The Ontario Securities Commission (OSC) and the Royal Canadian Mounted Police (RCMP) have issued a warning to investors to steer clear of bogus financial instruments. They say individuals are still being lured into illegal investment scams, duped by apparently official and legitimate offers labelled prime bank notes, roll-over programmes or prime bank debentures.

These instruments typically take the form of letters of credit, notes, debentures, bank purchase orders, zero coupon bonds, or guarantees. The word prime is meant to refer to reputable financial institutions, which supposedly issue these investments. The schemes sometimes claim affiliations with major international organisations, including the International Chamber of Commerce (ICC) and International Monetary Fund (IMF). Both these organisations deny any association with such investments.

Lured by high returns

Promoters of these schemes typically lead prospective investors to believe that they are being allowed to participate in an otherwise secret trading regime. Investors might be required to sign non-disclosure and non-circumvention agreements, which prevent them from disclosing the identity of the parties involved in the investment programmes and the terms of the transactions.

Often some part of the schemes would be transacted through a country regarded as a secrecy haven. An "offshore secrecy" feature conceivably enables investors to avoid paying tax on proposed investment returns.

Other common features in the scams include promises of above average returns, often within a short period of time. Sometimes a rate as high as 20 per cent per month risk free is quoted according to the OSC and RMCP. Legal-looking documents may use technical language in an attempt to confuse investors into believing their investments are worthwhile. Little or no information is provided to investors about how investors' returns are generated.

Early investors promised rewards

Monetary rewards are sometimes provided to early investors in the bogus schemes to encourage them to induce others to invest. The OSC and RMCP said many individuals brought into these schemes are initial investors' relatives or friends who are less sceptical of the investments because they trust the family member or friend who recommended the scheme.

The OSC and the RCMP reminded investors in the warning issued in November that when the legitimacy of a proposed investment is in doubt, one can usually rely on the basic principle of investing: "If it sounds too good to be true, it probably is."