Your company needs money and your bank won’t lend it. You look for a business loan online, and within days a broker offers your company a Prime Bank Guaranteed (PBG) loan. If you accept, you will be the victim of one of the oldest scams in the world.
How a Prime Bank Guaranteed loan is pitched
Most PBG brokers aren’t in on the scam. They’re victims too, expecting to make their fortune from commissions on your loan. Since you’ll never get the loan, they’ll never be paid.
The unsophisticated PBG broker represents the swindler, and the offer is simple: “I’ll lend you the money if you get a major bank to guarantee repayment.” The swindler represents a small tax-haven bank or insurance company that often lacks the assets to make the loan. “Guarantee” means the major bank must deposit the loan amount and the interest with this financially unsound tax-haven entity.
Why real banks never guarantee these loans
Banks don’t guarantee business loans like this. They would face two risks:
- You can’t repay your loan.
- The unsound tax-haven bank or insurance company, run by a crook, steals their money.
A bank’s reward for taking a financial risk is the interest on the money it lends. In a PBG loan, the tax-haven entity earns the interest. For the guarantor it is a lose-lose deal, and major banks will never agree to it.
How the front fee is collected
A PBG loan is a textbook front-fee scam. The simplest version demands the front fee, usually $25,000, with the loan application. That fee is the only money the swindler expects to get from you, which makes it the least profitable version.
The more profitable version lets you apply without a front fee. You try to get the prime bank guarantee and fail. The swindler then recommends a financial consulting firm, his offshore partner, which assures you it can get the guarantee but requires a large retainer. The swindlers split $75,000 to $100,000. The victim pays the retainer because the swindler didn’t charge a front fee, so surely he must be honest.
Front fees are standard in finance. Attorneys, accountants and consultants call them retainers, stockbrokers call them non-accountable expenses, and service firms call them advances. Some firms deliver and some don’t. Swindlers use the fact that front fees exist to bilk businesses. They never perform, they pocket the money and move on, and if the offer is structured properly it is nearly impossible to take legal action against them.
Checking out the people you’d pay
A front fee requirement isn’t a measure of honesty. Past performance is your best guide to choosing financial help.
- Don’t rely on references. At best they mislead. At worst, crooks use other crooks to supply glowing references.
- Contact the Better Business Bureau and local law enforcement to find out whether anyone has filed a complaint against the firm or its principals.
- If the firm hasn’t been at the same location for several years, check with the Better Business Bureau in its past locations too.
- If you must pay a substantial retainer, consider hiring a background research firm to investigate the firm or person.
A real case: $200 million in certificates that didn’t exist
An Asian bank once asked the author’s advice on a loan package from an American company headquartered in a Caribbean tax haven. The audited financial statement was impressive. As collateral for a $120 million loan, the package offered $200 million in certificates of deposit at a major European bank: 40 CDs of $5 million each, deposited by a well-known Middle Eastern group.
A form letter from the European bank confirmed it held the money for the group. A form letter from the group told the bank to pledge the deposits, but not the interest, as collateral for five-year loans. It was a Prime Bank Guarantee loan, and the Asian bank wanted to know if it was real.
The author asked the American company why the Middle Eastern group didn’t simply lend them the money. They said the Koran prohibits Muslims from lending money and collecting interest. Since the group was earning interest at the European bank, that made no sense.
He faxed the Middle Eastern group and never got an answer. He faxed the European bank, which said it issued its letter for credit purposes only and had never seen the group’s authorization letter. The CDs’ deposit term also ended nearly a year before a lender could claim them.
The CDs were mythical money. When the lender went after them on the defaulted loan, they wouldn’t exist. The audited financial statements, prepared by an accountant, were pure fiction.
Whether you’re a banker or a businessperson, always investigate before you risk your money. If it is a Prime Bank Guarantee loan, assume it’s a scam.
Don’t prepay loan fees
If a company is a good credit risk and can prove it, it doesn’t need to prepay broker fees. If it isn’t seen as a good credit risk, it is unlikely to get a good loan until it can prove its creditworthiness.
No doubt some companies have secured loans by prepaying broker fees. In the author’s experience, more have simply lost much-needed cash that would have been better spent making the company a better credit risk.
