“TALES” from the Pacific – Fraud and Deceit in the Developing World
Developing countries, or emerging economies, are particularly prone to fraud and scams since they often lack the legal infrastructure and the professional capacity to properly prevent such activities, and are often all too hungry for the “quick” route to economic riches. In the mid‐1990s, Albania, newly emerged from its Iron Curtain days, fell victim when many of its citizens and government leaders invested in elaborate pyramid schemes, only to lose their money when the scams finally collapsed.
Another device used by criminals to defraud investors that was prominent in the 1990s was the “prime bank note”. These notes were billed as high‐yield investments in central banks available to only a select group of investors. The scammer would claim that he had “inside access” to these prime bank notes (often in the name of obscure or non‐existent banks) and would solicit funds from persons and institutions wanting to earn more than the then prevailing rate of interest on the open market. The problem was that these “prime bank notes” were, in fact, fraudulent and the “investment advisor” turned out to be just another high‐class swindler.
Pacific island developing nations have been susceptible to such scams for several reasons. One, many of the smaller island countries have been independent only since the latter part of the 20th Century. As such, they do not have the level of experience that can be found in larger economies. Second, for much of their existence, they depended upon outside powers, i.e. colonizers, for much of their legal infrastructure. Only until recent years have many of these countries been able to develop laws based on their own circumstances. Additional challenges facing these countries are the lack of sufficiently qualified and experienced professionals and economic challenges. Accordingly, these jurisdictions are often ripe for the scam artist to exploit.
Having worked in the Pacific region for the past decade and more, I would like to relate to you several of these scams. For various reasons, I will not state the name of the jurisdictions involved or the actual names of institutions investigated.
The case of the giant red ruby. The lack of efficient and fast communications between jurisdictions has enabled many con artists in the past to carry out their nefarious deeds, however, with the Internet and cooperative networks it is changing for the better. A fairly successful scam was conducted by one creative entrepreneur in several island countries, in the Caribbean as well as the Pacific. In this enterprise, an investor would go into a country with limited banking facilities and offer to open a financial institution. At the time the banking laws of some of these countries were not yet well developed. This investor claimed that he had the “world’s largest” red ruby, weighing several hundred carats and reportedly worth several millions of dollars. He would offer to place that ruby as his capital contribution toward forming a banking (or in some cases buying an existing bank). Using a written “appraisal” certifying the ruby’s worth, this investor quickly became the bank’s largest depositor and was able to effectively control the board operating the bank. With the deposit of the ruby and its purported value, the bank now became one of the largest, if not the largest, financial institution on the island and depositors swarmed to open accounts at the bank. Once the bank had accumulated a large deposit base, the investor would take out a loan, using the ruby as collateral. Of course, once that was done, the investor would leave the island, never to be seen again. The ruby (if it was indeed a real ruby) proved to be a very poor source of capital funding and collateral. Typically, the investor would only pledge a share of the ruby’s value as collateral, thus the bank could not foreclose on the entire ruby. It was also not a conducive means to liquidity. The market for a large red ruby is fairly limited, especially if the quality or authenticity was in doubt. Plus, even if it was legitimate and real, it had to be sold as is to retain its value. Cutting the “gem” into smaller pieces would destroy its “uniqueness” in terms of size and ultimately would reduce its value. This particular scam went on in several countries until newly appointed bank regulators in one country questioned the viability of relying on a single gem to finance a bank and upon further checking found out that this scam had been tried in other jurisdictions. The investor quickly left and was not heard from again, leaving the red ruby in his wake.
The dead accountant. In another island country, banking laws were non‐existent until the Financial Action Task Force began its work. Even then, passing effective legislation took some time. During that period of time, several bank applications were filed. One of these represented itself as a new bank formed by experienced banking executives. They promised to base their global headquarters on the island, employing many locals, and even proposed the establishment of a regional bank training facility. The glossy, well‐designed brochures left no doubt to local officials of the professionalism and credibility of the applicants. The proposed name of the new financial institution even rang faintly of well‐established banking connections and rumors swirled that the Rothschild family was somehow connected to the venture. The bank obtained its business license (prior to passage of the law requiring a banking license, it only needed a general business license to begin operations). Two years later, the banking law was effective and the local financial institutions commission began reviewing existing banks and supervising for their prudential adherence to regulatory requirements. When approached by the regulators, this particular bank presented a balance sheet showing several billions of dollars in assets purportedly held by the bank. (In banking, deposits are not “assets”, they are liabilities to the bank.) Coincidentally, the same week that this balance sheet was presented, the banking magazine, Global Finance, came out listing the world’s largest banks and their holdings. According to the balance sheet signed by an “accountant” this particular bank should have shown in the mid‐range of the largest banks; however, nowhere was this bank listed in the Global Finance listings.
