There are arrangements circulating in the market which are known as “advance fee frauds”. These work on the basis that borrowers (often borrowers who are finding it difficult to access conventional funding sources) are offered loans on unconventional terms but on the basis that, in order to access the funds, they must pay amounts upfront, such as commitment letter fee, due-diligence fee, arrangement fee and/or interest in advance, or whatsoever. The arrangements are fraudulent because, although the upfront amounts are paid, the promised loan is never made.
Advance fee frauds typically have a number of common characteristics, some of which I would list as follows:
• The arrangements are unusually complex for the size of loan.
• The lender is not disclosed (indeed their identity is usually described as “highly confidential”) but is described in glowing terms as being a “major bank” or a very high net worth individual. Where a “major bank” is supposed to be the lender, the reason for their identity not being disclosed is often given as being that this is a secret type of lending which they undertake because of some “loophole in the syndicated loan market” or “outside full regulatory control”. Occasionally the name of a bank is given, but one is never allowed to communicate with them direct.
• There is always some pressing need for matters to proceed according to a particular timetable and often on the basis that documents must be signed “at a meeting in London” etc. Sometimes expressions such as "there is a fixed window each year for making these loans” are used.
• There are elements of the loan arrangements which do not make any commercial sense. For example, there is very limited due diligence being done on the borrower or the loan documentation is materially and unusually defective for a loan of the size to be made. Often the loan is of a size that is simply not available to the borrower from conventional sources.
• The arrangements for the loan involve upfront payments of significant amounts before any part of the loan is advanced. Importantly, these fees are never just deducted from the amount of the loan, even though this would be an entirely logical way of getting them paid. If this objection is raised, it is usually met with the rebuttal that the payment of the fees upfront is necessary to demonstrate the good faith or the financial soundness of the borrower. In the more sophisticated versions of these arrangements, the upfront fees are not paid direct to the lender or the arranger, but complicated escrow arrangements are created using a trusted third party. Such escrow arrangements for the upfront payments will be explained as “a closed loop” which will protect the monies until the loan advance is made.
• There will often be some condition to the loan which is actually very difficult, maybe in practice impossible, for the borrower to fulfill, but the arrangements work on the basis that there is no refund of any advance payments if this condition ultimately cannot be fulfilled. This is often a critical part of the fraud, because the lender/arranger takes the advance fee and walks away without facing any possibility of legal attack because the borrower has failed to meet the lending conditions and the lender/arranger has done nothing legally wrong.
• When one looks at these arrangements, one often cannot see exactly where the upfront monies will leave the “closed loop” without the advance being made. The documentation and often certain elements of the commercial arrangements, are frequently deliberately confused. In any event, what often happens is that a new requirement is introduced at the last minute and at the closing meeting under which the closed loop arrangements have to be “slightly varied”. So, for example, the arranger will say that, the borrower has now spent too much time negotiating the loan documentation or trying to organize the letter of credit, and “the window” for the loan to be made is closing, but even so, the arranger can still help the borrower if the arrangements are varied in a particular way (a way which will break the closed loop somewhere) but this must be done immediately.
• Sometimes the arrangements are not intended to defraud the borrower, and the borrower may get the advance payments they make back from the escrow agent, but the arrangements are intended to defraud other people, such as potential investors in the loan or in some other arrangement. Letters of credit and “proof of deposit funds” letters can often be used for this purpose.
• There is often a trusted intermediary involved somewhere (who will often be entirely innocent of the fraud and will have been carefully cultivated to build up their trust in the scheme).
• None of the lender/arranger side parties is a normal well-known enterprise or has a conventional lending business. None is a regulated entity.
Not all of the above features are present in every advance fee fraud – the people who put them together are clever and know that they need to try to differentiate their schemes to avoid early detection. I would add that I am aware of the features of such schemes not just on the basis of general market information but also from the direct experience of myself and members of my team advising clients who have been approached with such schemes.
