moted a type of Advance Fee Scheme, whereby investors were offered a host of Prime Bank Instruments, which were allegedly supported by debt obligations, and issued and backed by fictitious institutions such as the "World Prime Bank." Like other Ponzi and Advance Fee Schemes, purchasers of these instruments were promised exorbitant, risk-free rates of return, only to lose their entire investments. Based on industry regulatory alerts and several successful criminal investigations, fraudsters began the shift to Comptroller Warrant schemes, instruments which have been most closely associated with groups such as the Freemen and Posse Comitatus. Like Prime Bank Instruments, these Warrants have no legitimate financial institution support or basis in value. In simplest terms, these Warrants are akin to fictitious checks drawn on accounts with insufficient funds, except that no financial accounts supporting the Warrants actually exist. Makers of these instruments purport that they are legal tender and negotiable, backed by bogus liens or nebulous lawsuits filed against Federal Governmental institutions for an assortment of alleged improprieties and wrongdoings. Freemen like LeRoy Schweitzer in Montana, and his disciples such as Elizabeth Broderick in Los Angeles, have drafted and issued thousands of these Warrants across the country, with face values totaling in excess of $1 billion. However, few financial institutions have fallen prey to this activity with actual sustained losses estimated at under $1 million. On several occasions the Internal Revenue Service has also been victimized by this fraud; the remaining victims consist of non-financial institutions such as automobile and boat dealerships. Each of these schemes lasts for a relatively short time period before the offender or group develops new methods for fraud. For instance, in addition to a significant decrease in the number of Prime Bank schemes over the past several years, representatives from the Office of the Comptroller of the Currency reported at the June 30, 1996 meeting of the Interagency Bank Fraud Working Group, that complaints received from its member institutions regarding bogus Comptroller Warrants have practically ceased since the FBI's arrests of Schweitzer and Broderick this spring. With current statutory laws relative to bank fraud, mail fraud, fraud by wire, and money laundering, the FBI has been able to investigate each of these types of schemes with resultant successful prosecutions through the U.S. Attorney's Offices. In fact, the FBI has never been inhibited in investigating or seeking Federal prosecution of a single financial crimes case involving fictitious financial instruments because of an inadequacy of current law concerning such matters. Numerous cases have been investigated by various FBI field offices in which fraudulent negotiable instruments such as Prime Bank Notes, Certified Money Orders and Comptroller Warrants purportedly backed by foreign governments or U.S. lien repository accounts have been utilized. Often, these instruments are presented for sale by con artists who state that the instruments can be used to collateralize loans or perpetrate other frauds. Although the dollar denominations of these instruments can be large, they are typically sold for a small percentage of their stated value. Moreover, many of these attempts result in actual losses that do not meet Federal prosecutive guidelines. Like the FBI and other law enforcement agencies, U.S. Attorney's Offices operate within a realm of limited resources to address a variety of WhiteCollar criminal matters. Most districts have set dollar loss guidelines in place in determining whether or not prosecution of a particular case is warranted. Regardless of the face value of a bogus financial instrument, based on the FBI's experience in investigating financial fraud matters, U.S. Attorneys typically look beyond mere possession of a fraudulent negotiable instrument in rendering a prosecutive opinion on a case. Factors such as the creation or counterfeiting of such an instrument, and the negotiation or attempted negotiation of the instrument make prosecution much more likely. In addition, U.S. Attorneys will generally prosecute lower dollar volume losses when such activity has a tendency to create havoc within our financial systems, such as the needless processing and return of Comptroller Warrants for non-payment, and the eradication of bogus liens filed against U.S. citizens. Once again, these offenses are effectively prosecuted through existing fraud statutes. Thousands of these bogus Warrants were circulated throughout the country; as such, isolated cases or those involving mere possession of such documents would prove impossible to prosecute. Much of this low-dollar activity is addressed through our liaison with local law enforcement and through Federal/local task force operations. Financial