Offshore financial centers have attracted everyone, from the small investor to the large multinational corporation eager to take advantage of low tax regimes to legally maximize profits while minimizing taxes. Often, zealous investors, all too eager to access new opportunities available to them, fall prey to sophisticated schemes designed to bilk them of their cash. The Internet grants easy access to a huge variety of new investments but does not separate the legitimate from the illicit. Many are the hapless investors who have fallen prey to these offshore sharks with little recourse but to write the experience off as an expensive lesson in the school of hard knocks. Understanding the modus operandi to schemes that make exaggerated and impossible claims assist those who venture into offshore waters to recognize a potential scam before its too late. Here are examples of some programs that have been uncovered and techniques by law enforcement officials and investment authorities to help prevent the offshore investor from becoming shark bait.
Log on the Internet, go to any one of the major search engines and type in phrases such as "Prime Bank Notes" or "High Yield Investments" and your screen fills with investment possibilities beyond your wildest dreams. Herein lies the problem, because they are mostly pipe dreams!
The Pitch
There is a little known, but lucrative, international investment. This investment involves the trading of bank credit instruments (debentures), also known as known as "deferred payment," "delayed payment," or "stand-by credits." Until recently, trades were only available in minimum blocks of $100 million, but certain developments have allowed small investors to qualify. Profits range from 400% to 2,000% or more per year. The trading in "bank debenture instruments" is a multi trillion-dollar industry worldwide. Top world banks (Money Center Banks) are authorized to issue blocks of debt instruments like Bank Purchase Orders (BPOs), Promissory Bank Notes or Bank Debenture Instruments (BDls) under International Chamber of Commerce guidelines (ICC -400 & 500).
The Bait
The program offers monthly investment options with returns ranging from 7% for a minimum $100 investment to an incredible 40% for a $10,000 investment per month! The larger the sum, the greater the return. Turn a minimum $200,000 into a cool $53 million in just 40 weeks. Who needs the lottery!
We had a call recently from a fellow in Florida with two palls on the West Coast claiming to have invested $75,000 each in an offshore investment pool which guarantees them 50% return on their investments per month. We told him that unless he had savings to lose, to hang back and let his palls take the beating they were almost certain to experience.
Other investments offered are self-liquidating loans (loans that never have to be paid back), stock and commodity investments offering 20-60% profit per month with a ration of 60:40 winners to losers. The possibilities were endless.
How could anyone fall for a promise to return more than 2000% per year? How about turning $200,000 into $53 million in 40 weeks! It is strictly a numbers game for crooks. If just 1 in a million fall for the scheme, the con artists make a killing thanks to a potential market of hundreds of millions on the Net. Often, those caught in the traps can least afford it but many well-heeled investors also fall prey every year.
Bank Roll or Bank Debenture Programs
Perpetrators of this fraud use banking and investment jargon to confuse and impress their victims. According to the FBI, the promoters purport to have access to "bank guarantees" which they can buy at a discount and sell at a premium. By reselling the "bank guarantees" several times, they claim to be able to produce exceptional returns on investment. For example, if $10 million worth of "bank guarantees" can be sold at a two- percent profit on ten separate occasions, or "traunches," the seller would receive a 20% profit.
Such a scheme is often referred to as a "roll program." To make their schemes more enticing, con artists often refer to the "guarantees" as being issued by the world’s "Prime Banks," hence the term "Prime Bank Guarantees." Other official sounding terms are also used, such as "Prime Bank Notes" and "Prime Bank Debentures." Legal documents associated with such schemes often require the victim to enter into non-disclosure and non-circumvention agreements, offer returns on investment in "a year and a day" and claim to use forms required by the International Chamber of Commerce (ICC). In fact, the ICC has issued a warning to all potential investors that no such investments exist. Such documents are impressive and look real but are usually phony or have escape clauses in favor of promoters that render them unenforceable by the victim.
The purpose of these frauds is generally to encourage the victim to send money to a foreign bank, where it is eventually transferred to an offshore account that is in the control of the con artist. From there, the victim’s money disappears.
The jargon they use can be convincing to those not familiar with commercial banking terms. While foreign banks use instruments called "bank guarantees" in the same manner that U.S. banks use letters of credit to insure payment for goods in international trade, such bank guarantees are never traded or sold on any kind of market.
Investors are encouraged to initially put up a small investment of $1,000 which "returns" $1,500 the following week. Impressed, the investor then puts up $20,000 and is returned $30,000 in a relatively short period of time. The hapless victim is then pushed to put up all he can, often investing $100,000 to $200,000. After a series of delays that may last a year or more, the victim is told the deal "fell through" and it was just bad luck. He is encouraged not to say anything because what he did was illegal, especially if he went along with the con artist’s idea and set up an offshore corporation or trust to evade paying tax on the promised gains.
