, only the instrument is changed.
You will pay to lease a useless instrument.
Ask yourself this: If I use this "Leased Bank Guarantee" as collateral for a loan, or even as an enhancement to my overall standing so that I might be more favorably considered for financing, and I default, what security would it provide?
Answer: NONE! The lender would lose the money they loaned to you, and you would have tricked them into giving you that loan by showing an asset which you never owned, and against which you never revealed any encumbrance.
You will never receive any money against the leased BG (Bank Guarantee). The one charging you the lease fee makes money. You have a useless instrument, or one with which you could defraud someone. Nothing more
THE BUSINESS LOGIC OF A LEASING TRANSACTION IN GENERAL
The leasing of instruments is a worldwide phenomenon that has been ongoing for over thirty (30) years. Usually, it involves a client leasing a certificate of deposit, bank guarantee, standby letter of credit, a cash balance in an account or some other bank or brokerage house issued instrument. In nearly 100% of the cases it involves a fraud on the client. The client is asked to pay a “leasing fee” to lease the instrument or account. An example of a leasing fee may be a monthly payment of three percent (3%) of the face amount of the instrument, and the term of the lease is anywhere from one month to a year or more. The leased instruments are usually in very large denominations; for example, the most common amount is One Hundred Million Euros (€100,000,000.00), but it can be any amount in dollars or Euros. Thus, the lease payment for a €100 million instrument may be €3 million for a month or two use of the instrument (3% for 60 days is very common). For an expenditure of this amount, one would think that a reasonable businessperson would obtain counsel for such a transaction, but ordinarily and unfortunately they do not until after a substantial payment is made.
PURPOSE FOR LEASING
There are several purposes for leasing instruments:
1. Finance Real Property Development. In this scenario, a developer is seeking financing for the development of a real estate project. The developer is told that if he leases an instrument, that instrument can be used as collateral for a loan. Of course, the next step facing the developer is to obtain a loan using the leased instrument as collateral.
2. Invest in Securities Trading Program. In this situation the investor (client) seeks to obtain collateral for a loan with the proceeds of the loan being invested in a security trading program (sometimes called “high yield investment programs” or more recently “platform trading”). Again, once the client has obtained the instrument, he must find someone to loan against the instrument.
3. Financing Other Purchases. Like the need to finance a real estate development, sometimes the client wants to finance some other type purchase; e.g. purchase a corporation, buy a business, etc.
4. Credit Enhancement Purposes. Commonly there is the case where the client either has no credit or his credit is insufficient to borrow funds to purchase a large asset (e.g. a €50 million company). Consequently, he wishes to enhance his credit by leasing an instrument to show on his financial statements for loan purposes. We should just get rid of this idea right now. Here is the problem, if you list the credit enhancement amount on your financial statements, and you know it is only leased by you and that it has to be returned to the Lessor, and then you have to list the same amount as a liability. Consequently, the asset and the liability offset each other, and there is NO credit enhancement. Your client pays for NOTHING! If the fraudster tries to advice your client to not tell the lender that the credit enhancement instrument is leased, then this is bank fraud, and if your client “attempts” to get a loan on these financials, just the “attempt” (without success) is a felonious bank fraud, and your client and the fraudster will go to prison as co-conspirators for bank fraud.
5. Compensating Balances. A compensating balance is different from a credit enhancement. In a compensating balance the borrower may deposit or have a third party deposit with a bank or lender a significant deposit to encourage the bank to make the borrower a loan. The compensating balance is not collateral, and theoretically to the uninitiated in banking conduct the bank cannot seek this balance to collect a defaulted loan (though they often do).
HOW INSTRUMENT LEASING WORKS
1. The Applicant. Instrument leasing programs begin with an investor who has cash or bank credit. This investor is called the “Applicant”. (This applicant-investor is not to be confused with your “client-investor”) The Applicant applies to a bank for the issuance of an instrument. For a certificate of deposit, bank guarantee, or standby letter of credit he has to deposit the face amount of the instrument in the issuing bank. Usually the issuing bank is paying interest on the amount deposited in existing accounts, and the bank takes a deposit or savings account of the Applicant as collateral for issuing the instrument. It is not uncommon for the deposited funds used as collateral to be off-shore tax evasion funds that the Applicant is seeking to use in such a scheme (a form of money laundering).
2. Inducement to the Applicant. The Applicant is induced to provide the funding to back the instruments for two good reasons: profit and security. With regard to “profit”, the Applicant is paid a percentage of the leasing fee, which is added to the interest that he is already receiving on the funds. For instance, by entering such a transaction he can increase his yield from 3 or 4% annual interest from the bank to maybe half of 3% per month (calculated at 3% per month less half for broker fees.) that he receives as leasing fees.
Here is the most important point of this White Paper; to wit: the “safety factor for the Applicant”. The Applicant is willing and eager to provide the funding for the instrument because he knows that the instrument will never be called on (cashed) for any reason. These instruments are supposed to be used as a guarantee for a loan; however, the nature of the transaction assures the Applicant that this guarantee will never be called upon as collateral to pay the loan on its default.
Why will the instrument never be called upon? There are various techniques and at least one is used in every transaction, and often more than one is used. These techniques are discussed in the next paragraph.
REASONS THAT THE INSTRUMENT WILL NEVER BE CALLED UPON AT DEFAULT
1. Face of the Instrument. Sometimes the face of the instrument is written to preclude the Client-Investor from presenting the instrument for payment. For instance, a standby letter of credit requires the named beneficiary to present the required performance for payment.
a. Client Not Named as Beneficiary. In this situation, because the Client has little or no knowledge of bank issued negotiable instruments, he allows someone else to be named as beneficiary. Thus, in order to collect on default and present the instrument for payment he must rely on the beneficiary, someone other than himself. That other beneficiary is in the “back pocket” of the Applicant and will never make such a presentment. Further, no bank will lend against the instrument without the signature of the beneficiary pledging the instrument, and the other beneficiary will not do so to protect the Applicant.
b. Co-Beneficiary is named on Instrument. However, either the Client-Investor is not the named beneficiary or is a co-beneficiary and presentment requires both co-beneficiaries to go to the window for collection, and, of course, the co-beneficiary is in the “back pocket” of the “Applicant” and will never go. Another situation is the “Escrow Scam”. This is where the Client-Investor is named as the beneficiary, but the terms of the transaction require that the instrument be placed in an escrow and the escrow holder is required to present it on default on behalf of the Client-Investor. Again, the escrow holder is in the “back pocket” of the Applicant and will never follow the Client-Investor’s instructions to present the instrument for payment. Also, the issuing bank will not take presentment from the escrow holder, as the face of the instrument calls for only the beneficiary to do so.
