Ponzi Schemes & Money Laundering

Michael P Linthicum Sr. MS, CFE, CAMS

Patriotic Investigations & Consulting LLC.4250 Alafaya Trail, Suite 212-320

Oviedo, Florida 32765

© 2008 Patriotic Investigations & Consulting LLC

Who or What is a Ponzi Scheme ?Definition

A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns (“profits”) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. The scheme is named after Charles Ponzi, who became notorious for using the technique.

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Charles S. PonziBorn: March 03, 1882Location: Lugo, ItalyDied: January 18, 1949Location: Rio De Janiero, Brazil

Arrived in the United States 1903

Arrived with $2.50 in his pocket

Gambled most of his life savings away on the trip over!

Held menial jobs, eventually landing a job as a dishwasher and then worked his way up to Waiter. on the East Coast of the United States.

Fired for short changing customers Photo Courtesy “”Boston Public Library”

Moved to Montreal, Quebec Canada in 1907

Became an Assistant Teller at the newly formed ‘Banco Zarossi” Serving the Italian

Immigrants

Bank started by Louis Luigi Zarossi opened it’s doors paying 6% interest, double the going rate.

Accounts Grew

Bank made bad real estate loans, and Zarossi began paying off customer interest from new depositor’s money.

Bank eventually failed,

Zarossi fled with a large amount of banks money to Mexico

Click icon to add picture

Ponzi’s 1st Arrest

After Bank Failed, Ponzi walked into office of a former bank customer.

Found checkbook, and wrote himself a check for $423.58 by forging the signature of the company Director.

Confronted by police and admitted guilt.

Sentenced to 3 years in a Quebec, Canada Prison.

Photo courtesy of The National Postal Museum

In 1911, after Prison, Ponzi moved back to the United States.

Involved in Alien Smuggling venture.

Arrested again and sentenced to Federal Prison in Atlanta, Georgia

Released from Federal Prison and moved to Boston, Massachusetts.

Ponzi tried other employment selling advertising

One day received an envelope containing an request for one of his catalogs and in the envelope was a International Postal Reply Coupon (IRC)

Ponzi became curios and further investigated what the IRC was and found a fault in the system that would allow him to make Money.

The Famous Scheme!Ponzi figured out that based upon post-war exchange rates after World War I, International Reply Coupons bought in much of Europe were worth more in the United States than what they cost in their country of origination. Ponzi, figured that if he could work out a way to deal with the coupons in high quantity, he could quickly become rich off of simply buying and selling them. Ponzi convinced a few investors to give him money, promising a 50% profit in 45 days based upon trade in the coupons. Ponzi couldn’t quite figure out how to make it work. He asked postal officials if he could exchange the coupons for cash, causing him to receive a visit from postal inspectors who warned him that the coupons were not intended for financial speculation; they were only redeemable for stamps.

International Postal Reply Coupon (IRC)

International Reply Coupons were dreamed up by the international Universal Postal Union in 1906 as a way for people in different countries to send return postage to each other. The International Reply Coupon could be purchased in one country and then redeemed in another for the equivalent value of that nation’s stamps; regulations set the rate of exchange, but the massive devaluation across Europe following World War I wreaked havoc with rates.

The Scheme Grows!

Numerous people invested, and were paid stipend interest payments on their investment as promised. The word spread, and investment came in at an ever-increasing rate. Ponzi went out and hired agents and paid them generous commissions for every dollar they brought in. By February 1920, Ponzi's total take was $5,000 USD, in 1920’s dollars, quite a large sum.By March 1920 he had made $30,000 and there seemed no end. Investing continued at a fevorish pace and Ponzi began to hire agents to take in money from all over New England and New Jersey. At that time investors were being paid impressive rates, encouraging yet others to invest.By May 1920 he had made $420,000. He began depositing the money in the Hanover Trust Bank and would eventually obtain a controlling interest in the bank. By July 1920 he had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits, but reinvested.Cash was coming in at a torrential rate, but no one was asking for an accounting or looking at the books. As long as money kept flowing in, existing investors could be paid with the new money, but colossal liabilities were accumulating.