Selling the sizzle is what these con artists are good at, and the good ones ply their trade with all the finesse and confidence of Wall Street promoters. The programs have been around for years, but like the well-known Nigerian 914 Scam below, they continue to catch new victims. According to the International Chamber of Commerce ‘s commercial crime bureau, bank debenture-type programs cost investors in North America more than $10 million U.S. in loses per day! Victims rarely come forward as they are either too ashamed to admit their blunder or fear attracting the attention of tax authorities for attempting to evade taxes.
High Yield Investment Programs (HYIP)
Recently, a fellow from Jamaica sent an urgent email asking that we check out a company he had seen on the Internet offering 20% per month on a minimum $100,000 investment. He wanted an answer immediately claiming he had to wire the money to them that day. A phone call to the London number produced a return call from a certain "Chris" in Nevis who refused to give his last name or phone number. We were asked to sign and return a "confidential" non-disclosure agreement to the company and then all our questions would be answered. Our money was to be invested with a Nevis trust company that would forward it to a New York broker who would in turn invest in the U.S. markets. All was done with complete anonymity and privacy. There are no income taxes in Nevis. Paying our taxes was our business we were told. When asked about security, "Chris" explained that once they received confirmation of funds from our bank, we would be given the proper documents. The episode had all the properties of a fraud. We warned the eager investor accordingly.
The Advance Fee Scam
This scheme has become increasingly popular because it usually involves amounts under $1,000. It occurs when the victim pays money to someone in anticipation of receiving something of greater value, such as a loan, contract, investment or gift, and then receives little or nothing in return. Victims rarely complain to authorities due to the small amounts of money involved and because con artists shift the blame to the applicant for failing to meet a list of requirements in an application that are impossible to fulfill.
Examples include offshore credit and debit cards, self-liquidating loans, investment loans, and a variety of other promotions. The variety of advance fee schemes is limited only by the imagination of the con artists who offer them. They may also involve the sale of products or services, the offering of investments, lottery winnings, "found money," or a myriad of other opportunities according to the FBI. Clever con artists will offer to find funds to loan to their clients who pay a "finder’s fee" in advance. "Clients" are required to fill out applications and sign contracts in which they agree to pay the fee upon introduction to the financing source. Victims often learn that they are ineligible for financing only after they have paid the finder’s fee according to the contract. Such agreements may be legal unless it can be shown that the "finder" never had the intention or the ability to provide financing for the victims which is next to impossible to prove.
The Nigerian or 914 Fraud
More than $5 billion US has been stolen from victims of the Nigerian Scam since it was first reported in 1989. It has been run for the last ten years under successive governments of Nigeria. It is also referred to as "Advance Fee Fraud", "419 Fraud" after the relevant section of the U.S. Criminal Code of Nigeria, and "The Fax Scam."
Much has already been written about this fraud and the many forms it takes. The target receives an unsolicited fax or letter from Nigeria containing either a money laundering or other illegal proposal or he may receive a seemingly legal and legitimate business proposal by normal means. Generally, the victim is encouraged to give access to a business bank account so that funds being moved out of Nigeria can be deposited there temporarily. The victim is promised a commission of between $2 million to $25 million. Once the criminals gain access any funds in the accounts are removed. The fraud often involves an advance fee being paid to help facilitate the transfer. According to reports, this scheme is the third largest industry in Nigeria! More recently, a new twist on Nigerian Scam has surfaced. Reports received by INTERPOL indicate that the criminals are becoming so brazen and confident that they are contacting earlier victims of the fraud and are posing as Nigerian government officials investigating the fraud in a so-called attempt to get the victims’ money back upon payment of an up-front fee.
Abusive Trusts
The Internal Revenue Service is again reminding consumers not to count on "abusive" trusts to help them evade income taxes. Real trusts are used mainly to avoid estate taxes or probate after death, but trusts cannot be used to lower current income tax burdens for the settlor (one who creates the trust).
An abusive trust is usually expensive and promises lower taxes without loss of control over assets. True ownership of assets or the size of income is hidden. A promoter agrees to sets up the trust for a taxpayer who transfers assets to the trust. The promoter either acts as trustee or provides another individual for the task while providing a means of accessing those funds such as a credit card secured by the money in the trust or pre-signed blank checks.
In the case of business trusts, often payments are made to the taxpayer as dividends that are labeled as business expenses. The original owner is assured that he will have full access and control of the money. In these cases, the person who set up the trust (grantor) is responsible for paying the tax and failure to do so constitutes tax evasion. Failure to report a foreign trust is also required.
There are many types of trusts, whether legal or abusive. Businesses are placed in business trusts or unincorporated business trusts. The machinery used by a business is usually placed in an equipment or service trust. A house is placed in a family residence trust and personal property or income is often placed in a charitable trust. In some states, unincorporated business trusts can be used to limit state business income tax liability but they can never be used to limit federal income tax liability.
Charitable trusts are used by people who want to give their money to charity when they die but still want to use it while they live. The taxpayer pays income taxes but avoids probate taxes. The problem comes when trusts are misused in an illegal attempt to avoid income taxes.