2. Conditions cannot be met within Time Period. Once in a while you may find that an instrument is legitimately issued, but the lease term is, for instance, sixty days. Now, the purpose of the investor-client in leasing the instrument is to generate cash to invest in a trading program, called “High Yield Investment Programs” or “Trading Platforms”. The idea of the investor-client is to lease the instrument, borrow the money against the instrument, invest in a trading program, and from the profits pay back the leasing fee that he has obtained from third parties or borrowed from a bank. Here is the problem: The Lessor of the instrument relies ever successfully on the fact that 99.5% of these trading programs are bogus and the lessee will never find a real trading program within the 60 day term. And the Lessor is safe even if the lessee of his instrument were to find that “needle in a haystack” called a real trading program, because there is no way that the lessee can qualify AND invest in a real private securities trading program within the 60 day term. It is too short of a term. And to add to the problems facing the lessee, the party providing the trading program is often also the Lessor of the instrument or his associates, and you know what they plan to do. And finally on this subject, it is interesting to note that often the Lessor will give the Lessee free extension, because Lessor is very sure that the Lessee will never find a legitimate trading program.
3. Requires Third Party Performance. Either the face of the instrument or the terms of the documents require that a third party perform some condition in order for the instrument to be usable as collateral. The important point in this situation is that the third party will never perform that condition. An example of this situation is where a cash balance is purportedly held in the account of a third party brokerage house or offshore bank, and it is represented that that cash balance can be used as collateral for investor’s loan. The condition that the third party must perform is the release of that fund as collateral for the loan; i.e. the account is placed in such a form that a lender will be comfortable that it can collect on the account in the event of default on the loan. As the third party is in a conspiracy with the promoter, and it will never place the cash balance account (or instrument) in jeopardy as called for by the terms of the documentation? So the investor-client pays the fees, and is unable to fund his deal with the cash balance (or instrument) as collateral. Sometimes the third party is the holder of the cash balance or sometimes it may be a third party escrow holder with instructions to act on the cash balance account according to the terms of the documentation between the promoter and the investor-client, the terms irrevocably favor the promoter.
4. Third Party as Beneficiary with Assignment. Similar to Paragraph a. above, sometimes the investor-client is talked into allowing a third party to be the beneficiary with an “assignment” of the beneficiary interest to the investor-client. Here is what the investor-client does not know: The assignment of a negotiable instrument has to be approved by the issuer, and usually the issuer will not approve such an action. The investor-client on the default of the loan and the need for presentment to the issuing bank for collection cannot make the presentment to get the money, because only the beneficiary on the face of the instrument may do this, and in this case that “beneficiary” is in a conspiracy with the Applicant and the default will not be allowed. Further, if the client-investor take the instrument to a lender and wants to pledge it as collateral for a loan, the lender will not accept it as collateral because the borrower is not the beneficiary of the instrument. Another road block in favor of the Applicant.
5. Fraudulent Escrow. In this situation the fraudster has the investor-client place an initial fee (e.g. €600,000) into an independent escrow, often using a real escrow company. However, the terms of the escrow provide that the escrow holder shall release the funds to the fraudster upon notice from the fraudster that he has arranged the leased instrument. Note, that the notice of performance comes from the one who is to perform, and there is no independent verification of performance by the third party escrow holder. Since there is no way that the investor-client can use the instrument (as you never can), then the escrow holder gambit has worked and the fraudster has the initial fee.
6. Instrument is Only Available on Screen. In this fraud the fraudster gets his fee, or the initial fee, and has the instrument place on, for example, DTC (Depository Trust Corporation) and can only be seen by DTC members with a certain level of access (which is almost no victim as they have no idea how to belong to DTC). In this situation there is always a clause in the agreement that the instrument cannot be withdrawn or transferred or even attempted to be withdrawn or transferred under the threat of immediate cancellation, which means that it cannot be used as collateral. If someone is going to make a loan using the instrument as collateral, then that lender has to have some control via a transfer (e.g. an assignment) of some sort to collateralize the loan. So even if you can get a DTC member with a (certain level of access) to confirm the instrument on the screen, for your initial fee (e.g. €300,000) all you can do is LOOK AT IT…nothing more!
THE INITIAL FEE FRAUD
The Initial Fee Scam. Many times in these leasing of instrument transactions there is an initial fee that is payable prior to the payment of the leasing fee; for instance, in order to just get the transaction underway a fee much smaller than the “leasing fee” is required. That fee may be anywhere from €10,000 to €100,000 or more. What is important to note is that the payment of this fee is the sole fee that that the promoters ever seek to collect; i.e. the whole leasing of instrument scam is set up to defraud the investor out of this fee. Nothing more. After the payment of this fee either the promoter starts making excuses as to why the instrument for leasing is not available thereby delaying the investor-client in moving forward in the transaction or the investor-client starts asking more questions before putting up the large leasing fee. In any event, the initial fee is paid and the investor has lost it. From the promoters’ viewpoint it is better to collect a lot of initial smaller fees than wait for the big “score” with the payment of the larger leasing fee.
THE PROJECT FINANCING SCAM
One of the most common instrument frauds, though it may or may not involve leasing of instruments, is the case where the fraudster offers project financing in exchange for the investor-client paying an upfront fee for the instrument that will “fund the project”. This instrument is usually a bank guarantee (which are used outside the U.S.) or standby letters of credit (which are used in the United States and elsewhere). The institution issues the instrument usually in huge amounts to fund big development projects; however, the instrument is only viable and useeable provided that the beneficiary delivers either to the issuing bank sufficient cash to back up the instrument (guarantee that if the instrument is called on there will be cash to pay the default amount) or deliver into an escrow with the issuing bank (usually) sufficient funds to build the project (along with a completion bond to guarantee completion of the project) so that the issuing bank knows that the instrument will never be called on for a default payment. The practical effect, in either case, is that the investor-client cannot get a loan against the instrument unless he independently raises the required balance amount of the project cost (which is also the face amount of the instrument). So now the investor-client has paid for a useless instrument and still has to raise the same money he needed at the beginning to fund his project. This instrument is called by the fraudsters a “non-cash back” instrument, and that says it all.
THE AUTHENTICATION RUSE
Usually the first thing the investor wants to do after seeing a copy of an instrument is make sure that it is authentic. Here is a list of what may happen:
1. Low Quality Issuing Bank. Almost all the documentation that the promoter and the investor sign does not require that that instrument being leased be from a quality bank or institution. There is simply no requirement in most of the documentation. There may be a requirement of the “Top 25 Banks”, but who knows what this means. This important issue is invariable overlooked by the investor, and consequently in some of these leasing transactions the promoter provides an instrument that is issued by an offshore bank that has little or no assets behind it. Thus, the instrument has no value as collateral and no bank or other lender will provide a loan against it. So when the instrument is authenticated, it is authentic, but of no value whatsoever for any use other than wallpaper.
