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| TO THE |
OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE SUPERVISORY STAFF AT EACH FEDERAL RESERVE BANK AND TO BANKING ORGANIZATIONS SUPERVISED BY THE FEDERAL RESERVE |
| SUBJECT: |
"Prime Bank" and Other Financial Instrument Fraud Schemes |
In 1993 and 1996, the Federal Reserve issued advisories concerning illegal schemes
purporting to involve "prime bank" financial instruments.1 In its alerts, the
Federal Reserve advised banking organizations and the public that, among others
things, it does not know of any legitimate use of any financial instrument called
a "prime bank" note, guarantee, letter of credit, or debenture and that
the Federal Reserve does not guarantee or enter into transactions with individuals
and does not license anyone to trade "prime bank" financial instruments
or act as the Federal Reserve's agent to sell or redeem such instruments.
Since 1996, fraudulent schemes involving financial instruments have proliferated
in the United States and abroad, and investors have lost significant sums
of money. Federal and state law enforcement agencies, as well as the
U.S. Securities and Exchange Commission, have investigated and prosecuted
numerous individuals associated with supposed investment opportunities involving
"prime bank" instruments or other financial instruments.
The Federal Reserve wants to again highlight the dangers associated with investing
or participating in questionable transactions that promise unrealisticly high
rates of return and involve other dubious characteristics. Over the past
several years, Federal Reserve staff has reviewed numerous illicit transactions
and provided assistance to U.S. and foreign law enforcement and securities
regulators and, based on this experience, has identified the following hallmarks
or "red flags" associated with many fraudulent financial instrument
scams that can be used to avoid them:
References to financial instruments issued by "prime banks,"
"top 100 world banks," "top 25 European banks," and
similar references to categories or groups of banks that are not used in the
banking industry. Promises of extremely high, unrealistic rates of return with little or no
risk. Participation in an investment program often referred to as a "roll
program (or programme)," "high yield investment program," or
"bank debenture trading program." High rates of return are generated by repeatedly trading (or buying and
selling) financial instruments (often over a 40-week period). Legitimate financial instruments, such as letters of credit, guarantees,
and medium term notes, are bought and sold or traded in manners that are not
realistic -- for example, standby letters of credit are bought and sold.2 Transactions are overly complex and nonsensical. Terms that have no meaning in legitimate financial transactions are used
repeatedly -- for example, "conditional SWIFT," "key tested
telex," "pay order," "funds of good, clean, clear and
non-criminal origin," "master commitment," "one year and one
day," and "commitment holder." High degree of secrecy -- for example, the trading of financial instruments
takes place on a secret market, your banker or investment adviser will not know
about the investment opportunity because only a few special people around the
world are aware of it or participate in the secret trading, or the investor is
being allowed to participate in a secret trading program and, if he or she reveals
any information about the program, the investor's participation will be
terminated. The investor's funds are absolutely safe and cannot be lost -- for example, a
bank has issued a guarantee or an attorney is holding the funds in a special
escrow fund. Involvement of a well known governmental authority, such as the Federal
Reserve, World Bank, or IMF. Inaccurate references to the International Chamber of Commerce and its
publications. Investor's funds will be used for "humanitarian" projects.
Federal law enforcement authorities have asked the Federal Reserve to advise
individuals, banking organizations, and other entities who have been approached to
invest in a "prime bank" financial instrument or participate in some
manner in any transaction containing the characteristics listed above to contact
the local offices of the agencies. This includes the field offices of the
Federal Bureau of Investigation, U.S. Secret Service, U.S. Customs Service, or
Internal Revenue Service's Criminal Investigation Division. The U.S.
Securities and Exchange Commission is also actively involved with investigating
securities frauds associated with these types of transactions, and asks that
companies and individuals alert a local office of that agency.
Reserve Banks are asked to distribute this SR letter to domestic and
foreign banking organizations supervised by the Federal Reserve. Questions
regarding apparent fraudulent schemes involving "prime bank" financial
instruments or other transactions with the hallmarks described above can be
directed to the Special Investigations Section of the Division of Banking
Supervision and Regulation at (202) 452-2620 or (202) 452-5235.
Herbert A. Biern
Senior Associate Director
Note:
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Copies of the
Federal Reserve’s alerts are available at
http://www.newyorkfed.org/bankinfo/circular/10858.html#Investment_Scheme_Advisory.
Over the past several years, advisories
concerning illegal "prime bank" and other
financial instrument schemes have also been
issued by the U.S. Securities and Exchange
Commission, the World Bank, the International
Monetary Fund, the International Chamber
of Commerce, the Law Society of Britain
and Wales, and other U.S. and foreign law
enforcement and regulatory authorities. Return to text
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In August 1993,
an article entitled "Anatomy of the Medium-Term
Note Market" was published in the Federal
Reserve Bulletin. The article was written
by Federal Reserve economists and describes
the use of this type of legitimate debt
instrument by corporations and banking organizations
and how they are underwritten and priced
by the market. Since the publication of
this article and the issuance of the Federal
Reserve’s 1993 "prime bank" advisory, which
alerted the public to the non-existence
of "prime bank" instruments, many illicit
scams purport to involve the trading of
"medium term notes" (often referred to as
"MTNs") rather than "prime bank" financial
instruments. Apparently, wrongdoers involved
with illegal financial instrument scams
try to convince their victims that the Federal
Reserve Bulletin article proves the existence
a market where MTNs can be traded for enormous
profits. No such market exists.. Return to text
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