I clearly cannot say categorically that the Loan does involve an advance fee fraud, but you will see from the above that the arrangements do have very many of the typical features of such a fraud. Most of the similarities are obvious from the description above, but I would also mention the following specific features which fall into the category of things which make no commercial sense and which appear rapidly from a review of the Documentation:
• It is not entirely clear but the “security” for the Loan appears to be a pledge given by the Borrower of preferred ‘A’ shares in the Borrower. This is not legally possible. Even if this is some sort of technical error and the Pledgor is meant to be a shareholder of the Borrower pledging such shares, the shares are non-voting and do not carry dividend rights and, above all, they are shares in the Borrower and so would rank on an insolvency behind the loan rights which they are purportedly securing and behind all other creditors of the Borrower. They are not really “security” at all (although I note that security over the licence (a potentially valuable asset) was rejected in favor of the Share Pledge).
• The pledge over shares is made in favor of the Syndicator, but the loan is made by the “Investor”. There is a mismatch here which is not fully dealt with by the purported assignment of the Loan that will occur post completion. A normal lender would not accept this mismatch.
• A normal lender making loan available would carry out proper legal due diligence on the Borrower and would want, for example, a legal opinion on its ability to commit to the loan arrangements.
• The Borrower is asked to procure the issue of a Letter of Credit to be drawn in favor of the Syndicator (not, which would be more sensible, the Investor) and which will be held by the escrow agent. However, once a Letter of Credit is issued, it cannot really be “held in escrow”, it is a live document under which a claim can be made even if the original is held in a vault.
Finally, whatever changes made to the documentation would either be rejected with clever explanations or would not have the effect which we intended. Whatever additional protections we sought to build in could also be circumvented. By way of analogy, we would be like members of an audience watching a magician very very hard to make sure that he did not make the rabbit disappear – but it still would because magicians know how to divert your eyes just at the right moment.
I purchase the Ticket for am sure to watch HF performance...
Financiers, as real professionals, should first invest in some time reading the BP to figure out whether it is bankable, or not!
Finally, real Lenders, have intern people to service the borrower against whatever success fees.
What do you usually charge upfront?
IT'S THE BORROWER'S FAULT!
Not really, just grabbing your attention. I personally can see both sides to the issue. There are many, many 'less than professional' joker-brokers out there taking advantage of the current market conditions. This casts a shadow on all of us.
Do we deserve to get paid even if we don't produce? Matter of opinion I suppose. A player batting .500 is considered a great player even though he only acheives the purpose 1/2 the time. I personally will only accept payment upon success. I mark up the ones that waste my time as being a cost of doing business. It's the cost of protecting my good name .. no one will ever be able to claim I committed fraud on them. That is a cost I am willing to pay. Not happy to pay .. willing to pay!
THIS IS WHAT THE BORROWERS CAN DO TO STOP THE FRAUD!
Simply give us honest, hard working consultants some respect and allow us enough time to locate the funding for you. Nothing hurts more than to refuse an upfront fee, find a valid source that works for the borrower, get the paperwork together just to find out you had 12 other brokers working on it too and someone beat you to the finish line 12 hrs sooner.
The use of multiple brokers just creates a RACE TO THE COMMISSION LINE. Only 1 gets the gold and the rest get nothing. And then they wonder why people like Marcus want upfront fees.
BOTTOM LINE: Treat me with respect and allow me the time I need to take care of you. If I am honest enough to refuse upfront fees .. then I am honest enough to tell you when I can not find you funding. I wouldn't be taking on your project unless I felt strongly that I could get a commission at the end of the day.
Congratulations for your honesty pointing out the Jokers from both sides!
Therefore, considering this mutual respect, how could I know Mr X deserves it when am facing thousands of consultants?
The lost-borrower-in-the-consulting-jungle starts by eliminating upfront fees offers and pray for a win-win deal with the remaining consultants on the following basis : "If I had real source of fundings, why would I take miserable upfront fees when am sure to make my day with the comfortable success fees?
Hi, I am a businessman engaged in Gold, Diamonds, Commodities, Jewelry business. I am surveying in Africa since 2006 and found lucrative opportunity for Gold and Diamonds mining business. I also have distress sale in property in India which is very much cheaper at present cost. Please advise me how you can help for these projects. Tkt size in inlimited
Gold and diamond mining are tough right now but there are sources out there. I am in the midst of helping 6 other gold and copper mines in various parts of the world. I could add yours to my offering list if you like.
I don't personally deal with distressed properties though. If you are looking for 1 consultant to handle both for you then I would have to pass.
If you like, send me the executive summary on the mines and I'll review them to make sure they are compatible to the sources I am aware are currently active.