2. Parked in a Clearinghouse. In the situations where the instrument is issued and the promoter wants to create a greater aura of authenticity, he will “park” it in a clearing house such as Depository Trust Corporation (DTC) or Euroclear where it can be confirmed on a screen. I say “park” because there is a clear distinction between “parking” an instrument and placing it for clearing. These house clear securities; i.e. they complete the trades between buyers and a sellers only of securities. However, a bank guarantee, standby letter of credit or a certificate of deposit are not “securities” and are not subject to “clearing” at these houses. But a member of the clearing house group can place a non-security like a bank guarantee, standby letter of credit, or certificate of deposit on the screen so that it can be observed by other members. Here is the important point: placing these instruments on the screen with one of these clearing houses or similar institution (i.e. parking) does NOT authenticate them as being validly issued. So do not let your client be “taken in” by the relationship of the instrument to a clearing house; it is nonsense. Using the vernacular of another saying, you can park a ham sandwich on a clearing house, but you can’t sell it.
3. Escrow by Law Firm. The fact that a law firm is holding the instrument in escrow is sometimes used to create an aura of legitimacy and enhance the appearance of “authenticity” of the instrument. Let me tell you from my experience, some of the most prestigious New York law firms have held fraudulent instruments, and usually did not know the instruments were invalid. Most lawyers have no idea how to authenticate an instrument, and that possibility is substantially enhanced when the lawyer is a one a one man office in a “one horse” town in Mississippi or similar abode. Further to my observations over the last 30 years, relying on lawyers is the largest cause of clients losing money to these fraud schemes than any other cause. So, lawyers be careful and give competent advice. And what else you should know is that these losses to fraudsters are usually considered business transactions and not covered by malpractice insurance (but I try and go after the insurance anyway). So if you are going after a lawyer, you have to go after him and his firm…not his insurance carrier.
4. Bait and Switch of Instrument. I have seen the situation where a “sample” of the instrument initially shown is from a major bank (e.g. Citibank). But the documents signed by the parties do not define what bank has to be used as issuer of the instrument to be leased, though using the sample “infers” that the issuer will be a major bank (Citibank in this example). Without a clear definition of the issuing bank, the promoter substitutes in a bait and switch maneuver a lower classified or worthless bank or other institution (e.g. brokerage house). Usually on review of the documents, the fraudster is found to be correct. It is not covered.
5. Misleading Instruments. In example #4 above where “Citibank” is purported to be used, the promoter changes the spelling of the bank to “Citibank” and this is usually not picked up by the investor. This was done on one of my cases and the lawyer involved was disbarred and served time and his client is still in prison (Let me say, it was very hard work getting him there.). Another thing they will do is to use the name of a major bank (e.g. Bank of America), but add to it a branch that does not exist; for example, the name of the issuing bank may be “Bank of America of North Island”). Authenticating this is usually done very easily by a “Google” search for such a bank, but unfortunately, most investors never check. Their greed along with blind trust and awful judgment just sees “Bank of America”. The fraudsters will use familiar names such as “Chase Manhatten” even though these names have disappeared into a quagmire of mergers. For instance, you may see “Chase Manhatten BWI” on a Certificate of Deposit that appears to be coming from Chase Manhatten in Grand Cayman. But the name in Grand Cayman is not “Chase Manhatten BWI”; it is Chase Manhattan Trust Ltd. P.O. Box 190.George Town, Grand Cayman, BWI and Chase Manhattan Trust does not have a SWIFT address AND as a trust does not issue CD;s..
6. The Translucent Cash Balance Account. In this situation the investor-client pays for the leased use of a cash balance in an account either in a bank or brokerage firm. Usually the bank or brokerage firm is offshore. The promoters pay a bank or brokerage house to “represent” that they have a large cash balance account that the investor-client can lease for use as collateral for a loan. Now sometimes the money is actually in the account or sometimes it is not. It makes no difference, because the same account is simultaneously used over and over again for a multitude of investor who lease the same “funds” for collateral purposes while the Lessor knows that the structure is such that none of these investor will ever be able to have a lender verify the existence of funds that can be used as collateral and consequently no lender will ever loan against the account. The reasons that the funds cannot be verified for collateral purposes are set out under the section on “REASONS THAT THE INSTRUMENT WILL NEVER BE CALLED UPON DEFAULT”.
7. The SWIFT Transfer Transaction. Sometimes the instruments are purported to be transferred by SWIFT message code transmission. This gambit is used to create an aura of authenticity. The main thing to understand that any form of a guarantee transmitted by SWIFT message can be such as to make it impossible to call on that guarantee; thus the SWIFT transmitted guarantee is useless when this is done. First, it is important to note that often these SWIFT message codes do not operate as represented by the fraudsters. For instance, the representation that the instrument will be transmitted to the beneficiary by SWIFT code MT799 is a red flag. Swift code MT799 is not a binding transfer; i.e. it is tantamount to a non-binding letter either advising that the sending bank may do something or requesting the receiving bank to do something. Neither bank has to do it under MT799. The MT 799 is a swift message used between banks to communicate in electronic written form which is usually referred to as a “pre-advice”. For example, Red Bank may send a MT799 message to Blue Bank stating that, “We confirm $1 million on deposit and are prepared to block this amount via MT760 in favor of account 0001 at your bank. Please confirm readiness and receipt.” Often the MT799 will be sent prior to the MT760 being issued. [Typically the MT 760 is issued and the investor-client pays the initial fee or sometimes the leasing fee; he thinks that the MT799 is binding and can operate as collateral. Remember that it is nothing more than a nice letter sent electronically.] However the fraudsters will misrepresent that the MT799 is a collateral instrument. Also, it cannot be used in a platform trading transaction.
The MT760 message can operate as a guarantee. If an MT760 is actually sent, it is subject to all the reasons that the guarantee cannot be called up as stated above. I say if it is actually sent, because after collecting the funds via a MT799 transaction there often is no intent to send a MT760. No matter how nice this appears, the terms of the guarantee can be such as to guarantee nothing because this MT760 guarantee is susceptible to the same non-performance reasons of other transactions described above. I have spent many an hour with the wire departments of major banks trying to get the language of a SWIFT message correct. Sometimes getting the right wording is not easy, but you can eventually get the wording down to create a real guarantee for lawful purposes or a fraudulent instrument for no good.