The Collapse!

On July 26th 1920 the Boston Post newspaper started a series of articles that asked hard questions about the operation of Ponzi's money machine. The Post contacted Clarence Barron, the financial analyst who published the Barrons financial paper, to examine Ponzi's scheme. Barron observed that though Ponzi was offering fantastic returns on investments, Ponzi himself wasn't investing with his own company.Barron then noted that to cover the investments made with the Securities Exchange Company, 160,000,000 postal reply coupons would have to be in circulation. However, only about 27,000 coupons were actually circulating. The Untied States Post Office stated that postal reply coupons were not being bought in quantity at home or abroad. The articles raised some serious questions about the success of Ponzi’s financial plan. The newspapers stories caused a panic run on Ponzi’s company the Securities Exchange Company. Ponzi paid out $2 million in three days to a wild crowd outside his office. He canvassed the crowd, passed out coffee and donuts, and cheerfully told them they had nothing to worry about. Many changed their minds and left their money with him.

Ponzi Goes to Jail!November 01, 1920 Ponzi pleaded Guilty to Mail Fraud and was sentenced to 5 years in Federal Prison.

Released after 3 ½ years to face state charges.

Found Guilty in Massachusetts and sentenced to 9 years.

Jumped bail and fled to Florida where he set up another scam selling “prime Florida land” to gullible investors during the 1920 Florida land rush.

Once detected fled to Texas and later returned to Massachusetts to serve his sentence,

Released in 1934, Ponzi was deported back to Italy

Died in Brazil on January 18, 1949

Authorities never could sort out the total scheme or recover all the victims money.

Did it Stop There? No!

Every day there are hundreds of variations of Ponzi Schemes going on in the United States. They involve hundreds of financial institutions and their employees.

Some Recent Ponzi Schemes In 2000, a Ponzi scheme perpetrated by scientology minister Reed Slatkin came unraveled

when the U.S Securities and Exchange Commission regulators became aware that Slatkin was not a licensed investment adviser. Slatkin had raised some $600 million from over 500 wealthy investors, mostly Hollywood celebrities.

In December 2005, in Los Angeles, California, Larry Toshio Osaki, who ran a gigantic Ponzi scheme and continued to offer bogus investments in accounts receivable "factoring" after being ordered to cease and desist by a Federal judge, was sentenced to 20 years in federal prison. In addition to the prison term, Judge Stephen V. Wilson ordered Osaki to pay more than $145 million in restitution to victims.

In May 2006, James Paul Lewis, Jr. was sentenced to 30 years in federal prison for running a $311 million Ponzi scheme over a 20-year time period. He operated under the name Financial Advisory Consultants from Lake Forest, California.

In October 2006 in Malaysia, two prominent members of society and several others were held for running an alleged scam, known variously as SwissCash or Swiss Mutual Fund (1948). SwissCash offered a returns of up to 300% within a 15-month investment period. Currently, this HYIP investment is offered to citizens of Malaysia, Singapore, and Indonesia. It claimed investors’ funds were channeled to business activities ranging from oil exploration to shipping and agriculture in the Caribbean. The company claims to be operating out of New York and incorporated in the Commonwealth of Dominica.

On Friday April 13, 2007 a person named Sibt-e-Hassan Shah, aka “Double Shah," was arrested by government officials in Wazirabad, a small town of Pakistan. Sibt-e-Hassan claimed to double investors' money within 30 days in the beginning of his scheme, later extended to 90 days. He is suspected to have gathered very large investments (approx US$ 1 Billion) in a very short time period.

