Banking Investment Fraud

By Matthew B. Greene, JD

Copyright 2007, 2009 STILAS International Law Services, P.A.

All International Rights Reserved.

Matthew Greene is the founder of STILAS, originally a government contractor for international economic security. Matthew Greene is a former Chief of Special Operations in anti-organized crime and anti-corruption, and is an international legal expert and career strategic advisor to governments, agencies and ministries in various countries.

This article is a brief extract from one of a series of expert reports developed by Matthew Greene and STILAS, in cooperation with certain federal law enforcement and national security agencies of multiple countries, for protection of national critical infrastructure in the private sector.

Introduction

Like any sphere or industry involving large scale dealings with formidable sums of money, "high finance" is a virtual "magnet" for attracting all kinds of fraudulent scams. Fraudsters target institutional players in the banking industry to steal their funds (or use their name and image to steal other people's funds). They also target individual and corporate players in the commercial sector (who want to enter the banking sphere as investors) to steal their funds. Compounding the problem is the fact that such fraudulent investment proposals are "infectious", often "contaminating" legitimate practices through confusion and distraction, primarily because they are so widely and aggressively promoted and circulated.

Imaginary Issuing of Fictitious Instruments

Fraudulent investment schemes (or other large financial transactions) are often based upon painting a picture of certain "bank notes" that either do not exist, or do exist but are not used the same way as falsely described by the promoters. Since an important part of any fraud is inventing "jargon" or "insider" terminology to impress upon the victim the specialized knowledge of the con artists of a subject matter that is "too complex" for the victim to understand, there are certain key words that are commonly used. These terms and phrases are typically non-banking terms that have no legitimate meaning in real financial transactions, and are used to describe the imaginary issuing (or purchasing, selling, leasing, etc.) of fictitious instruments.

These interrelated imaginary terms purportedly describing the issuing of fictitious banknotes, strangely enough, often originate from the culinary and food service industry. Only vegetables and cheese can be "fresh cut", and only soups, salads and meats can be "slightly seasoned" or "well seasoned". (Perhaps a dedicated vegetarian would prefer something "unseasoned"). Like the top quality juicy beef steak or "prime rib", the fraudsters also promise you a "prime bank" or "prime bank note". All of these terms seem to better belong on one document referred to by another fraudulent term on the law enforcement lists: "bank menu". These terms more accurately reflect what is probably on the fraudsters' minds when making up their story, rather than effectively describing any real transaction. Just imagine a banker in your bank asking you: "would you like some pepper on your fresh cut checkbook, sir?" and have a good laugh, because that is all those fraudulent documents are good for, pure entertainment for those who know the truth.

False Legal Theory of Regulatory Compliance

One of the primary tasks of a "successful" fraudulent document is to give a false sense of confidence in the "legitimacy" of the transaction and the promoters. This is commonly accomplished (among many other methods) by using language that pretends to be concerned with regulatory compliance and following certain well-known laws.

Among the most famous phrases found in fraudulent documents is contained in letters of intent, contracts (in a "key" section that is emphasized) or separate addendums to a contract (for extra emphasis). In these sections, the victims are asked to sign a statement warranting that their hard earned money (that the fraudsters are attempting to steal) consists of "Good clean and clear funds of non-criminal origin." While this phrase at first sounds innocent and on the surface appears to be required in compliance with anti-money laundering and anti-terrorism laws, closer analysis reveals it to be yet another fiction designed to give false confidence.

Asking an investor or purchaser to sign a statement that their funds are legitimate is based upon a false legal theory of the wrong way to do "compliance". Simply signing a statement that funds are in compliance logically cannot possibly make them in compliance. If that were true, then terrorists or organized crime groups laundering money would only have to sign such statements for all the bankers to be happy with the transaction. Of course things are not that simple. The fact is that compliance is the responsibility of the banks conducting a transaction, and the laws (and law enforcement agencies) place the burden on the banks to research and verify the source of funds and history of funds. Merely relying on a standard flat statement from the owner of funds would be negligent and illegal. The only rational purpose of such wording (since it is completely useless and meaningless to bankers) is to impress the victim of a fraud with a false face of the purported "legitimacy" of the transaction.

A closely related abuse of misleading wording is statements in contracts such as "the parties agree to comply with the Patriot Act." Anti-money-laundering laws such as the Patriot Act are laws with criminal penalties that are enforced by law enforcement and even national security agencies of the countries involved. It is absurd to imply that parties to a private commercial contract can simply "agree" that they will comply, and present this as a claimed assurance that the transaction is thereby lawful. The only way to comply with such laws is to use a contractual instrument carefully drafted by experienced licensed attorneys who know those laws in detail, and for the transaction itself in fact to comply, NOT merely state or "agree" that it will comply.