AUTHENTICATING AN INSTRUMENT
Sometimes the fraudsters will give the investor-client a copy of the instrument that they will be leasing. The initial inclination, of course, is to authenticate it. Authentication issues to check:
a. The quality and existence of the issuing institution. You want to determine the financial strength of the issuing bank. In this process you must also check to see if the bank really exists as a bank (or brokerage house), and believe it or not you have to see if the bank is really located where it is represented to be situated. One time a client of mine had an instrument from Bank One of Columbus Ohio. It had a street address, and as standard procedure I hired a private investigator to drive by the address and see if there was a bank there. There was not. It was a vacant lot. I was negotiating a bank guarantee with a bank in Beirut for an Egyptian development project. On the last day of negotiations when the instrument was to be issued, I got up that morning and walked from the Phoenicia Hotel down to the bank, and overnight some terrorist had blown up the bank. The bank was gone. There was no fraud involved, but the story illustrates that a bank can be here today and gone tomorrow. (I had to fly that morning back to Cairo and tell the Egyptians the bad news, “The bank was blown up” and I have to start over with their office in Zurich” Never had to say anything like before or since.)
b. Confirm that the signatures on the document represent people who work at the bank. Usually the instrument is signed by two purported bank officers. Check to see if these people actually work for the bank and ask them if they sign these types of documents. One time I had a meeting at Barclays Bank in London, and my client and I were to meet the officers of the bank in the bank’s lobby. We arrived and were met by two fellows who each appeared to be dressed like a banker. We were invited to follow them to an empty desk on the lobby floor where we sat down and signed some documents transferring a large fee to them for services. Right after I reviewed the documents and my client signed them, a young man from the bank walked up to all four of us and asked, “May I be of assistance?” I slowly took the signed documents off the desk and put them in my brief case, and asked the young man if he knows my two “bankers”. He said, I do not, but Barclays is a big bank”. At that point the two “bankers” ran out the front door.
c. Check Telephone Number. If the documents state a phone number (e.g. on letterhead accompanying the instrument), check and see if it is a cell number. Or if there is no telephone number visible on a document, ask the promoters for a telephone number for the bank. Banks do not use cell numbers.
d. Do not take an instrument to issuing bank for authentication or borrowing. Sometimes either you or your client decides to take the instrument to the issuing bank (or a branch) to see if the people who work there can authenticate the instrument. DON’T DO IT! Whomever you talk to, unless you know them VERY well as an existing customer, will not know the answer, and security will eventually be called. The chances are almost 100% that one of these people will call security, and when security comes they arrest you. Security calls the cops and you are put in jail, often with a high bail. I had a client who called me from the San Francisco jail after spending nine months there.
Previously to her incarceration, she had come to my office and showed me a bill of exchange for a large multi-million dollar amount issued by a Turkish bank. I confirmed that it was authentic. Unknown to me she took it to Bank of America in the financial district of San Francisco intending to borrow against it. It was referred to security; the security officers never heard of a bill of exchange and called the police. Nine months passed before a friend of hers got her bailed out. The way to do this is for the attorney to CALL the bank and tell them that you think that one of their instruments is circulating and that it is fraudulent. Tell them that you hope that they can confirm this and get it out of circulation before it can harm a victim or the reputation of the bank. Then fax a copy over to them.
HYIP AND LEASING INSTRUMENTS
One of the primary purposes for an investor to lease an instrument is to raise funds to invest in a high yield investment program (HYIP) or a trading program. Here is what happens where this is the purpose:
a. You Cannot Use Leased Instrument to Invest in HYIP. The investor-client tells the fraudster Lessor of the instrument that he wants to lease the instrument in order to raise capital by borrowing against the instrument for investment purposes in a high yield investment program. The fraudster knows that one cannot get a loan against the instrument and consequently with no loan, there can be no investment in a HYIP, because when you buy and sell securities you have to pay for them in cash before you can sell them for a profit. No cash, no HYIP! The fraudster does not tell the investor-client that leasing will not work with a HYIP program investment. In fact, he will often say he knows of such a program in which the victim can invest the funds generated by the leasing of his instrument. Sometimes the investor-client has been lead to believe that the instrument itself can be used as the investment in a HYIP, but, again, you cannot buy and sell securities without paying cash, and you cannot get cash from a fraudulently leased instrument. NOTE: Forget about so-called “blocked funds” transactions…all frauds.
THE SCAVENGERS OF LEASING DEALS
The scavengers (or worms) of these leasing deals are the people who represent that they can fund the leased instruments; i.e. they can find someone to lend against the “unlendable” instrument. They are also known as “brokers”. They will always charge an upfront fee (Sometimes a million dollars) for their “services”, because they have to get their money upfront as they won’t get paid on the completion of promised performance, as they KNOW that they will never be able to fund the leased instruments. They know that funding is not possible, or should know, as they are knowledgeable in how the leased transaction scam works (i.e. or doesn’t work for the investor-client). Sometimes, the scavenger is in a conspiracy with the promoter of the lease transaction, as the promoter is the one who refers the investor-client to the scavenger. And for this referral, the promoter shares the front-end fee paid by the investor-client. Also, the broker who introduces the promoter to the investor-client will often introduce the scavenger as well.
A REAL LEASING DEAL
I have been involved in transactions where leased instruments have been used for project funding. Go back to the idea that the applicant who deposits the cash to back a bank guarantee or standby letter of credit (or other collateral instrument) is not going to risk that deposit in return for a payment of one tenth of said amount. For example, if the applicant deposits €100 million in an account to back a €100 million standby letter of credit, the applicant is not going to risk the default on any loan secured by that standby letter of credit in exchange for a lease fee payment of €3 million. Only a lunatic would do such a thing. Therefore in order to actually use the instrument as true collateral to fund a loan that can be spent on a project you have to have the approval of the applicant for such use and exposure. The applicant has to decide to risk the call on his money in the event of default on a loan collateralized by his standby backed by his money.
So you have to present the project to the applicant (e.g. real estate development) and get his approval to use his cash backed standby as collateral for a loan to develop the project. The applicant, at this point, becomes an investor in the project and he will want some controls on the expenditure of the money as well as an equity position in the project. This is very complex legal work, and if you are representing the applicant you have to protect him from all possible risks other than the risk he signs up for. For example, if the beneficiary has a tax problem and owes tax payments, they may collect the tax liability from these funds to the detriment of the applicant.
(NOTE: Bank will not issue standby without collateral from the Applicant.).
The terms of the Standby should allow the Beneficiary of the Standby to borrow €80 million using the Standby as a guarantee of repayment to a lender (“Lender Bank”).
2. A second gentleman (called “Lessee”) wants to lease the Standby for €3 million for 365 days and use it as collateral for the €80 million loan. The Lessee pays the Applicant €3 million. Next the Lessee borrows €80 million from the Lender Bank using the Standby as collateral. The Lessee defaults on the repayment of that loan. The Lender Bank calls on the Standby for payment by the Issuing Bank of the defaulted loan. The Issuing Bank pays the Lender Bank €80 million. The Issuing Bank wants to be reimbursed for the €80 million it paid the Lender Bank when the Standby was called for the default of repayment of Lessee’s loan. The Issuing Bank now goes to the €100 million deposit made by the Applicant and takes €80 million from that deposit and reimburses itself for the draw down made on the Standby. The Applicant has now lost €80 million (plus fees, interest, brokers’ fees, etc.).
