OF SCAMS AND MONEY LOST

How often have you heard it said that if something appears to be too good to be true, it probably is?

Even so, every year thousands of people are defrauded by confidence tricksters. The scams vary from credit card fraud, to multi level marketing schemes via the internet, to sales of fake diplomatic titles which will, purportedly, grant the purchasers global tax exempt status for the rest of their lives. The most common scam is the so-called Advance Fee Fraud, such as the classic Nigerian letters schemes.

With the promise of millions of dollars available with no strings attached, the participant has to provide "working capital" to cover due diligence fees, legal and travel expenses and other such costs necessary to free up the dollars. Once the scammers have siphoned as much from their victims as they can, they disappear, leaving a fake address and disconnected mobile phone number as the only evidence of their presence in the first place.

But as people have become wise to those scams, so the scammers have become more inventive. While the degree of sophistication has increased, the theme is basically the same; a promise for a large amount of money in return for funding a few expenses along the way.

Usually the people who fall for the scheme are desperate businesses in need of capital and their desperation drives them to a belief that the fraudsters are the lifeline they have been seeking. It is amazing how many struggling businesses are waiting on "a funding line from offshore". When questioned, the directors cannot point to any contractual obligation for the "funder" to pay the money, they are short on detail and almost invariably they have already shelled out cash to procure the capital injection.

A variation on the theme is the Self-Liquidating or Arbitrage Loan. The scammers in this case contact businesses purporting to be putting together a syndication which will net the participants millions, with no repayment obligations because the loans self-liquidate. It is really quite simple: a bank, usually in Antigua or a similar jurisdiction, is awash with cash and is willing to make a loan of $500 million to the syndicate on a 25 year term. Part of that money will be used to purchase Certificates of Deposit to constitute securing collateral, part will be used to invest in high-yield assets to repay the loan, some of the money goes towards meeting brokers fees and the rest will go to the members of the syndicate. Of course it is all top secret and the investor should not breathe a word to anyone about it, least of all their accountant or lawyer.

Naturally, there is no syndicate and there is no bank willing to make such a loan. The way the scammers make their money in this instance is by coaxing an entry fee of a couple of thousand dollars out of the investor. It's a case of "pay us the entry fee and we will let you into a secret opportunity of a lifetime".

In New Zealand we have seen the recent emergence of the Ponzi schemes; an investment offering a phenomenally high yield. It is really a scheme where new investors pay the interest to the original investors until the scheme collapses, by which time the perpetrator has sailed away in their yacht with the original investment funds stashed away in an offshore bank account.

Another growing global fraud is the Prime Bank Guarantee scam. These scams come in numerous forms but always involve the notion of bringing individuals into that elite group of prime banks which pass paper between themselves, thus creating the money supply system, which only a Ph.D. in economics would understand. They all involve complex financial arrangements and jargon most mere mortals will not comprehend. Frequently the scammers will bring in accountants and lawyers, who themselves have been duped by the complexity, to lend credibility to the scheme.

The prime banks supposedly providing the guarantees know nothing about them and when the investor goes in search of their cash they have a rude awakening.

Be aware that there is no such thing as a "Prime Bank Guarantee" and the golden rule to follow is that if you don't understand the scheme's workings fully, do not commit a cent to the investment.

Some characteristics of scams to be aware of:

• Major international banks are purportedly involved, making some form of     guarantee available;
• They involve very large amounts of money, commonly in the multi-millions;
• They claim to be risk free;
• Frequently they claim to involve high ranking diplomats or government agencies;
• They use elaborate jargon and involve complex paperwork, usually faxed or electronically transmitted, never in original form;
• They are multi-jurisdictional, usually involving tax havens and offshore bank accounts;
• They rely on elaborate use of brokers and intermediaries; the principals never come to the fore;
• The rates of return quoted are commercially unavailable; and
• The scheme must be kept absolutely secret and is available to just a select few.

If such an investment is offered to you do not reach for the cheque book, instead, seek professional advice immediately and it's probably worth a call to the Commerce Commission, the Serious Fraud Office and your banker too. Remember, if it's too good to be trueﾅ..

A case study of a recent scam Gareth Hoole was asked to advise on can be read on our website (Click here)

Gareth Hoole

Contact:

Baker Tilly is a trademark of the UK firm Baker Tilly UK Group LLP, used under licence.

Software solutions for accountants by Acclipse

Site Map | Copyright Staples Rodway ©