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Fraud Prevention Tips: Bank Guarantees and Discounted Bank Instruments

Added: (Wed Sep 10 2008)

Pressbox (Press Release) - In today’s electronic world, there are several new instances of sophisticated financial fraud. Some cases are easier to detect, however, in an increasingly uncertain economic environment, mostly because of the unease of the US Dollar and the increasing strength and influence of the Euro. This has resulted in “banking instrument” fraud becoming increasingly common. I decided to write this article because as an international tax lawyer my offices have been receiving more than a dozen requests per month from honest clients looking to make money with a “sophisticated project” simply to discover that the “project” was on par with letters from Nigeria that promise unclaimed fortunes to appear on your doorstep because a dying uncle mentioned you in his will. I also compiled the list below with help from other credible sources I found on the internet.

In general, if you are approached to make a high yield income investment or to become involved in the prime bank investment fraud, then you should carefully look at the documentation that you are asked to sign and always use the advise of an experienced professional such as an accountant or a lawyer. Such documents are normally filled with meaningless legal gibberish that are relatively easy to spot if you are dealing with fraudsters.

Some of the typical phrases you should look for are set out below. Some of them are meaningless and have no legal definition, but they were inserted into the documents or proposal in order to impress unsuspecting investors:

• Ready Willing and Able
• Prime Bank Guarantees (PBGs)
• Prime Bank Notes (PBNs)
• Guaranteed by Top 100 World Prime Bank
• Unconditional S.W.I.F.T. Wire Transfer
• Freely negotiable, irrevocable, clear SWIFT wire transfers
• Callable Conditional Sight Drafts
• Closing Bank
• Issuing Bank
• Fiduciary Bank
• Bank Menu
• International Banking Days
• ICC (International Chamber of Commerce) 400
• UCC (Uniform Commercial Code) Form references
• Banking co-ordinates
• Fresh cut paper
• Seasoned paper
• Collateral Houses, Collateral Source, Collateral Supplier
• Collateral First Transaction
• Grand Master Collateral Commitment
• Validation of the MCC (Master Collateral Commitment)
• Collateral Purchase Orders
• Collateral Provider
• Instruments delivered free of all liens and/or encumbrances
• Non-circumvention and Non-disclosure agreements
• Irrevocable Pay Order
• Irrevocable, irretraceable commitment of funds to purchase instruments
• Lending Bank, Funding Bank, Closing Bank
• Good clean cleared funds of non-criminal origin
• With full corporate and legal responsibility
• Interest at seven and one half percent, payable annually in arrears
• 5, 10, 20 years etc. plus one week or one day
• Fully binding commercial letter contract
• Client Company Principals
• Transaction Trenches
• Millions or Billions of US dollars with rolls and extensions
• Emissions, remission, commissions and fallout
• Transaction parameters
• There is to be no communication with our bank other than through the normal bank channels, no phone call allowed.

If you see two or three of the above all in one document, then you ought to seriously consider whether or not fraud is involved and take reputable independent legal advice.

Below, 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.

More Information about the Author:--

John A. Neocleous is the founder and Managing Partner of NCI Law Group http://www.ncilawgroup.com, Neocleous & Neocleous law firm and NCI Finance Group http://www.ncifinance.com, 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.

John graduated from the University of East Anglia in the United Kingdom with an LL.B. (Honors) degree and continued his education at the University of Sussex where he obtained a Masters of Philosophy degree in International Criminal Law before teaching Human and Civil Rights and at the LLM program of International Criminal Law at the same University.

He also holds two graduate Diplomas from the European University Institute in Florence, Italy (EU Law) and the University of Ottawa, Canada (Canada National Committee on Accreditation, Canadian Law).

John is currently an active member of the Council of Bars and Law Societies of Europe (CCBE), the Cyprus Bar Association (CyBar), the Washington State Bar Association (WSBA) and the International Bar Association (IBA) and he specializes in international criminal and tax matters, international collections and assisting European and International high net worth clients with complicated tax and corporate structures. He has a wide network of associates globally that include lawyers, accountants, government agencies and financial institutions.


John Neocleous
E-mail: neocleous@ncilawgroup.com

Author: John Neocleous

Submitted by:John Neocleous
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