3. Here is the deal: The first gentleman, the Applicant, with the cash backing of €100 million to issue the Standby risks €80 million in exchange for a payment of €3 million leasing fee (less x% broker fees). I repeat: The Applicant risks €80 million in exchange for a payment of $3 million leasing fee.
4. Now, who would make that deal? Would you put up €80 million at risk to make €3 million? Who would risk €80 million for a return of €3 million? Does this meet the “smell test” of making business sense”? If it doesn’t make business sense, then there is a problem. This should make no business sense to anyone. You can see by this example that instrument leasing cannot be what it is purported to be.
5. So what is the real reason someone would invest €100 million to buy a standby letter of credit and allow someone to lease the Standby for €3 million a month (3%) and borrow €80 million using the Standby as collateral? The answer is: The standby letter of credit is set up so that there is no possibility that the instrument will ever be called on; i.e. it is set up so that there is no risk, and that is why the Applicant puts up his money. Further, if the Standby cannot REALLY be used as collateral for a loan, no LEGITIMATE lender will make a loan against it; i.e. it cannot be monetized with a real lender. Cut to the chase: The Lessee has leased a worthless instrument.
6. This process is also used with other instruments such as certificates of deposit, bank guarantees, cash deposits, etc. The story is the same, only the instrument is changed.
You will pay to lease a useless instrument.
Ask yourself this: If I use this "Leased Bank Guarantee" as collateral for a loan, or even as an enhancement to my overall standing so that I might be more favorably considered for financing, and I default, what security would it provide?
Answer: NONE! The lender would lose the money they loaned to you, and you would have tricked them into giving you that loan by showing an asset which you never owned, and against which you never revealed any encumbrance.
You will never receive any money against the leased BG (Bank Guarantee). The one charging you the lease fee makes money. You have a useless instrument, or one with which you could defraud someone. Nothing more
THE BUSINESS LOGIC OF A LEASING TRANSACTION IN GENERAL
The leasing of instruments is a worldwide phenomenon that has been ongoing for over thirty (30) years. Usually, it involves a client leasing a certificate of deposit, bank guarantee, standby letter of credit, a cash balance in an account or some other bank or brokerage house issued instrument. In nearly 100% of the cases it involves a fraud on the client. The client is asked to pay a “leasing fee” to lease the instrument or account. An example of a leasing fee may be a monthly payment of three percent (3%) of the face amount of the instrument, and the term of the lease is anywhere from one month to a year or more. The leased instruments are usually in very large denominations; for example, the most common amount is One Hundred Million Euros (€100,000,000.00), but it can be any amount in dollars or Euros. Thus, the lease payment for a €100 million instrument may be €3 million for a month or two use of the instrument (3% for 60 days is very common). For an expenditure of this amount, one would think that a reasonable businessperson would obtain counsel for such a transaction, but ordinarily and unfortunately they do not until after a substantial payment is made.
PURPOSE FOR LEASING
There are several purposes for leasing instruments:
1. Finance Real Property Development. In this scenario, a developer is seeking financing for the development of a real estate project. The developer is told that if he leases an instrument, that instrument can be used as collateral for a loan. Of course, the next step facing the developer is to obtain a loan using the leased instrument as collateral.
2. Invest in Securities Trading Program. In this situation the investor (client) seeks to obtain collateral for a loan with the proceeds of the loan being invested in a security trading program (sometimes called “high yield investment programs” or more recently “platform trading”). Again, once the client has obtained the instrument, he must find someone to loan against the instrument.
3. Financing Other Purchases. Like the need to finance a real estate development, sometimes the client wants to finance some other type purchase; e.g. purchase a corporation, buy a business, etc.
4. Credit Enhancement Purposes. Commonly there is the case where the client either has no credit or his credit is insufficient to borrow funds to purchase a large asset (e.g. a €50 million company). Consequently, he wishes to enhance his credit by leasing an instrument to show on his financial statements for loan purposes. We should just get rid of this idea right now. Here is the problem, if you list the credit enhancement amount on your financial statements, and you know it is only leased by you and that it has to be returned to the Lessor, and then you have to list the same amount as a liability. Consequently, the asset and the liability offset each other, and there is NO credit enhancement. Your client pays for NOTHING! If the fraudster tries to advice your client to not tell the lender that the credit enhancement instrument is leased, then this is bank fraud, and if your client “attempts” to get a loan on these financials, just the “attempt” (without success) is a felonious bank fraud, and your client and the fraudster will go to prison as co-conspirators for bank fraud.
5. Compensating Balances. A compensating balance is different from a credit enhancement. In a compensating balance the borrower may deposit or have a third party deposit with a bank or lender a significant deposit to encourage the bank to make the borrower a loan. The compensating balance is not collateral, and theoretically to the uninitiated in banking conduct the bank cannot seek this balance to collect a defaulted loan (though they often do).
HOW INSTRUMENT LEASING WORKS
1. The Applicant. Instrument leasing programs begin with an investor who has cash or bank credit. This investor is called the “Applicant”. (This applicant-investor is not to be confused with your “client-investor”) The Applicant applies to a bank for the issuance of an instrument. For a certificate of deposit, bank guarantee, or standby letter of credit he has to deposit the face amount of the instrument in the issuing bank. Usually the issuing bank is paying interest on the amount deposited in existing accounts, and the bank takes a deposit or savings account of the Applicant as collateral for issuing the instrument. It is not uncommon for the deposited funds used as collateral to be off-shore tax evasion funds that the Applicant is seeking to use in such a scheme (a form of money laundering).
2. Inducement to the Applicant. The Applicant is induced to provide the funding to back the instruments for two good reasons: profit and security. With regard to “profit”, the Applicant is paid a percentage of the leasing fee, which is added to the interest that he is already receiving on the funds. For instance, by entering such a transaction he can increase his yield from 3 or 4% annual interest from the bank to maybe half of 3% per month (calculated at 3% per month less half for broker fees.) that he receives as leasing fees.
Here is the most important point of this White Paper; to wit: the “safety factor for the Applicant”. The Applicant is willing and eager to provide the funding for the instrument because he knows that the instrument will never be called on (cashed) for any reason. These instruments are supposed to be used as a guarantee for a loan; however, the nature of the transaction assures the Applicant that this guarantee will never be called upon as collateral to pay the loan on its default.
Why will the instrument never be called upon? There are various techniques and at least one is used in every transaction, and often more than one is used. These techniques are discussed in the next paragraph.
