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Two Popular Business Loan Scams
William Cate
Fraud is a growth industry. Law Enforcement rarely investigates fraud complaints, unless losses are measured in the tens of millions of dollars. Investigations seldom lead to charges. Unless the accused is potentially involved with Organized Crime or Terrorists groups, extradition isn't a Government option. Swindlers are likeable people, convicting them of anything is extremely difficult. If convicted, jail time is in a resort atmosphere prisons and fines are infrequently collected. As Mafia members in the Canadian documentary "The Mafia in Canada" observed, Canadian jails offer better accommodations than their homes in Italy.
Knowledge and cynicism are your best defense against being taken. If it sounds too good to be true, odds are it isn't true. If it doesn't make sense, odds are it isn't true. If it isn't in writing, don't risk your money. If you can't arrange a local meeting with the principals, don't send them your money. Be aware of the common business and investment scams. There are hundreds of variations of any basic scam. If the offer you are considering sounds like any common swindle, odds are it's a variation of that swindle.
PBG - The Scam That Won't Die
You want to borrow millions of dollars for your startup business. There's a bank or insurance company in some far off land willing to lend you the needed funds. They are willing to prepare the loan papers and make the commitment for some sort of loan origination fee. The standard fee is 1% of the funds being sought. Once you have the loan commitment and before you get your loan, you must find a major bank to be your cosigner. Thus, the name of this swindle is the Prime Bank Guarantee (PBG) Swindle.
The major bank is being asked to accept all the risks inherent in making a business loan and get none of the benefits. Assuming the bank's loan officer has an IQ of 60 or above, he or she will realize that this isn't a good deal for the Prime Bank. At least, with the major bank doing the loan, they would get the interest payments until the borrower defaulted. PBG lenders know that Prime Banks won't lend. This is a front fee scam with no risks of defaulting on the contract terms, since the borrower will never find a major bank co-signer.
The folks with the IQs below 60 are the large networks of "brokers" selling these deals to the business community. They will help entrepreneurs find PBG lenders. For a fee, they will help the PBG victim contract Prime Banks to see if the bank wants to be the victim's co-signer. Many of the people in this network may be good salespersons, but they lack the capacity for simple logic.
The Liquid Asset Lending Swindle
Lenders want collateral to make loans. It's their insurance against loss of loan principal. When the borrower puts up the collateral, they usually lose control of it. It's the loss of control of the assets that allows the swindler to run this sting operation.
Often as an offshore bank or insurance company, the Liquid Asset Lender offers to lend 80%-90% of the value of approved liquid assets to anyone seeking a business loan. Terms are the standard Prime plus three adjusted quarterly. There is little lender concern about the merits of the business plan. The preferred liquid assets are gold bullion coins or shares trading on the New York Stock Exchange. Most of these lenders will accept shares in companies trading on Nasdaq, AMEX and regional stock exchanges, as long as the average daily trading volume meets the lender's requirements. There is usually a two-week or more delay between the time the borrower supplying the collateral and their company receiving their loan.
The lender takes the collateral and immediately sells it. Then, they loan the agreed upon percentage of the sold liquid assets to the borrower. They pocket the difference and await the monthly loan payments, which they pocket as well.
Over 99% of the time, the borrower defaults on the loan and the lender simply walks away with the profits. Rarely, the borrower repays the loan. In that case, the swindler creates a new lending firm and continues running the scam. Some of these swindlers have been running this scam for over a quarter of a century without ever being contacted by a government fraud investigator. This confidence game is easy and profitable. If you offer 90% loans and the pigeons supply you with ten million dollars in liquid assets, you keep a million dollars. Assuming an interest rate of 8% on the lending of the pigeon's sold assets, you earn $720,000/year, without any additional effort. The average bank robber gets $3,500 for their efforts and can expect a massive effort to put them in jail. As with the PBG broker network, there is a network of finders seeking the pigeons for this shakedown.
An ounce of prevention is worth a pound of cure. Have someone knowledgeable about business finance look at any offer that appears easy and too good to be true. It could save you hundreds of thousands of dollars.
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William Cate has been the Managing Director of Beowulf Investments http://home.earthlink.net/~beowulfinvestments/ since 1981 and is the Executive Director of the Global Village Investment Club
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