2000 65 year old individual receives $10 million wire transfer into Bank of America bank account in Titusville, Florida wired in from the Bahamas. Investigation reveals money is result of Ponzi scheme involving over 300 victims worldwide. 11 million recovered in Central Florida and returned to investors plus government interest. US Vs. Space Coast Trade & Development, U.S. District Court, Middle District of Florida, Orlando, Florida

On June 27, 2007 former boy band mogul and notorious con artist Lou Pearlman was indicted by a grand jury on several counts of fraud which is turning out to be one of the largest United States Ponzi schemes ever to the tune of $317 million dollars. The final total may rest somewhere near $500 million dollars. Pearlman's scam involved bilking innocent investors out of their savings with a fraudulent savings and loans program claiming it to be FDIC insured though it was not. He also conned several banks out of millions of dollars in loans for projects he never started. He then used that money to pay back certain investors and continue his Ponzi scheme. His scheme may have been going on for 12 years. Trial is tentatively set for March 3, 2008 . Orlando Sentinel, February 6, 2007 Pearlman, companies face $317 million in claims

Recent Central Florida Schemes

Variations of the Ponzi Scheme

Railroad Stock Certificate Sales

Gold Stock Certificate Sales

Prime Bank Fraud

Prime Bank Fraud

Definition

An investment scheme that offers extremely high yields in a relatively short period of time. In this scheme, they purport to have access to "bank guarantees" which they can buy at a discount and sell at a premium. By reselling the "bank guarantees" several times, they claim to be able to produce exceptional returns on investment.

Non-circumventionNon-disclosureGood, Clean, Clear, and of Non-Criminal OriginBlocked Funds Investment ProgramPrime Bank Trading ProgramFederal Reserve ApprovedTreasury ApprovedRoll ProgramIrrevocable Pay OrdersPrime Bank Debentures, Notes, Guarantees, Letters of CreditFresh-Cut PaperHigh-Yield Investment Program (HYIP)ICC 3034 or 3039 Letter of CreditOff Balance Sheet ProgramPrime Bank Debenture TradingPrime Bank Instruments, Notes, Guarantees, Trades, or Letters of CreditPrime European Bank Letters of CreditPrime World Bank Debentures or Financial InstrumentsPrime Insurance GuaranteesHigh-Yield Debenture Trading, Financial Programs, Asset Management ProgramsHigh-Yield Investment Programs (HYIP)High-Yield Promissory Notes or Bank NotesGuaranteed Bank NotesIntermediate Bank NotesRoll Programs or Bank Debenture Roll Programs

ICC 500 or 600 Bank Debenture InstrumentIMF (International Monetary Fund) Stand-by Letters of CreditIMF Backed Securities, Bill of Exchange, Bill of Equity, or Backed BondsDiscounted U.S. Treasury Obligations, Renting or Leasing of Treasury SecuritiesBlocking of Assigned Treasury Securities"Limited Edition" or Defacto Treasury SecuritiesUS Dollar Bonds, Federal Notes, Medium, or Mid-Term Notes or Bank NotesBlocked Funds Letters or Investment Programs, Documentary Letters of CreditIrrevocable Pay Orders, Collateral First Debentures, Money Center BankFresh Cut Paper or Bank Debentures, Bank PaperSeasoned Bank DebenturesPrivate Placement ProgramsPrivate Trading ProgramsInternational Certificate of Deposit (LCD)Irrevocable Bank Purchase Order (IBPO)Irrevocable Corporate/Confirmed Purchase Order (ICPO)Irrevocable Prime Bank CommitmentZero Coupon L/C

Terms Used in Prime Bank Frauds

Characteristics of a Prime Bank Instrument Fraud

The Deputy Associate Director of the Federal Reserve Board listed some of the claimed characteristics of a typical Prime Bank Instrument Fraud:

• Highly profitable

• Totally risk free

• Sanctioned by banks, federal reserve, and other international organizations.

• Sold on a secretive exchange

• Extremely complex documentation that is difficult to understand.

• Excessive use of name dropping of influential and well known individuals.

• Use of excessive disclaimers.

• Exorbitant yields on initial investmentBasic flaw in paperwork such as misspelling and improper grammar.

Buzzwords used by FraudstersBoth the ICC and the Deputy Associate Director of the Federal Reserve Board listed some key phrases and buzzwords used by fraudsters:

Conditional Swifthas no meaning in the banking community and is an invention of the fraudster.