REASONS THAT THE INSTRUMENT WILL NEVER BE CALLED UPON AT DEFAULT
1. Face of the Instrument. Sometimes the face of the instrument is written to preclude the Client-Investor from presenting the instrument for payment. For instance, a standby letter of credit requires the named beneficiary to present the required performance for payment.
a. Client Not Named as Beneficiary. In this situation, because the Client has little or no knowledge of bank issued negotiable instruments, he allows someone else to be named as beneficiary. Thus, in order to collect on default and present the instrument for payment he must rely on the beneficiary, someone other than himself. That other beneficiary is in the “back pocket” of the Applicant and will never make such a presentment. Further, no bank will lend against the instrument without the signature of the beneficiary pledging the instrument, and the other beneficiary will not do so to protect the Applicant.
b. Co-Beneficiary is named on Instrument. However, either the Client-Investor is not the named beneficiary or is a co-beneficiary and presentment requires both co-beneficiaries to go to the window for collection, and, of course, the co-beneficiary is in the “back pocket” of the “Applicant” and will never go. Another situation is the “Escrow Scam”. This is where the Client-Investor is named as the beneficiary, but the terms of the transaction require that the instrument be placed in an escrow and the escrow holder is required to present it on default on behalf of the Client-Investor. Again, the escrow holder is in the “back pocket” of the Applicant and will never follow the Client-Investor’s instructions to present the instrument for payment. Also, the issuing bank will not take presentment from the escrow holder, as the face of the instrument calls for only the beneficiary to do so.
2. Conditions cannot be met within Time Period. Once in a while you may find that an instrument is legitimately issued, but the lease term is, for instance, sixty days. Now, the purpose of the investor-client in leasing the instrument is to generate cash to invest in a trading program, called “High Yield Investment Programs” or “Trading Platforms”. The idea of the investor-client is to lease the instrument, borrow the money against the instrument, invest in a trading program, and from the profits pay back the leasing fee that he has obtained from third parties or borrowed from a bank. Here is the problem: The Lessor of the instrument relies ever successfully on the fact that 99.5% of these trading programs are bogus and the lessee will never find a real trading program within the 60 day term. And the Lessor is safe even if the lessee of his instrument were to find that “needle in a haystack” called a real trading program, because there is no way that the lessee can qualify AND invest in a real private securities trading program within the 60 day term. It is too short of a term. And to add to the problems facing the lessee, the party providing the trading program is often also the Lessor of the instrument or his associates, and you know what they plan to do. And finally on this subject, it is interesting to note that often the Lessor will give the Lessee free extension, because Lessor is very sure that the Lessee will never find a legitimate trading program.
3. Requires Third Party Performance. Either the face of the instrument or the terms of the documents require that a third party perform some condition in order for the instrument to be usable as collateral. The important point in this situation is that the third party will never perform that condition. An example of this situation is where a cash balance is purportedly held in the account of a third party brokerage house or offshore bank, and it is represented that that cash balance can be used as collateral for investor’s loan. The condition that the third party must perform is the release of that fund as collateral for the loan; i.e. the account is placed in such a form that a lender will be comfortable that it can collect on the account in the event of default on the loan. As the third party is in a conspiracy with the promoter, and it will never place the cash balance account (or instrument) in jeopardy as called for by the terms of the documentation? So the investor-client pays the fees, and is unable to fund his deal with the cash balance (or instrument) as collateral. Sometimes the third party is the holder of the cash balance or sometimes it may be a third party escrow holder with instructions to act on the cash balance account according to the terms of the documentation between the promoter and the investor-client, the terms irrevocably favor the promoter.
4. Third Party as Beneficiary with Assignment. Similar to Paragraph a. above, sometimes the investor-client is talked into allowing a third party to be the beneficiary with an “assignment” of the beneficiary interest to the investor-client. Here is what the investor-client does not know: The assignment of a negotiable instrument has to be approved by the issuer, and usually the issuer will not approve such an action. The investor-client on the default of the loan and the need for presentment to the issuing bank for collection cannot make the presentment to get the money, because only the beneficiary on the face of the instrument may do this, and in this case that “beneficiary” is in a conspiracy with the Applicant and the default will not be allowed. Further, if the client-investor take the instrument to a lender and wants to pledge it as collateral for a loan, the lender will not accept it as collateral because the borrower is not the beneficiary of the instrument. Another road block in favor of the Applicant.
5. Fraudulent Escrow. In this situation the fraudster has the investor-client place an initial fee (e.g. €600,000) into an independent escrow, often using a real escrow company. However, the terms of the escrow provide that the escrow holder shall release the funds to the fraudster upon notice from the fraudster that he has arranged the leased instrument. Note, that the notice of performance comes from the one who is to perform, and there is no independent verification of performance by the third party escrow holder. Since there is no way that the investor-client can use the instrument (as you never can), then the escrow holder gambit has worked and the fraudster has the initial fee.
6. Instrument is Only Available on Screen. In this fraud the fraudster gets his fee, or the initial fee, and has the instrument place on, for example, DTC (Depository Trust Corporation) and can only be seen by DTC members with a certain level of access (which is almost no victim as they have no idea how to belong to DTC). In this situation there is always a clause in the agreement that the instrument cannot be withdrawn or transferred or even attempted to be withdrawn or transferred under the threat of immediate cancellation, which means that it cannot be used as collateral. If someone is going to make a loan using the instrument as collateral, then that lender has to have some control via a transfer (e.g. an assignment) of some sort to collateralize the loan. So even if you can get a DTC member with a (certain level of access) to confirm the instrument on the screen, for your initial fee (e.g. €300,000) all you can do is LOOK AT IT…nothing more!
THE INITIAL FEE FRAUD
The Initial Fee Scam. Many times in these leasing of instrument transactions there is an initial fee that is payable prior to the payment of the leasing fee; for instance, in order to just get the transaction underway a fee much smaller than the “leasing fee” is required. That fee may be anywhere from €10,000 to €100,000 or more. What is important to note is that the payment of this fee is the sole fee that that the promoters ever seek to collect; i.e. the whole leasing of instrument scam is set up to defraud the investor out of this fee. Nothing more. After the payment of this fee either the promoter starts making excuses as to why the instrument for leasing is not available thereby delaying the investor-client in moving forward in the transaction or the investor-client starts asking more questions before putting up the large leasing fee. In any event, the initial fee is paid and the investor has lost it. From the promoters’ viewpoint it is better to collect a lot of initial smaller fees than wait for the big “score” with the payment of the larger leasing fee.
THE PROJECT FINANCING SCAM
One of the most common instrument frauds, though it may or may not involve leasing of instruments, is the case where the fraudster offers project financing in exchange for the investor-client paying an upfront fee for the instrument that will “fund the project”. This instrument is usually a bank guarantee (which are used outside the U.S.) or standby letters of credit (which are used in the United States and elsewhere). The institution issues the instrument usually in huge amounts to fund big development projects; however, the instrument is only viable and useeable provided that the beneficiary delivers either to the issuing bank sufficient cash to back up the instrument (guarantee that if the instrument is called on there will be cash to pay the default amount) or deliver into an escrow with the issuing bank (usually) sufficient funds to build the project (along with a completion bond to guarantee completion of the project) so that the issuing bank knows that the instrument will never be called on for a default payment. The practical effect, in either case, is that the investor-client cannot get a loan against the instrument unless he independently raises the required balance amount of the project cost (which is also the face amount of the instrument). So now the investor-client has paid for a useless instrument and still has to raise the same money he needed at the beginning to fund his project. This instrument is called by the fraudsters a “non-cash back” instrument, and that says it all.