For the victim, the cost will be more than he bargained for. Once assets are transferred to the trustee, he is granted wide powers to control the funds as he sees fit. In a legitimate trust situation, the trustee is bound by a set of strict rules designed to protect the assets. In an abusive trust, such controls rarely exist leaving the assets vulnerable to theft.
For both promoter and victim, if caught, the price can be high. According to the U.S. National Fraud Information Center, in a case brought by federal prosecutors, James Noske was convicted of setting up these trusts for others and sentenced to serve 6-1/2 years in prison by a federal judge. Those caught using trusts to illegally avoid paying taxes, the government must be paid the original taxes with interest plus fines plus an additional penalty of 75% of the original tax. You could wind up paying more than twice the original tax when it’s all over.
Similar fines and penalties exist for Canadians participating in abusive trust arrangements and Revenue Canada has added more than 1,000 new international auditors to help catch such perpetrators. The Federal Bureau of Investigation, Internal Revenue Service, Royal Canadian Mounted Police and Revenue Canada regularly monitor the Internet to identify abusive trust schemes.
The Pen to the Rescue
His motto is "the pen is mightier than the fraud" and his weapon the written word. Publisher of Offshore Alert, a newsletter with a mission to expose fraud and corruption in the major Caribbean financial centers, David Marchant warns investors of investments that he believes are less than above board.
In March, he reported on irregularities he’d discovered in Panama at a well-known firm providing offshore trusts, corporations and investments to clients, mainly from North America. The company, with an impressive array of web sites selling everything from mini-trusts to books on how to stop paying taxes, advertises itself as "the largest independent provider of independent financial services in the Caribbean and Latin America." Marchant claims that he has uncovered a massive Ponzi scheme being offered to clients and that they have been defrauded of millions of dollars. Through sources, he says he has proof that the company is insolvent with more than $25 million in debt due to the president’s siphoning of client’s funds.
The company responded with a $30 million lawsuit against Marchant alleging negligence. Marchant continues to report on his findings undaunted. Panama’s Republic daily newspaper and the June 1 edition of Business Week Magazine also carried the story. Business Week stated that the president of the offshore company together with another offshore consultant, well known for setting up banks for clients, were responsible for setting up banks in Montserrat later closed down by regulators, losing millions for depositors; the majority of whom were low income Americans.
Marchant also reported about a seminar in Nassau, Bahamas, sponsored by another well-known offshore services company where the seminar speaker was caught effectively promoting tax evasion schemes to a predominantly American audience. The speaker had been employed by a high-profile US investment firm and was promptly fired.
An Ounce of Prevention
Reading publications like this and others will help investors avoid potential offshore pitfalls but there is no substitute for a thorough due diligence and straight common sense. Understanding the techniques used by con artists helps the investor avoid falling prey.
Here are some tips from the FBI and offshore investment professionals.
1. If the offer of an "opportunity" appears too good to be true, it probably is.
2. Know whom you are dealing with. If you have not heard of or are not familiar with a person or company that you intend to do business with, do your homework. Visit the business location, check with the Better Business Bureau and consult with local banks, an attorney or the police. There are also professionals who will help you do a due diligence for a fee. Investing $200 in getting help before you invest is much cheaper than hiring attorneys and private investigators to track down your money after its gone.
3. Follow common business practice. Would you invest money with someone who was unwilling to provide you with a last name, references and a contact number?
4. Make sure you fully understand any business agreement that you enter into. If the terms are complex, have them reviewed by a competent attorney.
5. Be wary of businesses that operate out of post office boxes or mail drops and do not have a street address, or of dealing with persons who do not have a direct telephone line, who are never "in" when you call, but always return your call later.
6. Be wary of business deals that require you to sign non-disclosure or non-circumvention agreements that are designed to prevent you from independently verifying the credentials of the people with whom you intend to do business. Con artists often use non-circumvention agreements to threaten their victims with civil suit if they report their losses to law enforcement.
7. Avoid anyone who encourages you to break the laws of any nation or where the investment relies on complete secrecy. Falling for this trick gives the con artist leverage against you. Like a trap, he will spring it on you later insuring your silence when he steals your money.
8. Determine your security before spending a lot of time and money investigating the offer. If you are being asked to entrust your money to someone else whom you don’t know, be suspicious. The stage is set to have your money stolen from you without recourse.
9. Be wary of any offer that pressures you to make a decision in a short period of time. Often this is to prevent you from asking about the company and doing a thorough due diligence.
10. Trust your gut. If your "little voice" is warning you to beware, don’t get involved until you feel comfortable. Often greed can overwhelm common sense and this is always a mistake.
There are many legitimate offshore service providers who offer legal methods of helping you discover excellent legitimate investment opportunities without excess risk to your assets. Many of them appear as authors of expert articles in the archive on our website which you may research for very modest fees. With the right guidance, you will be well on your way to utilizing the many opportunities that await you offshore.
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