Saturday, April 30, 2005

Give me and "F:..........F!

Give me an "R"..........R!
Give me an "A"..........A!
Give me a "U"............U!
Give me a "D"............D!

What does that spell...........FRAUD!

Just spent a few hours this past week looking over some documents someone had presented to us in conjunction with a transaction. Lots of big impressive names, convoluted deal structure and a request for a initial pre payment equal to 10% of the loan amount in addition to a 3% commitment fee (which is standard in most deals, one of the few things about the documentation that didn't spook me). This 10% was to be used to purchase some unspecified insurance guarantees that would "make the whole deal work".

Given the "risk" of the underlying transaction associated with this loan, both the pricing of the loan and its equity requirement of the borrower were substantially deviant from standard commercial terms.

If a deal smells fishy, it is (Oh Josh, you are a sucker for cliche). Having seen an advance fee scam run on a contact of mine (and they fell for it hook, line and sinker), I am pretty well versed in how these things get pulled off.

Typically the victim is looking to undertake a project that is well beyond their financial means and have been unable to secure financing from traditional sources, due to the fact that they cannot come up with the equity portion of the deal.

They are then approached by "someone who knows someone who know someone" who will fund the deal, but not before the prospective borrower has coughed up a few hundred thousand dollars in fees (that has typically been borrowed from friends, retirement savings and against real estate). At this point, the prospective borrower is in a desperate state and will believe anything (except the reality of the situation), sometimes unwittingly becoming a party to a crime themselves. Having seen a business dream go down the tubes once in a while, I know that it brutally hard to walk away, but sometimes you have to. In the end it is only money, and I can think of few things worse than spending some time in the slammer for a crime you didn't realize you were committing and not having anything to show for it.

In almost any deal, fees are a normal part of the process, however, what is different in the advance fee scam is the scale of the fees and the type of financing that is being sought. Most intermediaries will charge a small up front fee and a success fee on the close of the deal. Most lenders will charge a due diligence and commitment fee (these typically range from .5% to 3% of the capital being lent).

The bottom line is that if you have never been a party to a large transaction, get advice from someone who has. Speak to a lawyer, accountant, even your bank manager. If something is too good to be true, it is (I know, it is a cliche)!

If you want a good primer on fraud, check out FraudAid


Anonymous Anonymous said...

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- A BNI colleague

7:41 PM  
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12:32 AM  

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