When asked, the bank’s executives explained that their bank was engaged in “special banking”, a category supposedly not covered by the Global Finance listing. The bank examiner decided to call the accountant whose name appeared on the balance sheet. The stated phone number was for a non‐active phone account. Further checking revealed that the accountant not only had been suspended from the practice of accounting some time before but had died prior to the date the balance sheet was allegedly signed. The next week, the bank’s offices displayed a “CLOSED” sign and its executives were no longer to be seen. The bank’s license was revoked and a worldwide alert was issued through the cooperation of American banking authorities.
The quit claim deed to Southern California. In yet another bank in the same country, bank examiners were surprised to find that a local bank whose deposits had previously amounted to less than $500,000 was representing itself to hold over $22 billion in assets. The examiners went to the bank manager and confronted him with their inquiry. He took the examiners to the bank’s vault where he pulled out a title abstract. (A title abstract is a certification of the chain or history of title to a particular piece of real estate, often accompanied by a photo of the subject property along with excerpts of the various deeds, judgments and other methods of conveying or transferring title from a previous owner to a successor.) In this particular instance, the title abstract purported to evidence a quit‐claim deed to the mineral rights for the southern half of the State of California. The bank manager claimed that this title abstract represented a value of over $22 billion. The title abstract was thick (many pages) and even had a photo of the premises being conveyed – a satellite photo of the southern portion of the state of California, along with a property description that generally followed the exterior boundaries of California and across the middle of the state. The bank examiners broke into a laugh. A quit‐claim deed, while being a legal document, only provides that the grantor (maker of the deed) surrenders or disclaims any interest he or she may have in a certain piece of property – even if that person had no legal interest to begin with. This was the case here. Someone had granted a quit‐claim deed disclaiming his interest in the mineral rights to the southern half of California. There was no real interest being granted – it was all a fiction. The document, if it had any worth at all, was the paper on which it was typed.
Black money. Another common scam floating around is that of the “black money”. Here, the con artist will claim to have a quantity of real currency that has been dyed black (e.g. to avoid detection by customs). The victim is persuaded to pay for chemicals to wash the “money” with a promise that he will share in the proceeds. In one island, the con artist, a man from a country in central Africa made contact with a local businessman and persuaded him to share in a cache of black money. The con artist claimed that there was $2 million in an aluminum briefcase. The local agreed to meet the con artist and the con artist boarded a flight to the island. The local, being anxious about the affair, told Customs he was expecting a shipment of $2 million to arrive, but when the con artist arrived and went through Customs he failed to declare any such funds. The Customs officer, being suspicious, asked the man to open the aluminum briefcase, which he refused to do. The conman further claimed he did not have a key to open the locked briefcase. Customs then seized the briefcase and placed it in a secure location until the man could produce a key to open it so they could check it. Since the man denied that there were any funds, the briefcase was not placed in a vault. Law enforcement, which by now had learned of the ruse, questioned the man about whether he had any money in the briefcase. To those, the man denied that there were funds. This then led to a series of rather ironic events, as being a small island, the local businessman was quite influential and now had the con artist in a corner. Either there were funds and they would have to be declared or there were no funds and the ruse was up. Either way, the final answer was never known, as the aluminum briefcase mysteriously disappeared from the storage area before anyone could find out. Although, the conman later tried to make a claim against Customs for $2 million due to the loss, the claim was denied since the man had first denied that there was anything of value.
Lost country of Atlantis. It is amazing the brazenness that some con artists display when attempting to ply their trade. For many of these smaller island countries, almost anyone of importance can get a meeting with the President or Prime Minister. In one island, a man dressed in a flowing white robe and accompanied by two bodyguards, asked to meet the President. When asked the purpose of the meeting, the man explained that he was a sheikh from a well‐respected Middle Eastern family that had relocated several generations before to an island off the northeastern coast of Australia, close to the Great Barrier Reef. He came to solicit the recognition of his island as a country by the President. In support of his request, he carried glossy brochures, along with a map, a flag, a copy of his island’s national anthem, and photos of a large modern metropolis, in which he claimed some 50,000 citizens resided. He was impeccably dressed as an Arab royal sheikh would be expected and he had a convincing story. However, some things just didn’t ring true. First, the name of his island was Atlantis. Second, the President’s legal counsel, who was intrigued listening to the story of the “sheikh” decided to do a google search to find out more. Although he did find a website purporting to be the “official” government website of Atlantis, a satellite image of the coordinates of the “city” and the “island” showed nothing but just expanses of the Pacific ocean. When confronted with this information, the sheikh claimed it was proof of the global conspiracy to deny his country its international sovereign rights, at which time the sheikh and his bodyguards were escorted to the airport and promptly asked to leave the country.
By Kenneth Barden, JD, CSAR, CAMS ‐ [email protected]