Illegal "Prime Bank" Financial Instruments and Scams
To All State Member Banks, and Others Concerned, in the Second Federal Reserve District:
The following statement was issued by the Board of Governors of the Federal Reserve System:
The Federal Reserve Board has issued an Investment Scheme Advisory alert cautioning the public about the continued proliferation of illegal "prime bank" financial instruments and scams.
This Investment Scheme Advisory updates an October 1993 interagency alert concerning fraudulent "prime bank" financial instruments and investment programs that supposedly invest in them.
The Advisory also states that, contrary to statements in some of the written materials used by individuals involved with the fraudulent schemes, the Federal Reserve does not, among other things, authorize, sanction or oversee any investment programs or plans involving "prime bank" products. The Federal Reserve also does NOT license traders in "prime bank" instruments or have agents abroad to sell or redeem such financial instruments.
Printed on the following pages is the Board's current Investment Scheme Advisory, together with a copy of the October 21, 1993 Advisory. Please contact the appropriate federal agency in the event you become aware of illegal "prime bank" scams or similar transactions.
Questions regarding this matter may be directed to Timothy D. Mahoney, Enforcement Officer or your respective portfolio manager in Bank Supervision.
June 11, 1996
On October 21, 1993, the Federal Reserve Board and other federal banking agencies issued an Interagency Advisory concerning "prime bank" financial instruments, a copy of which is attached. The 1993 advisory warned that there were illegal schemes claiming to involve financial instruments issued by a "prime bank" and claiming unrealistic rates of return or other benefits. Since the issuance of the advisory, law enforcement and regulatory authorities in the United States and abroad have prosecuted numerous individuals for their participation in "prime bank" scams, and millions of dollars in illegal proceeds have been seized.
In one federal case involving a program that supposedly invested in "prime bank" financial instruments, a U.S. Court of Appeals stated unequivocally that "Prime Bank Instruments do not exist". (Securities and Exchange Commission v. John D. Lauer, 52 F.3d 667,669 (7th Cir. 1995)).
Despite the notoriety given to illegal "prime bank" scams and the efforts of law enforcement authorities over the past several years, fraudulent investment schemes supposedly involving "prime bank" financial instruments and other investment opportunities involving extremely unusual rates of return, which are sometimes referred to as "roll programs", are still proliferating. Unlike the schemes the Federal Reserve encountered in 1993, many of the recent frauds state that the Federal Reserve sanctions the investment program, oversees trading in secret "prime bank" markets, licenses or registers traders of "prime bank" financial instruments, has agents in offices around the world to handle investments and redemptions of "prime bank" instruments, or is in some other manner involved with an investment opportunity.
This advisory reiterates that the Federal Reserve is not aware of any legitimate use of any type of "prime bank" financial instrument. Also, the Federal Reserve does not participate in any manner in any "prime bank"-related investment program. The Federal Reserve does not license or register traders, does not have agents who process or oversee investments, and does not sanction, authorize, license, or otherwise administer any type of investment program or plan for the public in the United States or abroad.
October 21, 1993
The enforcement staffs of the federal financial institutions supervisory agencies, who work with federal law enforcement officials responsible for investigating and prosecuting bank fraud-related matters, have noted an increase in the use, or attempted use, of questionable financial instruments in connection with complex, and possibly illegal, schemes. Many of these schemes have been aimed at defrauding borrowers and investors in the United States and abroad, as well as domestic and foreign banks. The questionable instruments are often denominated as "Prime Bank Notes", "Prime Bank Guarantees", or "Prime Bank letters of Credit". They are also called by such other names as "Prime European Bank Letters of Credit", "Prime World Bank Debentures", or "Prime Insurance Guarantees".1
Over the past several years, federal and state law enforcement authorities have prosecuted, or are presently in the process of investigating, wrongdoers who have defrauded individuals and entities by promising, for example, to arrange loans that would be funded in some manner by "Prime Bank-types of financial instruments, or would, in some other way, involve such instruments and advance loan fee payments. Many of the illegal or dubious schemes that have been brought to the attention of various regulatory agencies by law enforcement officials, foreign banks, the World Bank, and central banking authorities appear to involve overly complex loan funding mechanisms necessitating the use of "Prime Bank"-type documents. Other suspicious schemes involve "investments" in "Prime Bank"-type financial instruments and promises of unrealistic returns on multi-million dollar investments. In many recent situations, the agencies have been advised that individuals have been improperly using the names of large, well-known domestic and foreign banks, the World Bank, and central banks in connection with their "Prime Bank" schemes. When contacted by potential borrowers, investors or regulators, the institutions had no knowledge about the unauthorized use of their names or the issuance of anything akin to "Prime Bank"-type financial instruments.
Because the staffs of the federal bank, thrift and credit union regulatory agencies are not aware of any legitimate use of any financial instrument called a "Prime Bank" note, guarantee, letter of credit, debenture, or similar type of financial instrument, you should be alert to the potential dangers associated with any transaction involving these types of instruments.2 Likewise, you should be attentive to the attempted use of any traditional type of financial instrument--such as a standby, performance or commercial letter of credit--that is somehow referred to in an unconventional manner, such as a letter of credit referencing forms allegedly produced or approved by the International Chamber of Commerce. Examples of these include bogus schemes involving the supposed issuance of an "ICC 3034" or an "ICC 3039" letter of credit by a domestic or foreign bank.
The staffs of the regulatory agencies, in cooperation with the Department of Justice, the Federal Bureau of Investigation, the U.S. Secret Service, and the Securities and Exchange Commission, want to alert you to this situation and request that, in the event you become aware of any transaction involving any of the aforementioned types of financial instruments, you advise one of the following federal regulatory agency officials:
Board of Governors of the Federal Reserve System
Deputy Associate Director
Enforcement and Special Investigations Sections
Division of Banking Supervision and Regulation
Mail Stop 175
Washington, D.C. 20551
National Credit Union Administration
Office of the General Counsel
1775 Duke Street
Alexandria, Virginia 22314
Federal Deposit Insurance Corporation
Special Activities Section
Division of Supervision
550 17th Street, N.W.
Washington, D.C. 20429
Office of the Comptroller of the Currency
Enforcement and Compliance Director
250 E Street, S.W.
Washington, D.C. 20219
Office of Thrift Supervision
Deputy Director for Regional Operations
1700 G Street, N.W.
Washington, D.C. 20552
Also, if you suspect that a criminal offense is being committed, it is required that you promptly make a criminal referral to the appropriate federal law enforcement agencies in accordance with applicable criminal referral regulations.
1. These and similar financial instruments were the subject of prior regulatory agency alerts issued by the Office of the Comptroller of the Currency. These included the Office of the Comptroller of the Currency's Banking Circular BC- 141, Supplement 2, dated July 14, 1982, several subsequent supplements to BC- 141, and BC-243, dated February 7, 1990.
2. There are currently six insured depository institutions with the word "Prime" in their names in the United States. Two of them are commercial banks that operate in Florida, one is a commercial bank in Connecticut, another is a commercial bank in Indiana, and two of them are thrift associations operating in Wisconsin and Pennsylvania, respectively. There is also one bank holding company in Illinois with the word "Prime" in its name. This alert is not associated with any deposit or other type of legitimate debt obligation or financial instrument issued by any of these financial institutions.