Matthew B. Greene Finance Law Blog on Lawyers.com

Copyright 2007, 2009 STILAS International Law Services, P.A.  All International Rights Reserved. 

Matthew Greene is the founder of STILAS, originally a government contractor for international economic security.  Matthew Greene is a former Chief of Special Operations in anti-organized crime and anti-corruption, and is an international legal expert and career strategic advisor to governments, agencies and ministries in various countries.

This article is a brief extract from one of a series of expert reports developed by Matthew Greene and STILAS, in cooperation with certain federal law enforcement and national security agencies of multiple countries, for protection of national critical infrastructure in the private sector.

Premature “Guarantees” of Funding are Illegal

As a result of the many various fraud notices and warnings published by government agencies, many amateur intermediary brokers, and also many general practice lawyers who do not specialize in financing and banking transactions, have developed a mistaken and misdirected reaction.  To avoid “up front fee” fraud, they believe in demanding a binding commitment or “guarantee” of funding from a lender, as a condition to moving forward with any payment, prior to even submitting an application.

The government warnings concentrate on the fact that the actual fraud itself is false claims of “guaranteed” or “certain” funding.  Thus, the typical demand of a preliminary guarantee is contradictory and goes against the meaning and intent of the warnings.  It is objectively impossible for any lender to issue a binding guarantee or commitment of funding before they ever even receive the application for review, decision making, and regulatory compliance procedures required by law.

The US Federal Trade Commission (FTC) clearly states in its official published documents that:  “Legitimate lenders may guarantee firm offers of credit to ‘credit worthy’ consumers, but first, they evaluate the consumer’s creditworthiness and confirm the information in the application.  … Remember that legitimate lenders never guarantee or say that you will receive a loan before you apply, or before they have checked out your credit status or contacted your references, especially if you have bad credit or no credit record.”  (US Federal Trade Commission (FTC), FTC Facts for Consumers, The Truth About Advance-Fee Loan Scams, May 2005, emphasis added.)

“Up-Front Fee” Criteria do NOT Apply to Licensed Professional Services

As a result of a superficial public understanding (and misunderstanding) of the various government notices, the “conventional wisdom” in the financing industry became a counter-productive overreaction of complete refusal to pay any fees of any kind whatsoever to anybody, if the payment happens to be requested at any time before a loan offer is issued.  This “knee jerk reaction” (or “Pavlovian conditioned response”) has become standard, no matter how necessary or legitimate the services are proven to be.

The government warnings, however, are not as overly broad in scope as the popular misconceptions, and were never intended to discourage or deprive borrowers of licensed professional services that are required for banking compliance and necessary to protect and advance the interests of the borrower.

The US Federal Trade Commission (FTC) most concisely and accurately summarizes all of the fraud warnings of various government agencies, with the following general rule:  “Legitimate offers of credit do not require an up-front payment. … Don’t pay for the promise of a loan.  It’s illegal for companies… to promise you a loan and ask you to pay for it before they deliver.”  The federal agency further clarifies that what is prohibited, and what it warns about, is specifically any offer that “guarantees a loan in exchange for a fee in advance.”  (US Federal Trade Commission (FTC), FTC Facts for Consumers, The Truth About Advance-Fee Loan Scams, May 2005.)

The focus of the majority of fee scams, primarily marketed over the internet and by e-mail, is the sphere of personal credit cards and mortgage loans.  These are basic and public consumer products that do not require any licensed professional services.  International project financing, especially when providing and structuring third party collateral, does require certain licensed professional services in order to comply with banking regulations.  Such costs are in exchange for licensed work product of independent commercial value that is a prerequisite to any lender making a decision.  Obtaining qualified licensed legal or underwriting services is essential to assist and navigate a borrower through the highly regulated, law-intensive and technical sphere of banking transactions. 

The US Department of State clarifies that “legal fees” that are sometimes claimed as costs for an upfront fee scam are not legitimate retainers for real law firm services, precisely because they do not create any attorney-client relationship with any lawyer or law firm.  Such claimed “legal fees” are merely yet another false description among many other justifications (i.e. “registration” fees, taxes, bribes, etc.) for demanding upfront payment, none of which exist because the transactions are entirely fictitious, and all of the payment is taken as pure profits for the fraudsters.  (See: US Department of State, Bureau of International Narcotics and Law Enforcement Affairs, Nigerian Advance Fee Fraud, DOS Publication No. 10465 of April, 1997, page 14.) 

The only time that purported professional services can turn out to be an “upfront fee” scam, is when the terms of the service contract explicitly specify that the payment is, essentially, for nothing of value in return.  For example, some fraudulent financial companies (that are not licensed, and are in fact brokers) charge upfront fees for mere “due diligence review”, which means that they literally review the documents only for their own personal awareness, which is of no value to the client.  To avoid such problems, the client must carefully read contracts that they sign, to ensure that the professional services promised are clearly specified in detail in the text of the contract.