institution fraud task forces in Tampa, Phoenix, and Denver have proven very effective in addressing all volumes of bank fraud matters through Federal, State, and local prosecutors. This concept is expanding to other FBI field offices around the country. As fraud schemes involving Prime Bank Notes and Comptroller Warrants prove to be increasingly unsuccessful, criminals alter their methods and devise new tech niques to defraud financial institutions and the general public. Of greatest concern are organized groups, such as Vietnamese, Nigerians, and Russians, who are perpetrating large-scale, complex frauds against numerous institutions. These frauds include counterfeiting, identity assumption, and computer intrusion schemes. The FBI has had successful investigations in all of these areas. For instance, during early 1995, the Los Angeles Police Department notified the FBI concerning information that subject Cuong Thoai Diep was attempting to recruit a U.S. banker to steal more than $10,000,000 in bank and cashier's checks as part of a loan fraud scheme based in Hong Kong and Beijing, China. An FBI undercover Agent posed as a local banker who agreed to provide Diep and his associate Tony Wing Yu with $13,500,000 in counterfeit and stolen cashier's checks. These checks were to then be used as collateral in fraudulently obtaining a series of Chinese loans totaling more than $50,000,000. The scheme also involved the corruption of a People's Republic of China bank official and several Asian organized crime subjects. During February 1995, subjects Diep and Yu, who had been successfully lured from Hong Kong, were arrested and convicted on various bank fraud charges. In April 1994, a Nigerian representing himself as Dr. Benjamin Okafor, the Accountant General of the Nigerian National Petroleum Corporation (NNPC) contacted an American citizen via letter, and falsely advised that he was in control of $20,000,000 in Nigerian funding as the result of an “over-invoiced” contract. Okafor solicited the victim's assistance in getting these funds out of Nigeria, promising 40 percent of the money in return. In subsequent meetings in Hong Kong, Okafor induced the victim to provide $1.35 million to cover supposed expenses relating to this transaction. These funds were wired to a Okafor-controlled account in Woodbridge, Virginia. Okafor was subsequently extradited and arrested, along with his U.S. counterpart, Ibe Uzodinma. Both subjects were indicted on bank and wire fraud charges and convicted by jury trial. Each defendant received a lengthy prison sentence for involvement in this scheme. Since sophisticated financial institution frauds are truly becoming a worldwide problem, the FBI has established an international fraud initiative, and will host an international bank fraud conference in the fall of this year, to be attended by United States, Canadian, and Western European law enforcement, banking, and regulatory representatives. The purpose of this conference is to discuss universal financial institution fraud and other financial schemes, and to develop a definitive strategy for the international sharing of fraud intelligence information, as well as to establish several joint North American/European financial fraud investigations affecting multiple countries. During the past several years, the FBI has taken a proactive investigative approach in addressing a variety of these financial institution frauds, many of which will come to fruition during the next year. The FBI continues its commitment to combating all financial institution fraud schemes, from complex wire fraud and counterfeiting operations to simplified Comptroller Warrant and Letter Fraud schemes. To address all of these crime problems, the FBI has employed, and will continue to employ the vast array of Federal criminal statutes. (See Attachment No. 1.) These existing statutes have provided us with the necessary tools to fully address these crime problems, and have significantly contributed to our success. ATTACHMENT NO. 1 FINANCIAL INSTITUTION FRAUD FEDERAL STATUTES Title 18 United States Code Section 1344-Bank Fraud; Attempts to Defraud a Financial Institution. Sections 1005 & 1006—Bank Fraud: False Entries, Reports, and Transactions. Sections 656 & 657-Theft or Embezzlement, or Misapplication by a Bank Officer or Employee. Section 215-Bank Bribery. Section 1032-Concealment of Financial Institution Assets from Regulatory Agencies. Section 1341-Mail Fraud. Section 1343-Fraud by Wire. Section 2314-Transportation of Stolen or Counterfeit Negotiable Instruments. Sections 1961-1968-Racketeer Influenced and Corrupt Organizations (RICO). WILLIAM R. MCLUCAS, DIRECTOR U.S. SECURITIES AND EXCHANGE COMMISSION CONCERNING FRAUDS INVOLVING FICTITIOUS FINANCIAL INSTRUMENTS BEFORE THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE JULY 17, 1996 U. S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 I