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BOOK EXCERPT

11.5.99  
For a Fee, We'll Defraud You
Excerpt from Fraud! How to Protect Yourself from Schemes, Scams, and Swindles

In May 1998, Janet Rockledge decided to take out a debt consolidation loan. Rockledge saw an ad for Northshore Financial's consolidation loans. On May 20, 1998, she called the company. A representative took Rockledge's application.

A few days later, the representative called to say her loan had been approved, and he was faxing papers for her to sign. She also needed to fax him a copy of her driver's license, Social Security card, and employment paycheck stubs. In addition, she had to pay the first and last months' payments in advance by money order in the amount of $895.46 before the loan could be released. On May 27, 1998, Rockledge purchased a money order and mailed it. Time passed, and she didn't receive her loan. The company representative told her to be patient. The check never arrived.

Rockledge reported the problem to her state's Securities Commissioner, who found that neither Northshore Financial nor the representative was registered as a loan broker. The securities commissioner issued a cease-and-desist order which helped stop Northshore Financial from defrauding others, but Rockledge lost her $895.46.

What Rockledge experienced is called advance-fee loan fraud. There are two categories of advance-fee loan fraud, those targeting individuals -- such as Rockledge -- and businesses. Business advance-fee loan fraud targets small-business owners, family businesses, and farmers. The loans are for large amounts, even millions of dollars, which generate fees of tens of thousands or hundreds of thousands of dollars per loan. The interest is always below-market rates. This category of advance-fee loan fraud was especially popular in the 1980s when interest rates were in the low-20-percent range, and farmers and business people were losing their livelihoods. Credit was hard to get -- and when available, it cost 17% or 18%.

The con artists would advertise in business and agricultural magazines that they had money available at 7% or 8%. The reason it was so cheap, the story went, was that they had access to overseas money from a Saudi oil prince or a Hong Kong businessman who wanted to move his money out of Hong Kong before the Chinese took over. The con artist would ask the business owner or farmer for appraisals, income statements, and tax records. Then came the request for the up-front fee, which could be tens of thousands of dollars. After the fee was paid, the con artist would string the person along. They never got any money.

Some con artists even try to convince their victims that if they apply for and receive a "self-liquidating" loan, they'll never have to pay the loan back. They're told that a portion of the principal of the loan will be used to purchase a zero-coupon bond. When the bond matures, the money will be used to pay off the loan. The truth is that self-liquidating loans don't exist.

ROADBLOCKS TO PROSECUTION. In both types of advance fee loan fraud, con artists string victims along after the fee is paid to buy time. As soon as the victim knows she's been defrauded, the next phone call she'll make is to the authorities, and that means the con artist has to pull up stakes quickly and move on. But if the victim doesn't realize it's a con and keeps sending more documents, the con artist has time to defraud others.

That extra time means a lot of money to these con artists. One con artist in Kansas City set up an office with a fax machine and a phone, made up a fancy name of Chase, Morgan, Stearns, and Lloyd, and put a business loan ad in the New York Times. Within just six months, he took in almost $500,000 in fees from fewer than ten victims.

Both business and individual advance-fee loan fraud could be eradicated if potential victims understood that a legitimate lender does not ask for a fee to process a loan. In fact, the FTC's new Telemarketing Sales Rule makes it illegal for any telemarketer who promises consumers a loan or other credit to ask for money up front. Although there are legitimate fees associated with applying for a loan, such as a fee for a credit check or an appraisal, those amounts are fairly small and are often deducted out of the proceeds of the loan at the time of closing. Of course, some people with bad credit histories can't be approved for a loan from a legitimate lending institution. Although that can be a difficult situation, turning to an advance-fee con artist is not the answer. Being robbed of what money you do have only makes matters worse.

It's difficult for the authorities to stop this con. There are federal laws against mail fraud and wire fraud, which these activities fall under, but at the federal level there's a shortage of resources, so other types of crime take priority. That means enforcement is left up to the states.

According to Larry Cook, director of the Enforcement Division of the Office of the Kansas Securities Commissioner, his office regularly responds to these bogus ads, not as the government but posing as potential borrowers. Once they have a reasonable belief that the con artist is violating the law, Cook's office issues a cease-and-desist order, an administrative order requiring the con artists to stop advertising and doing business in the state. Notification of that order is sent to a national computer database, where other states have access to the information.

If the con artists violate the cease-and-desist order and continue their fraud, the authorities can charge them criminally. But instead of violating the order and facing criminal charges, the con artists usually pick up shop and move to another state, setting up operations there. To charge them criminally without first issuing the cease-and-desist order, the regulators would have to pay the advance fee and take the chance of losing the money. That approach is very time-consuming, requires a lot of manpower that isn't available, and can be very expensive.

Another problem the authorities face is that when it comes to individual advance-fee fraud, approximately 90% of those scams are run out of Canada, where U.S. authorities have no jurisdiction.The state regulators have to go through the Justice Department to subpoena records and issue arrest warrants, a bureaucratic hassle.

PROTECTING YOURSELF. There are other types of advance-fee scams, including complicated investment schemes originating in Nigeria, student-loan offers, and access to job opportunities for a fee. Wherever you get an offer from that requires any type of advance fee, don't bite; you'll only lose. Although the offers these people make may sound plausible, ask yourself why an unknown person from another state or country would be more willing to provide you with a loan or job or business opportunity than your own local financial institutions or other business contacts.

Here's a checklist of offers that you should definitely refuse. If you answered yes to any of these questions, you may be the target of an advance-fee scheme.

Have you been:

— Offered a self-liquidating loan?
— Offered a loan in which you must pay an advance fee prior to receiving the loan proceeds?
— Offered a loan at below-market interest rates?
— Offered easy access to credit cards with no credit check required?
— Offered a loan through a cold call that originated in Canada?
— Offered a commission by someone in a foreign country if you allow him to deposit money in your bank account?
— Offered access to job opportunities in return for paying an advance fee?
— Offered access to college scholarships if you pay an advance fee?
Marsha Bertrand is a writer specializing in investment, finance, and business topics. She is the author of The Consumer Guide to the Stock Market and A Woman's Guide to Savvy Investing. She has worked as director of shareholder relations at Allnet Communications Services and managed a portfolio of limited partnerships and publicly traded funds at a well-known investment firm.

Reprinted and excerpted with permission from Fraud! How to Protect Yourself from Schemes, Scams, and Swindles
By Marsha Bertrand
Copyright 2000, Marsha Bertrand
All rights reserved
Reprinted with permission of Amacom, a division of the American Management Association International, New York, N.Y. www.amanet.org
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