Prime Bank Fraud
April 19, 2012

I know. You think you are too sophisticated to fall prey to a scam. I hope that's so. Let's just say it is so for nine in ten of the 218 million people of voting age in the U.S. This then is written for the 21.8 million who are not as sophisticated as you are. Perhaps you might send it on to your mother, or someone at your church or synagogue, or a client, or a colleague, or the treasurer of your club, or someone like that. Whoever sees this, please read on, because my hope is to work toward eradicating a scam that simply will not die. It is like the polio of American finance.

I speak of what is known in law enforcement circles as "prime bank" fraud. It has been around for at least 35 years and probably longer. As the story usually goes, there is some form of secretive market among (usually) Europe's "prime" banks. If the deals are described at all, there may be talk of one major bank having an excess of cash overnight, while another bank needs cash overnight, so they enter into some sort of transaction, negotiated by some sort of specialized and exclusive (sometimes licensed) traders. These transaction somehow pay an incredible yield, perhaps 50 to 75% interest per transaction, in which the investor may participate. The investor's money is to be placed in some form of escrow or trust account at a very well known international brokerage house. The funds will be "blocked," so that no one can access them. The account is insured by SIPC, or Lloyds of London or some other insurer. The money will not be touched. The account simply serves as some form of collateral for these banking transactions. This market is all very secret, so that if the investors were to make any official inquiries, bankers, regulators and others will, of course, deny it exists. All documentation is highly confidential, so that showing it to anyone else could result in the loss of funds as well as litigation against the offending investor who disclosed it.

Con men have used literally dozens of different terms in connection with the purported transactions, such as: Prime Bank Notes, Prime Bank Instruments ("PBIs"), Medium Term Notes ("MTNs"), Standby Letters of Credit, Bank Guarantees, Offshore Trading Program (or Programme), Roll Program, Bank Issued Debentures, High Yield Investments, and Bank Debenture Trading Programme. In their printed materials, reference is often made to the World Bank, the International Monetary Fund, and a favorite, the International Chamber of Commerce ("ICC"), its Uniform Customs and Practice Documentary Credits and its Publications 322, 400 and 500. In one scam I worked on, the crooks cited "Articles 2 to 5 of the Due Diligence Convention and Federal Banking Commission Circular of December, 1998" and "Article 305 of the Swiss Criminal Code." For whatever reason, there is usually some misspelling somewhere in the document. The documents often require that the investors attest to the fact they are providing "good, clean funds of non-criminal origin."

The hard, cold truth is that this "market" simply does not exist. "Prime bank" instruments simply do not exist. The whole story is as fictional and fabricated as the tooth fairy and crop circles. However, as the scammers know and depend on, it is impossible to prove a negative, and that is particularly so for someone who really wants to believe in the truth of the proposition.

As with most investment scams, a lot of the terms and institutions involved are perfectly legitimate. Many of the instruments they describe actually exist in legitimate commerce, although in different and rarified contexts. The institutions they identify are real. This information is drawn from financial newspapers and literature to give the purported transactions and market a tinge of legitimacy and credibility. The scammers then inject the further promise of bank and account security, through escrow or trust accounts and "blocked funds." When you hear the term "blocked funds," you don't quite know what it means when they say it, but it sounds good and consistent with other terms they use, like collateral, escrow, trust, FDIC and SIPC. In the U.S., we are all familiar with federal bank deposit insurance provided since the Depression by the Federal Deposit Insurance Corporation ("FDIC"). We are generally aware of, but less well-informed about, the securities account insurance provided by the Securities Investor Protection Corporation ("SIPC"), but we see and hear "SIPC" in brokerage ads and commercials all the time and think it works about the same way as does FDIC insurance (it doesn't).

In relating the story and incorporating all these terms, the scammers hope to exploit some all-too-common human traits. Many people—certainly not you, as one of the nine-in-ten sophisticated people but still reading this article, but you, one of the hapless one-in-ten—do all they can to not sound ignorant to a stranger who has engaged them in conversation, regardless of how obscure the subject. Someone might say, "And because of the specific atomic weight of cadmium, it makes it a perfect phenolog for firmal ketosis." and you nod your head like you understand. (I made that up to make my point—it is jibberish.) Most scammers will incorporate very early in their spiel a question like, "And you know how the International Monetary Fund has been cracking down on European banks right now, right?" (more jibberish), yet for some of us, just that one-in-ten at most, we nod and say "Yes" when we really don't know what the International Monetary Fund is, or have a clue if it's been cracking down on European banks, but we've heard of it and have been meaning to subscribe to the Economist for years and read each edition cover to cover.

When Mr. One-in-Ten says "yes," the scammer senses he might have a new "fish eying the hook." Maybe not this time, but perhaps in a later, follow-up conversation—he doesn't want to appear too eager—he'll bring up the transaction. It will not make sense. He will not be able to explain it thoroughly. In dealing with the part that makes no sense, he will say "Understand?" Our unfortunate victim will say "yes" when in fact he doesn't understand at all. Then, the con man will mention the outrageous return on investment, like 50 to 75% per month. At this point (if not before), the "good angel" on the shoulder of most people will say (perhaps scream) "it is too good to be true" and they will politely disengage. Let's say that's another nine-in-ten cut. So now, we're down to about 2.2 million potential victims.