THE AUTHENTICATION RUSE
Usually the first thing the investor wants to do after seeing a copy of an instrument is make sure that it is authentic. Here is a list of what may happen:
1. Low Quality Issuing Bank. Almost all the documentation that the promoter and the investor sign does not require that that instrument being leased be from a quality bank or institution. There is simply no requirement in most of the documentation. There may be a requirement of the “Top 25 Banks”, but who knows what this means. This important issue is invariable overlooked by the investor, and consequently in some of these leasing transactions the promoter provides an instrument that is issued by an offshore bank that has little or no assets behind it. Thus, the instrument has no value as collateral and no bank or other lender will provide a loan against it. So when the instrument is authenticated, it is authentic, but of no value whatsoever for any use other than wallpaper.
2. Parked in a Clearinghouse. In the situations where the instrument is issued and the promoter wants to create a greater aura of authenticity, he will “park” it in a clearing house such as Depository Trust Corporation (DTC) or Euroclear where it can be confirmed on a screen. I say “park” because there is a clear distinction between “parking” an instrument and placing it for clearing. These house clear securities; i.e. they complete the trades between buyers and a sellers only of securities. However, a bank guarantee, standby letter of credit or a certificate of deposit are not “securities” and are not subject to “clearing” at these houses. But a member of the clearing house group can place a non-security like a bank guarantee, standby letter of credit, or certificate of deposit on the screen so that it can be observed by other members. Here is the important point: placing these instruments on the screen with one of these clearing houses or similar institution (i.e. parking) does NOT authenticate them as being validly issued. So do not let your client be “taken in” by the relationship of the instrument to a clearing house; it is nonsense. Using the vernacular of another saying, you can park a ham sandwich on a clearing house, but you can’t sell it.
3. Escrow by Law Firm. The fact that a law firm is holding the instrument in escrow is sometimes used to create an aura of legitimacy and enhance the appearance of “authenticity” of the instrument. Let me tell you from my experience, some of the most prestigious New York law firms have held fraudulent instruments, and usually did not know the instruments were invalid. Most lawyers have no idea how to authenticate an instrument, and that possibility is substantially enhanced when the lawyer is a one a one man office in a “one horse” town in Mississippi or similar abode. Further to my observations over the last 30 years, relying on lawyers is the largest cause of clients losing money to these fraud schemes than any other cause. So, lawyers be careful and give competent advice. And what else you should know is that these losses to fraudsters are usually considered business transactions and not covered by malpractice insurance (but I try and go after the insurance anyway). So if you are going after a lawyer, you have to go after him and his firm…not his insurance carrier.
4. Bait and Switch of Instrument. I have seen the situation where a “sample” of the instrument initially shown is from a major bank (e.g. Citibank). But the documents signed by the parties do not define what bank has to be used as issuer of the instrument to be leased, though using the sample “infers” that the issuer will be a major bank (Citibank in this example). Without a clear definition of the issuing bank, the promoter substitutes in a bait and switch maneuver a lower classified or worthless bank or other institution (e.g. brokerage house). Usually on review of the documents, the fraudster is found to be correct. It is not covered.
5. Misleading Instruments. In example #4 above where “Citibank” is purported to be used, the promoter changes the spelling of the bank to “Citibank” and this is usually not picked up by the investor. This was done on one of my cases and the lawyer involved was disbarred and served time and his client is still in prison (Let me say, it was very hard work getting him there.). Another thing they will do is to use the name of a major bank (e.g. Bank of America), but add to it a branch that does not exist; for example, the name of the issuing bank may be “Bank of America of North Island”). Authenticating this is usually done very easily by a “Google” search for such a bank, but unfortunately, most investors never check. Their greed along with blind trust and awful judgment just sees “Bank of America”. The fraudsters will use familiar names such as “Chase Manhatten” even though these names have disappeared into a quagmire of mergers. For instance, you may see “Chase Manhatten BWI” on a Certificate of Deposit that appears to be coming from Chase Manhatten in Grand Cayman. But the name in Grand Cayman is not “Chase Manhatten BWI”; it is Chase Manhattan Trust Ltd. P.O. Box 190.George Town, Grand Cayman, BWI and Chase Manhattan Trust does not have a SWIFT address AND as a trust does not issue CD;s..
6. The Translucent Cash Balance Account. In this situation the investor-client pays for the leased use of a cash balance in an account either in a bank or brokerage firm. Usually the bank or brokerage firm is offshore. The promoters pay a bank or brokerage house to “represent” that they have a large cash balance account that the investor-client can lease for use as collateral for a loan. Now sometimes the money is actually in the account or sometimes it is not. It makes no difference, because the same account is simultaneously used over and over again for a multitude of investor who lease the same “funds” for collateral purposes while the Lessor knows that the structure is such that none of these investor will ever be able to have a lender verify the existence of funds that can be used as collateral and consequently no lender will ever loan against the account. The reasons that the funds cannot be verified for collateral purposes are set out under the section on “REASONS THAT THE INSTRUMENT WILL NEVER BE CALLED UPON DEFAULT”.
7. The SWIFT Transfer Transaction. Sometimes the instruments are purported to be transferred by SWIFT message code transmission. This gambit is used to create an aura of authenticity. The main thing to understand that any form of a guarantee transmitted by SWIFT message can be such as to make it impossible to call on that guarantee; thus the SWIFT transmitted guarantee is useless when this is done. First, it is important to note that often these SWIFT message codes do not operate as represented by the fraudsters. For instance, the representation that the instrument will be transmitted to the beneficiary by SWIFT code MT799 is a red flag. Swift code MT799 is not a binding transfer; i.e. it is tantamount to a non-binding letter either advising that the sending bank may do something or requesting the receiving bank to do something. Neither bank has to do it under MT799. The MT 799 is a swift message used between banks to communicate in electronic written form which is usually referred to as a “pre-advice”. For example, Red Bank may send a MT799 message to Blue Bank stating that, “We confirm $1 million on deposit and are prepared to block this amount via MT760 in favor of account 0001 at your bank. Please confirm readiness and receipt.” Often the MT799 will be sent prior to the MT760 being issued. [Typically the MT 760 is issued and the investor-client pays the initial fee or sometimes the leasing fee; he thinks that the MT799 is binding and can operate as collateral. Remember that it is nothing more than a nice letter sent electronically.] However the fraudsters will misrepresent that the MT799 is a collateral instrument. Also, it cannot be used in a platform trading transaction.