Concept of “Up-Front Fee” Fraud

The term “Up-Front Fee” became synonymous with fraudulent scams after a series of popular schemes beginning in the United States during the 1960’s and reaching their peak in the 1970’s.  These schemes were based upon the promoters promising immediate access to unrealistically low interest rate loans, in exchange for the payment of an upfront fee.  (Professor James E. Byrne, The Myth of Prime Bank Investment Scams, Institute of International Banking Law and Practice, Inc. (3^rd Edition, 2002), p.8, citing Office of the Comptroller of Currency (OCC) of the US Treasury Department, Banking Circular BC 141 of July 7, 1996.)

Commonly, the upfront fee would be in the form of a “commitment fee”.  Much of the fraud involved brokers receiving such fees purportedly on behalf of the lender, which led to the popular “safe practice” of borrowers insisting that they pay the fees only directly to a lender.  That led to many brokers fraudulently claiming to be “direct lenders”, who in fact were only brokers attempting to charge such fees.  According to the US Federal Trade Commission (FTC), “scam artists often impersonate legitimate lenders to entice consumers into falling for their bogus offer.”  (US Federal Trade Commission (FTC), FTC Facts for Consumers, The Truth About Advance-Fee Loan Scams, May 2005.)

The Metropolitan Police Service of London (founded in 1829, traditionally known as “Scotland Yard”, and now located at “New Scotland Yard”), defines and clarifies “advance fee fraud” to be “proposals purely designed to facilitate victims parting with money.”  It explains that fraudulent “advance fees” are paid in reliance on, and collected only on the basis of, fictitious and non-existent financial schemes that “are designed to part the unwary from their money.”  (Metropolitan Police Service of London, Specialist Crime Directorate (SCD) Operational Command Unit (OCU) on “Economic and Specialist Crime” (“SCD-6”), Standing Fraud Alert – “High Yield Investment Fraud”.)

New Scotland Yard emphasizes that the term “advance fee fraud” is really primarily used to describe the infamous “Nigerian scams”, also known by UK law enforcement as “West African” or “419” Fraud (named after Section 419 of the Nigerian Penal Code that makes such fraud a criminal violation, as amended by the Nigerian Presidential Decree No.13 of April 1995 entitled “Advance Fee Fraud and other Fraud Offenses Decree”.).  All of these are based on the false promise of a “guaranteed” or “certain” payment of a large sum of money to the victim.  The windfall profit of money promised is usually claimed to be some “secret” government funds or “hidden” private wealth, and is promised to be shared with the victim.  The fraudsters either represent at the beginning that an upfront payment will be required (such as a “Golden Key” to “unlock” some “blocked” funds waiting to be paid), or more often, “just when the money is about to be transferred some unforeseen difficulty suddenly occurs and fees from the victim are necessary to overcome the problem.”  (Metropolitan Police Service of London, “SDC-6” Economic and Specialist Crime, Standing Fraud Alert – “419 Fraud / Advance Fee Fraud”.)

“Up-Front Fee” Fraud Related to Loan and Credit Applications

The US State Department identifies the central common characteristics of an “advance fee fraud” scam.  “The proposals are unsolicited, emphasize the urgency and confidentiality of the deal, and require the victim to pay various government and legal fees and taxes before receiving what turns out to be nonexistent money.”  (US Department of State, Bureau of International Narcotics and Law Enforcement Affairs, Nigerian Advance Fee Fraud, DOS Publication No. 10465 of April, 1997, page 14.)

According to economic security experts of HSBC bank, the most typical form of upfront fee is limited to an “arrangement fee”, for unspecified intermediary services such as a mere “referral” which in fact does not cost anything.  (Hongkong Bank, Advance Fee Fraud and Banks, Paul A. Collier, Manager of Regional Security.)

The US Federal Trade Commission reports that:  “Often, advance-fee loan sharks claim that their fees will go to a third party for credit insurance or a related service.”  Such “credit insurance” at the early application stage is a complete fiction and such arrangement could not possibly exist.  This is a newer version of the traditional “commitment fee” often abused by scam artists pretending to be lenders, but with updated terminology.  (US Federal Trade Commission (FTC), FTC Facts for Consumers, The Truth About Advance-Fee Loan Scams, May 2005.)

According to the major national USA mortgage company “Lending Tree”, “In an upfront fee scam, a ‘lender’ requires some sort of payment, often called ‘insurance’, before an application has been taken or processed.  No legitimate lender does this.”  It is fraudulent to charge fees for anything directly related to the actual funding process with the final ultimate lending institution, such as “approving a loan, guaranteeing a loan or for ‘insuring’ a loan.”  (Lending Tree, Important Warning About “Upfront Fee” Requests, standing web-site warning.)

Matthew Greene and STILAS avoid accepting any business from the general public.  Consultation is generally provided only to government agencies and banking institutions.  Provision of services to the private sector may be considered only upon introduction through trusted partners or colleagues of Matthew Greene and STILAS.