That pool of potential victims is often distilled by another powerful factor and human trait: the trust borne of affinity. By this, I mean some religious, political, ethnic, fraternal, social or professional bond, a fellow Christian or Korean or Elk's Club member, or accountant or fireman, or even a family member. We form and belong to such groups because it is hard to trust the world in general. Many of us seek to surround ourselves with those like us, those we enjoy, with common backgrounds and interests and beliefs, those we can trust without fear of betrayal. We don't have to have our guards up there or with them. In considering any investment opportunity, we all experience a wrestling match between the opposites of the desire to make lots of money and the fear of losing lots of it. Trust is a perfect solvent for the fear of losing money. Scammers know all about trust. They carry it around by the barrelful. When they insinuate themselves into such a circle of brethren, "fox in the henhouse" doesn't do justice to describing the situation. Even there, the fox doesn't parade around in a chicken costume and act like one. The results to the victims can be gruesome to behold, both financially and emotionally. The betrayal is palpable. We refer to this as affinity fraud.

The con men also rely on another fairly common trait among adults in established economies everywhere—a distrust of banks. Coupled with the public's lack of understanding about how banks really operate, it works almost every time. Of course banks are going to keep the really good deals secret. Of course they would not share the truly profitable transactions with the general public. Of course they would deny the market exists. Do you really believe they make all that money just charging interest on loans? All those fancy derivatives and swaps and things caused the economy to tank, but do you see any bankers' houses being foreclosed on? Those Occupy Wall Street people might have been off base on most things, but they were right about those banks. You get the idea.

And finally, many prime bank schemes utilize another technique that turns friend on friend. The scammers who are pulling off the scheme, who will actually make off with the money, often recruit a number of intermediaries to do their dirty work for them. These intermediaries may be people employed in the finance industry, but perhaps not in the mainstream or thriving at what they do. They likely do not understand the purported transactions any better than their victims, but they have "drunk the Kool-Aid." They think they have seen and learned enough to be able to share this fantastic opportunity with their friends and colleagues. They have been told of successful, consummated transactions. Perhaps they have even spoken with "someone" who has been paid the fabulous interest rate. They are sincere, true believers when they start spreading the word. And they are often very well compensated at first, and that can go a long way in convincing someone who might not be earning a lot in hard times to go out and find an investor to share in this wonderful opportunity of a lifetime. If they actually succeed in finding someone to invest, what follows from the true scammers is a succession of excuses about exotic sounding delays that were never discussed as possible before the money was invested. Neither the intermediary nor the investor has a clue what has actually occurred.

Put all that together—the vague story with familiar terms about a secret market among foreign banks, using a secure, insured account at a big brokerage house, with fabulous returns, being sold by someone you can trust—and it forms a potent package. Where's the scam? How do they get away with the money? There are several possibilities, but just like the pea under one of the three shells or cups (hence "shell" game) on the table, it's all a diversion and sleight of hand. The guy moving the shells or cups quickly over the table has moved the one with the pea toward him just over the edge of table and has palmed the pea, in a move too quick for the naked eye to detect. After you pick an empty shell, he drops the pea to the table imperceptibly when he lifts one of the shells or cups you did not pick.

In the prime bank fraud, everything the victim has been told about the account being secured and insured is correct. What the scammer does not tell the investor, and what is very difficult to find out until it's too late, is that the scammer has signatory authority over the account or trust. The moment the investor's funds hit the account, the scammer wires the money to an array of accounts in exotic places and it is lost to the investor forever.

I know this may all sound completely ridiculous to you sophisticates out there, but I hear or read of one or two of these cases being prosecuted every year. I am certain many more prime bank frauds are perpetrated each year that we never hear about, or that are investigated but not pursued for one reason or another. The scams simply will not go away. Type "prime bank note fraud" into Google and you gain access to dozens of articles and websites detailing what I've written here. Virtually every financial regulator and association has a posting warning of the frauds. Yet type in "High Yield Investments" and you will find an equally numerous and disturbing array of "opportunities."

If you are pitched to invest in something like this, or know someone who has been pitched, it is important that you act on it promptly. If you have invested or are considering such an investment, please call someone right away. Do not be embarrassed, or fail to act because you do not wish to become "involved." Call us here at Rothgerber Johnson & Lyons LLP (effective September 1, 2013, Lewis and Roca LLP), call some other attorney, contact the U.S. Attorney, the FBI, Postal Inspector, the Securities and Exchange Commission, your local state securities authority, your attorney general's office, call someone and provide the documents you received. It may stop someone from being harmed financially; it may stop someone from getting in much deeper who does not realize he or she is involved in a scam in the first place. One thing is relatively certain: if it is not stopped, it is likely to succeed somewhere along the line and people will be harmed, even devastated.

As I stated earlier, a common feature of these scams is a so-called confidentiality provision. People are often worried about disclosing the scam information to state or federal government authorities, even to their personal advisors, like their lawyers or accountants. Confidentiality laws and such confidentiality provisions in legal documents simply do not prohibit you from sharing the information with government officials or your personal advisors. The scammer's threats are part of the con, to keep you from sharing the crooked information with the people who might stop you from giving them your money or bring them to justice.

My hope in writing this article is that all you sophisticated and world wise people out there, who obviously don't need this warning, will pass it along to others who may not share your level of knowledge and experience. Just in case, why don't you hang on to a copy yourself?


Related Attorneys