A leading international organisation devoted to investor protection has issued a stark warning to would be investors in prime bank scams, some of which are fabricated using bogus letters of credit (L/Cs).

Low interest rates, distrust of government, volatile equity markets, the recession and the Internet are apparently tempting an increasing number of investors into prime bank scams according to a January 2002 statement issued by the North American Securities Administrators Association (NASAA).

Secret investments

Regulators in the US described as "dramatic" the increase in investments in supposedly secretive portfolios of prime banks at a recent press conference where they showed videotape of promoters claiming that prime bank trading programmes could yield huge returns with no risk. In reality, the regulators said, neither prime banks nor the instruments they claim to trade exist.

In a typical pitch - increasingly made over the Internet - investors are promised access to secret, high-yield investments made through trades among the world's top or "prime" banks. Prime bank promoters falsely claim their investments are guaranteed or secured by some sort of collateral or insurance. So many prime bank scams succeed that the Commercial Crime Bureau of the International Chamber of Commerce calls them the "fraud of the century ".

Billion-dollar industry

Regulators in the US say that many victims of prime bank scams fail to report their losses because they do not want to appear foolish. Others simply cannot believe close friends, trusted business associates, or people they met at church could be involved in dishonest schemes.

Over the past three years, US regulators have brought actions on behalf of more than 41,000 people nationwide who invested at least US$470 million in prime bank scams. One estimate puts the total amount of cash invested in such scams in 2001 at US$1.5 billion.

Conspiracy theorists

"People want to believe there are secret ways to make fabulous amounts of money," said NASAA president Joseph Borg. Besides promising high returns with no risk, some prime bank scams appeal to conspiracy theorists, and those who distrust government or want to avoid paying taxes through offshore accounts.

One reason prime bank scam artists are able to mislead people is because the

instruments they claim to be using bank debentures and bank-secured

trading programmes and standby L/Cs for example mimic legitimate financial

instruments closely enough to deceive people unfamiliar with such

documentation.

Jargon

In one case, US regulators shut down an Internet-based scam that promised to "pool investor money to obtain an irrevocable line of credit from a fiduciary bank and use the line of credit to purchase negotiable receivable invoices and raise capital funds against these invoices and other secondary market debt instruments for par values higher than the actual face value of the original irrevocable L/Cs and then direct the fiduciary bank to exchange the receivable invoices for a certificate of deposit from a Prime Western Bank". The certificate of deposit would then, according to the fraudsters, be used to pay back investors with interest.

As the regulators correctly warn: watch for jargon that sounds sophisticated but makes no sense and remember that some things really are too good to be true.