appreciate the opportunity to provide the Committee with the views of the Securities and Exchange Commission "SEC" or "the Commission") concerning frauds involving fictitious financial instruments and to answer any questions you may have on this subject. I. "Prime Bank" Schemes In recent years, investors throughout the world have been defrauded in a variety of schemes involving fictitious financial instruments. Generally, the promoters associated with these frauds tell investors that these financial instruments are issued by a so-called "prime bank” or “top 100 world bank," which they represent to be some well-known domestic or foreign financial institution, the World Bank, or a country's central bank. The financial instruments are variously described as notes, letters of credit, debentures, or guarantees. To give the scheme an air of legitimacy, the promoters distribute documents that appear complex, sophisticated and official. The sellers frequently tell potential investors that they have some special access to programs which otherwise would be reserved for top financiers on Wall Street, or in London, Geneva, or other world financial centers. Învestors are told that those who purchase “prime bank” instruments at a discount can sell the instruments shortly thereafter at an enormous premium. The minimum investment can be as high as $10,000,000, either by an individual or a group of individuals who pool their smaller investments. The sellers often represent to potential investors that the market for these instruments is secret and that the institutions involved or regulatory agencies will deny the existence of the program if asked. Investors are also told that potential annual profits of 100 percent or more are possible with little risk. Some “prime bank” offerings include the opportunity to invest in a “roll program” in which transactions purportedly occur monthly, or even weekly, and trading profits are reinvested. II. The Commission Has Been Aggressive in Combating "Prime Bank" Fraud From the first indication that these instruments began to circulate in our markets, the Commission has responded with a series of investigations and prosecutions. The Commission has also issued a number of warnings and investor alerts.1 As early as 1992, the Commission brought an emergency injunctive action to halt the fraudulent sale of over $3.4 million in non-existent "prime bank” notes. In that case, the Commission alleged that investors were told that their money would be used to trade in Swiss bank instruments.2 In October 1993, the Commission issued an Investor Alert warning the public about fraudulent offerings of "prime bank” instruments.3 This alert advised the investing public that there was no known legitimate use of any financial instrument called a "Prime Bank" note, guarantee, letter of credit, debenture, or similar type of financial instrument otherwise associated with the moniker “prime bank." The Investor Alert warned that many of the schemes appeared to involve overly complex loan funding mechanisms which, in the eyes of an unsophisticated investor, may make a questionable investment appear worthwhile. The Commission also reminded investors, broker-dealers, and investment advisers of a basic rule for avoiding securities fraud: "If it looks too good to be true, it probably is." In March 1994, the Division of Enforcement issued another alert to warn of an ongoing $600 million "prime bank" fraud involving securities purportedly issued by Banka Bohemia A.S., a bank located in Prague, Czech Republic. Banka Bohemia had issued a notice to U.S. banks that the securities were being offered by unnamed persons and were not authorized by the bank. The Division of Enforcement again 1A compilation of investor alerts, administrative proceeding releases and litigation releases issued by the Commission relating to fraudulent "prime bank" offerings through February 1996, entitled "Prime Bank Securities Fraud," is attached hereto (hereinafter referred to as "Attachment"). The staff of the Commission periodically updates this document and makes it available to other regulators and members of the public. The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration have issued alerts, as have foreign and international regulators. 2 See Attachment at 26 (citing SEC v. Jedi Group Limited, Civil Action File No. H-92-934 (S.D. Texas 1992), Litigation Release Nos. 13206 (March 27, 1992), 14692 (October 16, 1995)). 9 See Attachment at 1-2. In that Investor Alert, the Commission noted that on October 21, 1993, the Federal Financial Institution Supervisory Agencies issued an Interagency Advisory to their regulated financial institutions. 