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Issues For Custodians

Issues For Custodians

Proper funds, trustees, and escrow companies all use the services of a custodian. A custodian is an independent entity that holds on to an asset, or the title to an asset, on behalf of the beneficial owners and the managers so as to add a level of authenticity to the management and care for that asset. It is also to make sure the asset is not taken by the manager or the agent without the consent of the beneficial owner.

The role of the custodian is an important role and is a role that is key to both the security and the transparency of our markets, either private or public. The role of the custodian in many cases is required by law and if not required by law is required by those who have wisdom in the ways of transaction. For a silly but useful example, if the foxes are in charge of the management of the hen house – it would be unwise to also allow the foxes to be the custodian of the hens and the records. More real to life it would be unwise to allow a fund manager to not only manager a fund but also be the custodian of the assets. Even with an independent custodian the industry is full of mischief. One can only imagine the heights of chicanery achievable if the manager could also be the one responsible for the custody of assets under management.

The point being made is that custodians are a key player in the world’s financial markets and a key player in their well being.

The issue is that most custodians do not care what the asset is that you give them. It could be a sheaf of warehouse receipts, a collection of old posters, stock certificates, car titles, derivative contracts, a bar of palladium, 144 karats of rubies, or a collection of shrunken heads. They do not care about the asset – only that they catalogue it correctly and care for the assets in accordance with the best practices for that particular asset. I respect that apolitical approach – but it can be, how do you say? – Problematic.

In recent years we have investigated the loss of millions of dollars based upon custodial certificates issued by excellent instructions on bogus – really bogus – items. We have seen custodial certificates on Brazil LTN bonds of 1972, Banco Central De Venezuela US Bonds, African Star Rubies, historical Mexican and Chinese Bonds, Peruvian Guano Bonds and so many more. These assets are worthless, but the use of a large credible bank’s custodial certificate by a fraudster to lend the credibility of the large bank to the bogus asset is very effective. You can just hear the fraudster’s pitch – “See the asset is real, would Big Bank issue a custodial certificate against a fraudulent asset?”

The custodial banks cannot be held responsible for the quality of all of the assets, but they really need to be held accountable for those assets long exposed as bogus and susceptible to abuse by fraudsters.

Concurrently it must be understood that the Big Bank is apolitical when it come to a custody issue. No matter the value of the asset, or the owner’s purpose of the asset, if they are willing for pay for the services, most Big Bank’s will provide the service.

The problem is that one day a case history will be made that a bank will have become an unwilling but liable partner in a fraud. Especially when the fraudulent item had already been exposed in the Aegis Journal.

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