The MT760 message can operate as a guarantee. If an MT760 is actually sent, it is subject to all the reasons that the guarantee cannot be called up as stated above. I say if it is actually sent, because after collecting the funds via a MT799 transaction there often is no intent to send a MT760. No matter how nice this appears, the terms of the guarantee can be such as to guarantee nothing because this MT760 guarantee is susceptible to the same non-performance reasons of other transactions described above. I have spent many an hour with the wire departments of major banks trying to get the language of a SWIFT message correct. Sometimes getting the right wording is not easy, but you can eventually get the wording down to create a real guarantee for lawful purposes or a fraudulent instrument for no good.
AUTHENTICATING AN INSTRUMENT
Sometimes the fraudsters will give the investor-client a copy of the instrument that they will be leasing. The initial inclination, of course, is to authenticate it. Authentication issues to check:
a. The quality and existence of the issuing institution. You want to determine the financial strength of the issuing bank. In this process you must also check to see if the bank really exists as a bank (or brokerage house), and believe it or not you have to see if the bank is really located where it is represented to be situated. One time a client of mine had an instrument from Bank One of Columbus Ohio. It had a street address, and as standard procedure I hired a private investigator to drive by the address and see if there was a bank there. There was not. It was a vacant lot. I was negotiating a bank guarantee with a bank in Beirut for an Egyptian development project. On the last day of negotiations when the instrument was to be issued, I got up that morning and walked from the Phoenicia Hotel down to the bank, and overnight some terrorist had blown up the bank. The bank was gone. There was no fraud involved, but the story illustrates that a bank can be here today and gone tomorrow. (I had to fly that morning back to Cairo and tell the Egyptians the bad news, “The bank was blown up” and I have to start over with their office in Zurich” Never had to say anything like before or since.)
b. Confirm that the signatures on the document represent people who work at the bank. Usually the instrument is signed by two purported bank officers. Check to see if these people actually work for the bank and ask them if they sign these types of documents. One time I had a meeting at Barclays Bank in London, and my client and I were to meet the officers of the bank in the bank’s lobby. We arrived and were met by two fellows who each appeared to be dressed like a banker. We were invited to follow them to an empty desk on the lobby floor where we sat down and signed some documents transferring a large fee to them for services. Right after I reviewed the documents and my client signed them, a young man from the bank walked up to all four of us and asked, “May I be of assistance?” I slowly took the signed documents off the desk and put them in my brief case, and asked the young man if he knows my two “bankers”. He said, I do not, but Barclays is a big bank”. At that point the two “bankers” ran out the front door.
c. Check Telephone Number. If the documents state a phone number (e.g. on letterhead accompanying the instrument), check and see if it is a cell number. Or if there is no telephone number visible on a document, ask the promoters for a telephone number for the bank. Banks do not use cell numbers.
d. Do not take an instrument to issuing bank for authentication or borrowing. Sometimes either you or your client decides to take the instrument to the issuing bank (or a branch) to see if the people who work there can authenticate the instrument. DON’T DO IT! Whomever you talk to, unless you know them VERY well as an existing customer, will not know the answer, and security will eventually be called. The chances are almost 100% that one of these people will call security, and when security comes they arrest you. Security calls the cops and you are put in jail, often with a high bail. I had a client who called me from the San Francisco jail after spending nine months there.
Previously to her incarceration, she had come to my office and showed me a bill of exchange for a large multi-million dollar amount issued by a Turkish bank. I confirmed that it was authentic. Unknown to me she took it to Bank of America in the financial district of San Francisco intending to borrow against it. It was referred to security; the security officers never heard of a bill of exchange and called the police. Nine months passed before a friend of hers got her bailed out. The way to do this is for the attorney to CALL the bank and tell them that you think that one of their instruments is circulating and that it is fraudulent. Tell them that you hope that they can confirm this and get it out of circulation before it can harm a victim or the reputation of the bank. Then fax a copy over to them.
HYIP AND LEASING INSTRUMENTS
One of the primary purposes for an investor to lease an instrument is to raise funds to invest in a high yield investment program (HYIP) or a trading program. Here is what happens where this is the purpose:
a. You Cannot Use Leased Instrument to Invest in HYIP. The investor-client tells the fraudster Lessor of the instrument that he wants to lease the instrument in order to raise capital by borrowing against the instrument for investment purposes in a high yield investment program. The fraudster knows that one cannot get a loan against the instrument and consequently with no loan, there can be no investment in a HYIP, because when you buy and sell securities you have to pay for them in cash before you can sell them for a profit. No cash, no HYIP! The fraudster does not tell the investor-client that leasing will not work with a HYIP program investment. In fact, he will often say he knows of such a program in which the victim can invest the funds generated by the leasing of his instrument. Sometimes the investor-client has been lead to believe that the instrument itself can be used as the investment in a HYIP, but, again, you cannot buy and sell securities without paying cash, and you cannot get cash from a fraudulently leased instrument. NOTE: Forget about so-called “blocked funds” transactions…all frauds.
THE SCAVENGERS OF LEASING DEALS
The scavengers (or worms) of these leasing deals are the people who represent that they can fund the leased instruments; i.e. they can find someone to lend against the “unlendable” instrument. They are also known as “brokers”. They will always charge an upfront fee (Sometimes a million dollars) for their “services”, because they have to get their money upfront as they won’t get paid on the completion of promised performance, as they KNOW that they will never be able to fund the leased instruments. They know that funding is not possible, or should know, as they are knowledgeable in how the leased transaction scam works (i.e. or doesn’t work for the investor-client). Sometimes, the scavenger is in a conspiracy with the promoter of the lease transaction, as the promoter is the one who refers the investor-client to the scavenger. And for this referral, the promoter shares the front-end fee paid by the investor-client. Also, the broker who introduces the promoter to the investor-client will often introduce the scavenger as well.
A REAL LEASING DEAL
I have been involved in transactions where leased instruments have been used for project funding. Go back to the idea that the applicant who deposits the cash to back a bank guarantee or standby letter of credit (or other collateral instrument) is not going to risk that deposit in return for a payment of one tenth of said amount. For example, if the applicant deposits €100 million in an account to back a €100 million standby letter of credit, the applicant is not going to risk the default on any loan secured by that standby letter of credit in exchange for a lease fee payment of €3 million. Only a lunatic would do such a thing. Therefore in order to actually use the instrument as true collateral to fund a loan that can be spent on a project you have to have the approval of the applicant for such use and exposure. The applicant has to decide to risk the call on his money in the event of default on a loan collateralized by his standby backed by his money.
So you have to present the project to the applicant (e.g. real estate development) and get his approval to use his cash backed standby as collateral for a loan to develop the project. The applicant, at this point, becomes an investor in the project and he will want some controls on the expenditure of the money as well as an equity position in the project. This is very complex legal work, and if you are representing the applicant you have to protect him from all possible risks other than the risk he signs up for. For example, if the beneficiary has a tax problem and owes tax payments, they may collect the tax liability from these funds to the detriment of the applicant.
No comments:
Post a Comment