4 See Attachment at 3. warned the investment community to be extremely cautious when dealing with any instrument that involves purported "prime bank" securities. Despite the alerts by the Commission and other agencies, investors have continued to be caught up in fraudulent schemes involving "prime bank" instruments. The Commission has devoted significant resources toward combating this wave of fraud. Since 1992, the Commission has brought more than 40 enforcement actions involving various "prime bank" scams. In addition to individuals, the victims of these frauds have included charitable organizations, municipalities, and other institutional investors. For example, the National Council of Churches of Christ ("NCCC"), a not-for-profit charitable organization, paid $7.98 million to purchase $13.2 million face value of "prime bank guarantees" purportedly issued by Banka Bohemia. We alleged, however, that those guarantees were worthless.5 The Chicago Housing Authority's Benefit Plan invested at least $12.5 million in a purported "Roll Program," which was designed to pool investor funds to purchase and trade "Prime Bank Instruments," but which we allege was nothing more than a scam to defraud investors.6 In most cases, investors put their money into an investment pool with the expectation that the pooled money would be used to purchase "prime bank" securities. For example, in one case, the Commission alleged in its complaint that the defendants raised more than $3.2 million from 20 investors. The funds were to be pooled and used to purchase and resell "Prime Bank Letters of Credit." The investors were told that institutions like pension funds stood ready to buy "Prime Bank Letters of Credit" from large banks, with purchases of over $100 million affording the highest return. The defendants represented to these investors that regulatory restrictions prevented the banks from selling such instruments directly to institutional investors, and thus a middle man would be required to effectuate the transaction at a contractually prearranged profit. In this case, investor monies were to be combined with funds from other investors to meet the $100 million threshold. We have alleged that no bank instruments, letters of credit, or other investments were purchased on behalf of investors.7 The promoters in these schemes have demonstrated remarkable audacity, reaching out to the investing public through advertisements in national newspapers, such as USA Today and The Wall Street Journal. Understandably, these ads can give the offerings some air of legitimacy. The Internet has provided an additional forum for promoters to reach the investing public, and we are concerned with the increased potential for fraudulent offerings through this medium. In fact, the Commission brought an injunctive action last year against a defendant who the Commission alleged used the Internet to induce members of the public to invest with him by, among other things, falsely representing that the initial investment was guaranteed against loss because a "Prime Bank Guarantee" would be used as security for the transaction. This defendant also promised to double investors' funds in as little as four months by buying and selling "Bank Instruments."9 III. The Commission Benefits from Cooperation with other Agencies The Commission has cooperated with various State and Federal agencies in its attempt to put a halt to the "prime bank" scams. For example, in particular cases, we have provided regulators and other Federal and State agencies with access to our expertise, such as in the areas of securities registration requirements and the elements of securities fraud, as well as to information gathered in the course of our investigations. A number of "prime bank" securities fraud cases have been prosecuted by the Commission and Federal criminal authorities.10 For example, on March 9, 1994, the 5 See Attachment at 63 (citing SEC v. Crawford, Civil Action No. 1:95CV-01435 (TPJ) (D.D.C. 1995), Litigation Release No. 14583 (August 1, 1995)). See Attachment at 45 (citing SEC v. Lauer, 94 CIV 3770 (N.D. Ill. 1994), Litigation Release No. 14143 (June 30, 1994)). 7 See Attachment 33-36 (citing SEC v. Northstar Investors Trust, C93-1626 (W.D. Wa. 1993), Litigation Release Nos. 13887 (November 23, 1993), 13895 (December 8, 1993), 13905 (December 14, 1993), 14101 (May 25, 1994)). See Attachment at pages 30-32, 56-59 (citing SEC v. Alexander, 93 Civ. 1834 (MP) (S.D.N.Y. 1993), Litigation Release Nos. 13575 (March 22 1993) and 13591 (April 6, 1993) and SEC v. Bankers Alliance Corp., Civil Action No. 95-0428 (PLF) (D.D.C. 1995), Litigation Release Nos. 14427 (March 2, 1995), 14436 (March 14, 1995), 14464 (April 10, 1995), 14495 (May 9, 1995)). 9 See Attachment at 68-70 (citing SEC v. Block, Civil Action No. 95-11748RCL, (D. Mass. 1995), Litigation Release Nos. 14598 (August 10, 1995), 14638 (September 18, 1995), 14711 (November 2, 1995)). 10 Prime bank fraud can currently be prosecuted under a variety of Federal criminal statutes such as mail fraud (18 U.S.C. § 1341), wire fraud (18 U.S.C. § 1343), and conspiracy (18 U.S.C. §371). |