|
Excuse me sir, could I interest you in a fa$t million?
Many cases of international fraudsters offering investors huge annual
returns on capital for a fee have been reported in recent years.
One famous scam, originating from a Pacific island known as the Dominion
of Melchizedek, involves the notorious convicted fraudster Mark Pedley,
who also goes under the bizarre name of Branch Vinedresser.
The scam involves Pedley and bogus insurance companies and banks,
allegedly based in Melchizedek, which have extracted millions of dollars
from victims around the world, more recently in Britain, promising huge
returns on initial investments.
"Melchizedek has certainly given a new meaning to the word �offshore�.
Although their operations have been closed down for the present in
Britain, there is always the risk they could return in another form,
such as an offshore reinsurance company,� said Trevor Jones, a UK-based
private detective.
Fraudsters are usually career fraudsters, according to a Bank of England
spokesman.
�Once a person thinks of a fraud, they often think of a second. They do
not go from being a blue-chip banker one week to a fraudster the next,�
he said.
The quoted returns are often in excess of 100 per cent per year, which
are generally unobtainable anywhere, unless the investor is privy to
insider information in a monopoly situation.
The fraudster, who will usually claim to have such knowledge about major
bank debt instrument issuance, offers to share the potentially huge
profits with the unsuspecting investor after he or she has paid a fee.
Elaborate
Covered by an elaborate private legal agreement or contract forbidding
the investors from contacting any bank, it often specifies a substantial
capital investment for a minimum of one year.
In order to repay the capital sum a so-called 108 per cent guarantee is
suggested, to be issued by a major international bank, via an escrow or
trust account, into which the investor�s funds disappear under the guise
of funds management.
This guarantee is almost certainly non-existant since no first-class
bank will ever issue such an instrument with interest in excess of
dollar market rates unless a third party pays the interest differential
to the bank first.
The fraudster disappears with the fee and sometimes some of the capital,
perpetrating the same fraud several times in different countries.
Unfortunately victims are either too embarassed to report the matter to
the police or unable to take action because of the legal wording of the
contract, which often allows the fraudster to keep the fee to cover his
�expenses�.
Fees typically range from $10,000 to $250,000 for false �master
commitment letters�, which are supposed to give the investor access to
huge amounts of heavily discounted and non-existant bank debt
instruments on a monthly basis.
The reason people fall for this kind of scam in the first place is that
it is similar to a legitimate method of investment known as a medium
term note (MTN) programme.
Legitimate agents with access to private placements which are usually
unlisted and untraded on the secondary market can obtain better returns
for investors than major investment banks do using listed offerings.
It is possible to obtain risk-free profit on a monthly basis of 2 to 3
per cent from the closed-end forfaiting of bank instruments, usually
called �bank notes�, issued under a medium term note programme.
The difference from the fraudster operation is that the investor�s
capital is at all times secure and there are no advance fees payable.
Agent and investor pre-agree a profit sharing agreement as the basis of
any contract and provided the investor is not using borrowed funds, this
approach should be entirely risk-free.
Using borrowed funds can create risks as the investment situation is
market driven and therefore there can be no absolute guarantee of
income.
UAE
IN the UAE, the MTN market has not been developed although there are a
few private and corporate �end� investors who buy for their own
portfolio through investment bankers, such as Merrill Lynch.
For the first nine months of 1997, Merrill Lynch dominated the public US
domestic market with 23.9 per cent, worth $18 billion, while Bear
Stearns and Lehman Brothers held second and third place with $16 billion
and 21.45 per cent between them.
That figure only relects 60 per cent of the market.
�There is limited financial fraud in the UAE as it is not a very
experienced market and MTNs are not widely available or even known
about,� said Denis Chambers, a UAE based private investment banking
advisor.
