Role Reversal: Banks Are Getting Conned

I’m sure that, like me, you’ve received countless messages from someone offering an intriguing (often bizarre) story. Each story is slightly different – ranging from some acquaintance travelling overseas who just had their wallet stolen… to a just-deposed African official who has tens of thousands of dollars they need help squirrelling out of the country; but they all end the same way. You are asked (instructed) to send money without delay to the author of the message. These messages have become so common and stereo-typed that, thankfully, few people get “conned” anymore.

However, in an ironic twist of fate, it was revealed in late July that the same folks whose greed and recklessness brought about the mortgage crisis of 2007-08 and sent our economy reeling toward “Depression” levels have lately fallen victim to conmen pulling off a more sophisticated version of the old “Nigerian” letter fraud!

The root of the problem is that nearly 11% of all federally insured bank institutions are on the “FDIC Problem Bank List”. Consequently, they are under great pressure to get their hands on any and all funds they can find. Needless to say, given the abysmal performance and reputation of financial firms since the banking crisis exploded, the average investor is wisely reluctant to invest their scarce capital in a bank. Therefore, banks that appear on the “problem list” have turned to unconventional sources of new capital.

A recent FDIC Alert revealed details about a financial scam that targets banks in need of recapitalization!

Evidently, the newest fraud trend has been for someone to represent himself as an investment advisor who represents one or more individuals willing to offer that bank access to funds for recapitalization. To enhance the enticing offer, the reputed advisor mentions the names of prominent public figures who are included in the group represented. The offer goes on to represent that these individuals have been approved by a federal banking agency to place large sums within the bank in question. There is only one catch – the bank must pay retention and due diligence fees upfront!!

Amazingly, according to a recent FDIC alert, some banks have actually fallen for this pitch:

“The FDIC has become aware of multiple instances in which individuals or purported investment advisors have approached financially weak institutions in apparent attempts to defraud the institutions by claiming to have access to funds for recapitalization… Ultimately, these parties have required the targeted institutions to pay, in advance, retention and due diligence fees, as well as other costs. Once paid, the parties have failed to conduct substantive due diligence or to actively pursue the proposed investment.”

The FDIC bulletin concludes by cautioning banks to be “extremely cautious” if offered money in return for upfront fees! If they receive such an offer, they are encouraged to file a “Suspicious Activity Report” with the FDIC. In light of numerous recent disclosures of fraud perpetrated by banks and financial institutions (LIBOR scandal, mortgage abuse, the “robo-signing” of foreclosure documents, the Goldman Sachs case, this story is simultaneously disturbing and (a least a bit) satisfying!


Submitted by: Thomas Petty

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