Bank of England urges banks to clamp down on frauds

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The Independent Online
LARGE-scale scams using forged or fictitious bonds and letters of credit have prompted the Bank of England to write to banks this week urging them to report all attempted frauds.

Michael Foot, head of banking supervision, said yesterday that 'prime bank guarantee frauds' were being perpetrated in the UK and abroad in a number of forms.

The fraudsters claimed they could supply bonds issued or guaranteed by a well known bank and paying above the market rate of interest.

Mr Foot said the usual claim was that the fraudster could get hold of these in packets of dollars 10m or more, and that they were normally only available to professionals. 'All he needs is an advance fee to help set up the deal or, worse, up-front payment for, say, 10 per cent of the bonds which will invariably turn out to be forged or fictitious,' he added.

This type of fraud was now prevalent, Mr Foot said. He gave no examples, but recent cases are the Salvation Army's loss of dollars 8.8m in the UK and a scam on a US church's health fund, which lost dollars 12m.

The best safeguards against fraud were evidence that fraudsters get caught in the end and that they are then prosecuted and receive heavy sentences, he said. But he believed that 'the current position is not ideal in either respect'. More could be done within companies to combat fraud.

Mr Foot said it was essential for banks to give the Bank of England full, frank and prompt information when frauds were attempted on them and their customers. The Bank believes that if it has a wider picture of what is going on, it can tackle fraud more effectively. 'Only in this way can we improve the chance of preventing the fraudsters striking elsewhere.' Improved understanding of how fraudsters operate would also help to improve monitoring systems in banks.

The letter, sent on Tuesday, said the Bank was continuing to hear of complex and potentially fraudulent schemes that claim to offer attractive opportunities for low-cost funding or high-return investment, based on claims of access to financial instruments with names such as 'Prime Bank Notes', 'Prime Bank Guarantees' or 'Prime Bank Standby Letters of Credit'. Sometimes the fraudster will mention the name of a recognised bank without its knowledge, but alternatively the name may be invented - as are some of the names of the bonds.

Mr Foot urged banks to devise systems to prevent them becoming unwitting supporters of such schemes or their promoters. He also said they should make sure they do not become custodians of the fake bonds.

He added: 'We wish to take this opportunity to underline the fact that we expect all authorised institutions to notify us of all significant cases of attempted fraud directed against them, whether by outside parties or within the institution, including serious breaches of internal rules by the bank's own staff.'

He said it was important for 'anyone approached with any unusual financial deal or by anyone they do not know well to repeat regularly to themselves one of the most important lessons I ever learnt in economics - namely that there is no such thing as a free lunch'.