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SCMP Reporter

HONG KONG investors and financial institutions have been warned to be on the lookout for an increasingly prevalent scam involving fraudulent financial instruments called standby letters of credit.

  The London-based International Chamber of Commerce's (ICC) Commercial Crime Bureau (CCB) has issued a warning that a growing number of unsuspecting investors have been tricked into purchasing these instruments after being promised large, risk-free returns.

  Among the high-profile victims was the Salvation Army in Britain, which lost US$8.8 million (HK$67.93 million) after it purchased a standby letter of credit from two Birmingham businessmen, Gamil Naguib and Stuart Ford.

  An Australian legal firm, Allan Allan & Hemsley, also fell victim after it discovered US$20 million of clients' funds was missing.

   A large chunk belonged to the Government of Nauru.

  The investments were issued by the Commonwealth Bank of Antigua, a ''brass plate'' bank operated by New York businessmen Leonard Fruber and Ralph Scheri.

  The ICC alleged promoters of these instruments promised that by paying a small percentage in advance, prime bank instruments could be used as collateral to raise capital without the security normally required.

  At the same time, these instruments would generate enough income to repay the loan.

  The CCB also claimed investors were told the investments were risk-free and yield returns of at least 12 to 14 per cent a year, and by participating in a roll programme, the money could be used to buy and sell prime bank instruments in the secondary market and realise two per cent a week or 200 per cent a year.

  To make investors less suspicious, the promoters claimed these instruments were off-balance activities of banks and only available to a handful of special customers.

  They said it is one of the banks' best-kept secrets and, as a result, no bank would admit they were involved in these transactions.

  The ICC issued its first warning about these fraudulent practices in February last year, telling the financial community and investors that prime bank instruments were unknown to legitimate banking institutions.

  It said while many frauds were now being investigated by law enforcement agencies, it believed the impact of these frauds had yet to be fully realised.

  While the ICC did not detail any cases involving fraud in Hong Kong, a report issued in January included an Associated Press story about an illegal transaction involving two officials from the Hebei branch of the Agricultural Bank of China.

  The chamber said small businesses in dire need of capital were advised not to make advance payments to brokers or individuals offering these types of investments.

  It did not believe it was possible to obtain an interest-free loan that required no premium or interest repayments plus an investment premium.

  ''These frauds can be prevented but investors must take care and make all necessary checks to ensure they do not become a victim,'' said ICC's Lin Kuo.



HK investors warned of scam