Another ill-conceived legal fiction is to show fake concern for compliance with "non-solicitation" laws. This is traditionally accomplished by asking the victim to sign statements that they are "Ready willing and able" (RWA) to pay out their money and complete the transaction. The phrase "ready willing and able" actually originated from the pornography industry of the early 1950's. Another term "soft probe" (a safe-sounding comfort term for full access to deplete your bank account under the pretense of limited verification of so-called "blocked" funds) appears to belong to the same industry that originated "ready willing and able". Like the culinary terminology, these terms most likely express what the fraudsters plan to be busy with after they steal your money, rather than stating any verifiable facts about the transaction. In any case, federal regulatory and law enforcement agencies have given the strongest warnings that people who give you such unprofessional documents are certainly "ready willing and able" to give your bank account a "soft probe" that you weren't expecting.

Misrepresentation and Abuse of the Limited Involvement of Banks

Many fraudulent schemes rely on the involvement of a major banking institution or governmental department in the transaction. Such involvement is usually remote at best. In such cases, the promoters actually target the banking or government entities, tricking or defrauding them into some limited level of involvement, such that the entity is not aware of the overall transaction or its exposure to affiliation with the fraudulent activity.

The Office of the Comptroller of Currency (OCC) of the US Department of Treasury warns that it "is aware of an increasing volume of bogus proposals currently being promoted and directed toward banks", and which "may utilize deposit, trust, or safekeeping accounts at major financial institutions". (Office of the Comptroller of Currency (OCC) of the US Department of Treasury, OCC Alert on Fraudulent Investment Programs, Alert 2001-3 of March 30, 2001, issued to US national banks, State banking authorities and federal regulatory agencies, signed by Brian C. McCormally, Director of Enforcement & Compliance Division.)

According to security experts of HSBC bank, "fraudsters almost invariably attempt to involve banks in some way in their frauds, and in some cases it is the banks and other large organizations themselves which are the intended targets. ... The most common reason for this is to add credibility to the transaction. By making the victim believe that a major financial institution is underwriting, or at least involved, in a large deal, they make the victim that much more confident". (Hongkong Bank, Advance Fee Fraud and Banks, Paul A. Collier, Manager of Regional Security, page 4. ("Hongkong Bank" is the original trademark of "The Hongkong and Shanghai Banking Corporation Limited, which is a founding member and wholly owned subsidiary of the major international bank HSBC.))

Abuse of the limited involvement of banks is especially prevalent in developing economies such as "third world" countries, where bank officers and staff often lack experience to detect that a seemingly innocent transaction is in fact a small component part of a larger, more complex fraud scam. Often compounding the problem is the need for translating highly technical or specialized (or fraudulent) financial terminology into languages where capitalism and investment banking are new and unfamiliar concepts. The possibility of bribes or "under the table" kickbacks (in the form of "unofficial" commissions) can also cause inexperienced bankers to overlook (or be distracted from) potential indications of a questionable transaction.

The security department of HSBC bank explains how bankers are often tricked into limited involvement or exposure in fraudulent transactions: "Fraudsters are very keen to obtain signed letter headed bank notepaper which they can then alter and use to convince others that a bank is actively participating in a deal. To get the maximum number of items of signed correspondence they will frequently send numerous letters and faxes to the bank which relate to deposits and remittances which they claim will be made or received at some time in the future. These deposits of course never materialize. It is quite common for a junior, or even medium level executive, to spend a great deal of time answering this correspondence and making other arrangements in the mistaken belief that he or she is promoting a very profitable deal for his bank." (Hongkong Bank, Advance Fee Fraud and Banks, Paul A. Collier, Manager of Regional Security, page 5.)

In addition to collecting official bank correspondence, other seemingly innocent steps are achieved such as convincing the bank to "hold documents against receipt" or "any number of other actions which all add up to the same thing - involvement by the bank and possible financial exposure. ... Occasionally, the fraudsters will attempt to involve or defraud a bank directly, often targeting a small branch or a junior or susceptible manager which they believe they may be able to deceive. A common tactic will be to persuade the manager to accept, for safekeeping against receipt, some certificates which are claimed to be worth millions of dollars. Armed with this receipt the fraudsters then deceive others", and "may also attempt to obtain credit... or to persuade the manager to issue other forms of guarantee based on documentation that they provide." (Hongkong Bank, Advance Fee Fraud and Banks, Paul A. Collier, Manager of Regional Security, pages 5 and 6.)

Matthew Greene and STILAS avoid accepting any business from the general public. Consultation is generally provided only to government agencies and banking institutions. Provision of services to the private sector may be considered only upon introduction through trusted partners or colleagues of Matthew Greene and STILAS.