In November last year British Bank Dubai issued a Certificate of Deposit
(CD) programme which was actually an MTN with Certificate of Deposit
features. It was issued directly to major local investors and
corporations for a minimum of Dhs 5 million (US$1.3 million) on a
confidential electronic transfer register basis. A spokesman at HSBC
Financial Services confirmed it was an MTN but said: �We could not tell
the investors because they are not yet familiar with MTNs.�
No actual MTN certificates were issued for this programme, merely an
account custodial receipt, as the UAE Central Bank must give approval
before a bank or financial institution can issue a full MTN.
�The beauty of an MTN programme is its swiftness, safety and secrecy. It
can be tailor made to suit an investor�s demands,� said Chambers.
Given the size of the MTN market in Europe and its continuing explosive
growth, the chances of any investor losses from non-trades is probably
limited to any very short-term differential between bank bid and offer
interest rates, plus leveraging costs, if any.
This assumes that at all times a pre-arranged closed-end forfaiting deal
is in place without the investor physically purchasing financial
instruments to hold to maturity.
The risk is virtually nil while profits are maximised. The end purchaser
is often a large institution where a certain yield to maturity is
required or else the deal suits shorter-term treasury operations.
Over the last fifteen years, MTNs have emerged as a major source of
funding for US and European corporations and banks, government agencies,
supra-national institutions and sovereign states.
Pionereed in the US in the early 1970s by General Motors Acceptance
Corporation as an alternative to short-term financing through commercial
paper and long-term borrowing in the bond market, they and other auto
companies needed to match maturing debt with loans to auto dealers and
customers.
But the market was hindered by a lack of liquidity and securities
regulations at that time so issuers would often seek private
placements.
It was not until the mid 1980s that the market expanded into a major
source of debt financing, initially by means of major US automobile
companies using MTNs to finance dealer floor stocking, leasing, consumer
credit and credit card operations.
In the 1990s, the market has seen a dramatic increase in size and there
is now somewhere in excess of $2,000 billion of outstanding MTNs. The
European market holds $1,000 billion of these from barely $100 million
in 1993.
Most MTNs are uncallable, unsecured senior debt securities with fixed
coupon rates and investment grade ratings, similar to bonds.
Bonds
However, unlike bonds, they may be sold on a best efforts basis by
investment banks or brokers acting as agents.
And unlike bonds, the agent does not have to underwrite the issue,
although as the markets have developed most issues are underwritten.
Another difference to bonds is that whereas bonds are usually sold in
large discreet stand-alone offerings, MTNs may be sold on either a
continuous or intermittent basis.
Offerings of MTNs may be issued with great flexibility to include zero
coupons, floating interest rates or rates computed to unusual formulas
tied to equity or commodity prices and other options.
This makes MTNs highly flexible debt instruments instead of the narrow
stand-alone bond issue.
The MTN market allows issuers to match more closely the maturities of
assets and liabilities through continuous offerings. This way a company
can average out its cost of funds over a period of time rather than a
single day bond offering.
Once an MTN programme is in place an issuer can place a sizeable amount
of debt in a short time.
Bonds on the other hand, usually require the prior arrangement of a
syndicate and negotiation of an underwiritng agreement plus further time
for a pre-selling to investors.
A bond issue may also require board of directors prior approval whereas
often a corporate treasurer can issue MTNs without delay within
discretionary limits.
The MTN market provides the opportunity to raise funds discreetly
because the issuer, the agent and the investor are the only parties that
need to know about a primary transaction.
In contrast, the investment market obtains detailed information
regarding underwritten bond offerings.
In times of economic uncertainty, issuers often avoid the bond market as
an issue could signal financial distress.
In the early 1990s, many commercial banks used the MTN market to raise
funds quietly rather than risk possible negative publicity in the bond
market.
Also, because of the discreet nature of the MTN market, many issues and
trades now stem from reverse enquiry, where investors approach potential
issuers with specific investment criteria. This reduces borrowing costs
to the issuer and gives the investor much flexibility.
|
Everyone wants to make easy money, which is why so many people fall prey
to international fraud. Luiza Karim investigates the medium term note
market and discovers that an advance fee is a warning bell. Technical
consultant Denis Chambers.