Swimming with the sharks

Wednesday September 20th 2006

James Featherstone

Like a cross between a sweaty villain in one of Graham Greene?s Latin American novels and a grinning used car salesman, the image of the offshore ?investment adviser? is not always the best.

There are sharks anywhere in the financial world. But the offshore world is more heavily infested. The lightest dusting of regulatory oversight in many jurisdictions added to secrecy makes for an attractive place to do business if your business is the rip-off. And there is a type of investor attracted to the offshore world who is in the business of making as much money as possible, as quickly as possible, without anyone getting too nosy.

But what if you?re just a humble expatriate? Should you be fearful of a rip-off round every corner? The simple way to stay scam-proof is to stick to the recognised business centres such as the Channel Islands and the Isle of Man, and not to fall for one of the many too-good-to-be-true investment offers out there.

Paul Hamer, director of Jersey-based Advisa Offshore, says the trouble begins when people start investing in some of the more ?interesting? offshore jurisdictions.

?Outside the well-known jurisdictions, which have regulatory systems comparable to the UK, you can find yourself in deep waters,? says Hamer. ?There are some dodgy places offering themselves as offshore centres. We simply advise clients to steer clear.?

Samoa now calls itself an offshore centre, as does Vanuatu. Until a few years ago, when international regulatory bodies began a long-overdue crackdown, so did Grenada. It is difficult to see what the ordinary expatriate would be doing investing in such places, where brass-plate companies sprout like weeds.

The well-known offshore finance centres are, on the other hand, pretty well regulated. Ask your independent financial adviser whether the jurisdiction you are placing your assets in has the appropriate protection.

What about offshore-based firms themselves? Does the fact that they are offshore make them inherently more dangerous to deal with? Again, it depends on the firm. In the well-known jurisdictions there are plenty of familiar high-street names. But people do hand money over in response to offers that the rest of us would consider screamingly crooked. ?It?s greed, pure and simple,? says Hamer.

If an investment offer looks too good to be true, it is. Last year one Caribbean-based firm was prosecuted for parting gullible investors from several million dollars on the promise of 1,000% interest a year. Obviously fraudulent, you might say. Yet enough people fell for it to make it worth the scamsters? bother.

The most painful and prevalent scam is the ?boiler room?. This basic share-pumping scam, based on the cold call, attempts to sell useless or non-existent shares. No investment return materialises and the initial capital vanishes. Attempts to get the money back end in failure and can often draw people in further.

In a typical boiler room, the ?brokers? (who are just high-volume salespeople with no real investment knowledge) work through huge name-and-number databases, pushing bad shares from a written script.

Alan Steel, a Glasgow-based financial adviser who has extensive experience in the offshore world, says no reputable investment firm would countenance cold-call selling.

?Why would they? That isn?t how they do business. If someone does call you up, it means they think they?re going to be able to get something out of you.?

It is worth emphasising how cunning the boiler rooms can be. A first contact might involve a soothing (often female) voice on the telephone asking to ?update our contact records?. Assuming you don?t put the phone down at this point, the next move, once they have your details, will be to send you a glossy brochure, including apparently bona fide investment articles.

One boiler room, Richmond International, since closed down, had a website designed to create an air of legitimacy, complete with photos of the Bank of England and articles from the Wall Street Journal.

Conmen aren?t stupid. They know what will appeal to punters, and what will make them look legit. If you check the UK Financial Services Authority blacklist of offshore firms, you will be struck by how many have chosen pukka names: Berkley, Carlton, Dunhill and Lombard . . . they can?t be crooked, surely? But there will be no details of regulatory oversight, licences to deal in stock or professional qualifications of key staff.

Some of the larger boiler rooms even list a ?company? on a stock exchange (you?d be amazed how lax some of the smaller, particularly offshore exchanges are). The ?shares? you agree to buy are never bought, and your money goes to the boiler room.

When you complain, the firm moves to the next stage. ?Soothers? are coached in how to calm down irate clients. ?Loaders? will try to persuade the client that now is the time to buy even more stock. ?Soakers? will tell you they can get your initial investment back ? for an additional fee.

A final step is often an apparently separate firm phoning to offer to buy the worthless shares. Again, for a fee. Put the phone down. No honest investment firm works this way. ?If you?re going to buy shares,? says Hamer, ?go to a stockbroker.? But if you fall for ridiculous offers of huge profits, you?re probably a bit greedy. And stupid.

What to watch for

  • Cold calling ? reputable firms don?t do it
  • No licence to deal shares
  • Prior run-ins with regulators ? always check
  • No details of professional qualifications of key staff
  • Works out of a little-known jurisdiction
  • Callers try to bully or belittle you
  • Offer seems too good to be true
  • Time pressure selling is used: ?This offer will not be around in a week?s time, buy now!?
  • Suspiciously ?posh? firm, but you?ve never heard of it

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