You could be forgiven for believing offshore frauds are a thing of the past. After all, with “Know Your Customer” rules that practically require you to submit to a DNA test to open an offshore account, you wouldn’t think it’s exactly easy for scam artists to bank the proceeds of fraud.
But greed and avarice, together with the quite natural desire to hide assets from “the man,” mean offshore scams are alive and well. Here’s a rundown of three of my “favorites.”
The “Anti-Terrorism Clearance Certificate” Scam
About a year ago, I received a panicked call from a wealthy client. He had just closed on a six-figure business deal in Asia, or so he thought. A couple days before he was supposed to receive a bank wire from the buyer, he received an unusual request for. My client would need to provide an “anti-terrorism clearance certificate.” The buyer sent my client instructions to wire $10,000 to an offshore bank to obtain this certificate. At that point, the client contacted me.
It’s more than a little ironic that measures taken to fight the war on terror have spawned scams like this. But in reality, this is a variation of a very old fraud: the advanced-fee scam. A criminal offers you a large sum of money. But you’ll only receive it after you pay a smaller amount to have the funds released. Some virtuoso scammers are brazen enough to ask for a second or even a third payment, under the guise that the company must perform “enhanced due diligence” on you. Once you’ve made your final payment, the criminal – and your money – disappears.
FATCA Scam Targets Foreign Investors in US Securities
Another scam targets non-resident investors in US accounts. It is an email message, purportedly from the IRS, that threatens to impose a 30% withholding tax related to the Foreign Account Tax Compliance Act (FATCA). The only way to avoid the tax, according to the message, is to disclose a great deal of confidential information on a fake IRS reporting form.
Leave it to a horrible law like FATCA to lead to this scam. Foreign investors have learned they need to be hyper-compliant to avoid FATCA’s 30% withholding tax on US income and sales proceeds. So they willingly disclose social security numbers, social insurance numbers, and other personal data that make stealing their identity a piece of cake.
There is a grain of truth to the message, in the sense that if you are a non-US resident investor in any bank or securities broker in the world, you’ll need to file a form to confirm this status when you open the account to avoid FATCA withholding. That form is IRS Form W8-BEN. That’s the only IRS form you should need to file to confirm your non-resident status.
Offshore Ponzi Schemes are Alive and Well!
In 1919, a 37-year-old ex-grocery store clerk with a silver tongue borrowed $20 and in the space of six months became Boston’s so-called "wizard of finance." Adored by the public as he rode throughout the city in his chauffeured limousine, Charles Ponzi promised that he would pay investors $15 for every $10 they invested with him for more than 90 days. With this appeal, he raised millions of dollars.
Ponzi claimed to be taking advantage of "currency fluctuations" and "specialized knowledge" to make 50% profits every 90 days. But in reality, he was pocketing the money. The scheme ran for nearly a year before it collapsed, costing investors more than $20 million.
Nearly a century later, not much has changed. What are now called "Ponzi schemes" operate in much the same way as Ponzi did decades ago. One that a client alerted me to a couple years ago involved investments in 1920s-era German government bearer bonds, redeemable in gold. Fortunately, I was able to steer my client away. But I wasn’t surprised to learn that in 2014, the mastermind behind this scheme was sentenced to 7 ½ years in prison and ordered to repay investors $2 million stolen from them.
That’s small potatoes, of course, compared to Charles Ponzi or the biggest Ponzi schemer of all, Bernie Madoff, who ran off with $150 billion. But if it’s your money that’s invested in a Ponzi scheme, a loss is a loss. Remember, if something sounds too good to be true, it probably is.
What leads people to suspend their judgment and participate in advanced-fee frauds, Ponzi schemes, and similar scams? One reason is the evolving culture of hyper-compliance in which we’ve been conditioned to disclose all manner of personal data to anyone who claims they need the information to comply with FATCA, the PATRIOT Act, or the anti-terror regulations du jour. And don’t forget that reasonably intelligent people who would ordinarily avoid something “too good to be true” will embrace it if it is presented as “insider” or “specialist” information. Promoters claim to have inside information on a “secret” world market that is available only to the “super rich,” or to people who, like them, are “very well connected.”
Don’t believe a word of it. If someone you don’t know very well insists that you turn over a bundle of personal information for compliance purposes, find out exactly why it’s needed and how it would be used. It doesn’t hurt to ask for a reference to a specific law or regulation that supposedly requires such disclosure. And if you get that reference, look it up to see for yourself.
Finally, before you invest a dollar in an international investment that’s not publicly traded on a securities exchange, do some homework. Find out who’s behind the scheme and learn a little about their background. If you can, try to meet them in person. If enough money is at stake, hire a private investigator to check them out. Forewarned is forearmed.