Good, clean funds of a non criminal originhas no specific meaning and is commonly used in fraudulent transactions.

CUSIP numberlegitimate meaning is to identify US stocksfraudsters use it to create impression of legitimacy

Non Circumvention or Non-Disclosure Agreementnot a normal course of legitimate business

Fresh cut seasoned or live paper no meaning to banks or financial institutions

Letter of Intent or Commitmentnot used by banking institutions

Proof of FundsUsed by fraudsters to gain support for the fraud

Roll Program or ProgrammeFraudsters version bears no resemblance to a real stock or bond turnoverFraudsters version acts as snowball and only grows

TrancheLegitimately a bond series issued for sale in in a foreign country often misused by fraudsters to identify an alleged trade.

The ICC said that prime bank fraudsters target certain victims:

Investors seeking new opportunities or needing a loan

Retirees

Business persons

A Modern Day Ponzi Scheme

Space Coast Trade & DevelopmentTitusville, Florida

Sale of a 100 Million Dollar Debenture note

350 victims worldwide

Started by 3 individuals

11 Million dollars seized in Orlando, Florida

Encouraged investors to meet in the Bahamas where he pitched the program to them.

Set up the Portifino Holdings and was a partner in Schooner Lisbon LTD.

Told individual that he didn’t want to do business in US. Didn’t like using telephone. Doing business out of U.S. could not come under U.S. law.

Used companies with names like Portifino Holdings to Schooner Lisbon LTD.

Has no formal investment training and is not a licenses securities dealer.

U.S. Vs Space Coast Trade & Development a recent Prime Bank fraud

President of Space Coast Trade & Development

has prior Florida convictions for Fraud and Selling Unregistered Securities

has no formal investment training and not licensed to sell securities

admitted to never successfully completing a debenture trade

removed $160,000.00 of investor’s money for personal gain

Financial Institutions are used unwittingly to support and continue the Fraud.

Financial Institutions are the means to move the Money.

Financial Institution’s legitimate customers are the victims of these crimes.

Financial Institutions can be liable for not doing their “Due Diligence” when they open accounts for the fraud perpetrators.

Financial Institutions can help detect, investigate and prosecute with their KYC procedures and anti-money laundering software and procedures currently in place.

Current U.S. and foreign Money Laundering laws and statutes can be used to prosecute these frauds.

So what does this have to do with Financial Institutions & Money Laundering?

Title 18, U.S.C. 1956 and 1957 Money Laundering The Money Laundering statutes includes definitions of the technical terms referred to “Specified unlawful activity. These include narcotics related activity, bankruptcy fraud bribery, false statement, mail or wire fraud, bank

fraud and others.

Title 18 U.S.C. 1961-1968 Racketeer Influenced and Corrupt Organizations (RICO)

Title 18 U.S.C. 1952 Travel Act

Title 18, USC 1341, 1343 Mail Fraud and Wire Fraud

Title 18, USC 1348 Securities Fraud

United States Criminal Statutes that cover Fraud and Money Laundering

Florida Law

F.S.S. 812.014 Theft

F.S.S. 817.02 Obtaining property by false personation.

517.301 Fraudulent transactions; falsification or concealment of facts.

Use the KYC procedures.Confirming the DOB of account holder from an official document.• Birth Certificate, Passport, etc.

Confirming a permanent address.• Electric bill, telephone bill, occupational license etc.

Contacting the customer by telephone, letter or email to confirm information.

Confirming the validity of the official documentation.• Notary Public, Tax collectors Office etc.

Confirm business through commercial inquiry data base.• Lexis-Nexus, Dun & Bradstreet, Better Business Bureau

Obtain prior bank references.

Visit the corporate entity if possible.

Be suspicious and ask detailed questions.

To SAR or not to SAR

It’s always a good idea to submit a Suspicious Activity Report when you suspecta major fraud has taken place or is taking place.