LONDON, 27 May — In a post 9/11 world that is supposed to be on a compliance alert mode, organized gangs of international financial fraudsters, especially from Europe and America, may be capitalizing on the fact that attention of regulatory authorities around the world is on terrorist finance and as such on account holders with Arabic-sounding names.
In the last few years, it was mainly Nigerian gangs posing as the relative of one or the other prominent politician or army general, who just happened to have died, and who left a sizable sum of money in an offshore bank account, which could be unlocked only if it was transferred into another overseas account and accompanied by a small service fee. As such they approached naïve but greedy people in the West and some of the Gulf states, some of whom amazingly parted with savings and their account details in expectation of sharing the booty. The fraudsters in reality were merely interested in cleaning out the accounts of the unsuspecting victims.
Another tactic was to arrange business deals supposedly involving Nigerian government agencies using forged letters of credit (LCs).
I got an e-mail recently from someone claiming to be the son of the late Tanzanian President Julius Nyerere. He claimed that his father had left a large amount of money in a Swiss account, which could only be unlocked through transferring it into an account in London. I could have a share of this money, he suggested, if I provided my account details to him so that he could transfer the money into my account. The e-mail was sent from South Africa and the person gave a post box address in Johannesburg.
The approach and modus operandi are exactly the same as the Nigerian approach which I got almost five years ago. The only conclusion I can draw is that these gangs must have slipped into South Africa.
More recently, the gangs from the US and Europe have been perpetrating even more sophisticated frauds, which has prompted many European regulatory authorities to issue consumer alerts.
Last week it was revealed that a plot to defraud the famous St Paul’s Cathedral in London for 100 million pounds by a gang of Americans, Finns and Italians, was foiled by Scotland Yard. A gang described as “brilliantly clever, sophisticated and unscrupulous” approached officials at St Paul’s offering a bogus donation of 50 million pounds if the cathedral deposited 100 million pounds in a ring-fenced account, on which the US Federal Reserve would pay high interest rates on large sums of money out on short-term deposit. The scam involved some members of the gang posing as Federal Reserve officials and others as officials of a prominent Swiss bank.
The consipracy somehow mushroomed, with the gang persuading investors from the Middle East and Europe to participate in the so-called ‘deal of the century’.
Fortunately, the cathedral officials became suspicious and played along but called in the City of London police and several arrests were made. Some of the gang absconded, but last week key members were convicted by a jury at Southwark Crown Court in London. They will be sentenced next month.
Last week, the Financial Services Authority (FSA) in London issued a customer alert of a potentially more disturbing kind which could affect thousands of unsuspecting ordinary investors. Already a number of investors in the UK have fallen foul of these unscrupulous financial services firms, who solicit business from ordinary investors promising high returns on equity and other investments.
The scam is that these firms, effectively overseas based companies, are fake because they are not registered with nor regulated by the FSA. They use UK addresses of convenience which forwards the client’s mail to the firm abroad, and give local phone numbers, which are automatically diverted to an overseas number. As such they are not legally responsible to any regulator. In any case they are illegally offering services to UK-based investors, because any firm that sells into the UK must be authorized by the FSA.
According to the FSA, “the representative (of these fake firms) who then calls (the potential client) may use hard sell tactics and persuade you to buy the shares they are touting. The FSA is aware of experienced investors who have been pressured into buying shares, which shows just how persuasive these sales people can be.”
Not surprisingly, after buying the shares, some investors experience considerable delays and difficulties in obtaining their share certificates. The shares the investors buy often turn out not to be the great deal they were promised. When they try to sell the shares, they often have difficulty obtaining the proceeds from the sale from these fake firms, or are put under a lot of pressure to buy shares with the money. In one case, one such firm even suggested one investor to mortgage his house to raise cash to invest in these so-called lucrative equity investments deals.
What is frightening is that these firms are doing this in the UK, which is probably the most strictly regulated financial market in the world. There is no doubt that they have also been targeting other markets in North America, southern Africa, Middle East and Asia.
Most of the Gulf states, including Saudi Arabia, have regulations in place governing the marketing of equity and mutual funds in their markets. A foreign bank or asset management company has to register the fund, say with the Saudi Arabian Monetary Agency (SAMA) or Bahrain Monetary Agency (BMA), before they can market them in the Kingdom or in Bahrain — either directly or through a local distributor.
However, many foreign financial institutions have in the past cut corners, partly because of the length of time its takes to register a product, or partly because of a perception of inadequate monitoring and enforcement by local regulators either because of lack of resources or lack of experienced personnel. Privately, some foreign financial institutions, including blue-chip Western ones, have admitted to me that many of them do market funds without the proper approval. They usually do this through existing client relationships, portfolio managers, and potential distribution partners.
I am merely trying to point out that the Middle East markets with its less sophisticated regulatory and compliance regimes, are just as if not more vulnerable to international financial fraud gangs as those in the West.
There is no suggestion that the fake firms targeting the UK are selling stocks to Gulf investors in this way. Their preferred method is through direct selling, telephone selling and mailshots.
Both customers and regulators need to be on the alert. The best way customers can protect themselves is to check with the relevant regulatory authority whether the firm offering equity and fund deals are authorized in their particular country. Pester them until you get a response. For, if a firm is not authorized, then the customer will have no access to complaints and compensation schemes. Investors should always insist on time to think over a deal and never hand over money immediately. Be aware of deals that sound too good to be true.