There's a sucker in every crowd

A solicitor has been jailed for nine years for advance fee fraud.
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The Independent Online
Each week many of us spend a few pounds on a lottery ticket. The marketing tells us that it could be one of us scooping the multi-million pound jackpot. The initial payment is minimal, but the odds on a win are something like 14 million to one.

So imagine being offered the chance to become involved in a risk-free deal that would give you a remarkably large profit on an initial investment and the guaranteed return of that original stake. How much money would you be prepared to gamble? If you were the trustee of a pension fund, or, perhaps, a solicitor with a bulging client account, would you be tempted to use the funds entrusted to you to go after a quick, easy profit?

For a company desperately looking for finance for a project, or simply to continue trading, and for whom the usual sources of finance are closed, the offer of a substantial low-interest or interest-free loan that repays itself (a so-called "self-liquidating" loan) may seem like the answer to a prayer.

What's the catch? Well, it is likely that if you have been offered one of these types of opportunity then you will probably be dealing with someone like Charles Deacon - the solicitor jailed for nine years last month for his involvement in a pounds 13m advance fee fraud. Prospective fraud victims will be asked to pay a sizeable fee before the transaction can proceed. That advance fee will then be stolen and the transaction will never materialise.

Press reports of the Deacon trial gave the impression that the fraud in which he was involved was "simple" and that, by implication, the Belling pension fund trustees were perhaps naive victims. But as a victim, the pension fund is not alone. The Salvation Army was the much-publicised target of an advance fee scam, which initially resulted in the charity being defrauded of around pounds 5.7m in a spurious transaction allegedly involving the trading of standby letters of credit (SLCs). That money was recovered through the courts. Last September, a large fraud was uncovered in Torquay. Fraudsters had stolen many millions in up-front fees paid by "investors" in exchange for worthless certificates of credit.

These are only the high-profile cases. Many others pass unnoticed or unreported.

It may be that the fraud is simple in the sense that the aim is no more and no less than the theft of an advance fee payment. What are not so simple, however, are the details of the non-existent transactions invented by the fraudsters to lure victims into parting with their money. The fraudster has the initial advantage because the potential victim will have been dazzled by the prospects of making vast profits or will perhaps be pinning their company's hopes of survival on an offer of cheap finance. In this way, potential victims and their professional advisers can be confused and deceived by jargon and fast-talking conmen.

Fraudsters operate internationally through obscure organisations called "trusts" and shell or offshore companies. They may allude to the involvement of a non-existent bank or of a "top 100 prime bank" to establish credibility. The use of forged banknote paper is common. They usually appear to be based in countries such as Panama and Liechtenstein, and are often introduced to their victims by intermediaries or brokers. The latter are often "financial advisers" who, through contacts or advertising, find those who are looking for cheap loans or lucrative investment opportunities. The intermediary, who may or may not be involved in the fraud, will probably be promised by the fraudster a fee or a percentage of the value of the transaction as the payment for the introduction. As has been made clear by the Deacon trial, solicitors (and accountants) can be the intermediaries or, indeed, the fraudsters.

The frauds are based on a variety of different transactions. Some of the more complex can be similar to the following:

Trading financial instruments - It may be that the victim is offered the opportunity to invest in the trading of standby letters of credit, discounted letters of credit (LCs), prime bank guarantees (PBGs) or bank debenture instruments. The deal might be based on "rolling over" SLCs or LCs or the release of "tranches" of instruments or money. Reference may be made to "cuts" of "paper". Alternatively, the victim could be asked to invest in the issue and trading of "master collateral commitments" (collateral trading).

While some of the expressions used can be found in genuine banking transactions, the fraudsters' usage is nonsensical and intended to confuse the victim and his advisers. SLCs and bank guarantees cannot be traded in the manner suggested, nor are LCs issued at a discount. And there are limits on the transferability of LCs. Many draft documents prepared by fraudsters do not comply with the UCP (Uniform Customs and Practice for Documentary Credits) and cite phoney standard document formats such as 3030 and 3032. These technical points are ignored by the fraudsters, whose promises of astonishing returns and requirements of confidentiality mean that many do not question the fundamental flaws that would become apparent during a close examination of what is being proposed. There may also be suggestions that the transaction is in some way unlawful, and that for that reason victims may not wish to make public their involvement. It is common for victims to be told that the transactions are carried out by banks in secret since they are "off-balance sheet" items. For this reason, it is claimed, banks will not admit to their existence.

Low-interest or self-liquidating loans - An interest-free or low-interest loan that will repay itself will be offered by a fraudster, perhaps through an intermediary. The promise will be that the fraudster or lender will be able to make available a large amount of funds (say $100m) and that they will also be able to arrange for the borrower to use part of that sum (say $80m) to purchase bank instruments. Those instruments, it will be claimed, can be bought at a discount to their face value. The discount in this case would be 20 per cent, so that $80m would be paid for them, but they would be worth $100m in 10 years' time, when they "mature". At the end of that period, they will be sufficient to repay the amount of the loan that will be due at the same time. Meanwhile, they will provide a sufficient income to cover either part or all of the interest liability under the original loan. Thus, the difference between $100m and $80m, the "fall-out", (ie, $20m) is an interest-free or low-interest loan.

While in principle a "self-liquidating" loan is not unlawful, in the context of the frauds under discussion, it is not possible to purchase the types of instruments referred to by fraudsters and the alleged returns will not, therefore, be achieved. A more telling point, perhaps, is that if the fraudsters could make so much money this way, why do they need to involve a third party? In one fraud, this problem was dealt with by the claim that the interest-free loan could only be made as a result of a non-existent loophole in US arbitrage legislation and only if the interest- free loan or "fall-out" was intended for use as a "bona fide, genuine commercial project loan".

It is in the context of the above examples that the commentary on the Deacon trial must be viewed. The aim of the fraud can be very simple, but in all but the most blatant Nigerian advance fee frauds the manner in which the coup de grace is delivered can confuse even relatively sophisticated business people and their advisers. Many solicitors, accountants and bankers can be fooled by clever confidence tricksters, and then cause loss to innocent third parties.

Unfortunately, it is unlikely that many lessons will be learnt from the Deacon case. Until people are able to curb their desire to make money at any cost, there will always be those who will throw caution to the wind for the promise of an easy killing. Fraudsters will always elude regulation and control, but potential victims could be better protected by financial services legislation. More must also be done to ensure that intermediaries and professionals appreciate the harsh fact that there is no such thing as a transaction that will provide a loan or a return on an investment at anything other than usual market rates (even in a lottery roll-over week).

The author is a solicitor at Walker Martineau in London and has written a book on advance fee fraud, published by Sweet & Maxwell.