Every few months I have a different client (usually a start-up, but always one that has been looking for investors) that thinks they have found gold in a new connection. The intro is nearly always the same:
The investor is ready to invest. They are an intermediary for a European family office. To move the funds, they are going to provide a standby letter of credit . . . .
When I hear “standby letter of credit” in close proximity to “European family office” all of my red flags are flying.
What clients need to know is that these words almost always precede a well-established scam.
The prospective “investor” (I will call them the “scammer”) tells the business founder that the investment is just around the corner. The scammer will provide formal looking documents with impressive sounding titles (“Deed of Investment”, “Irrevocable Funding Commitment” etc.) but when pressed for when the cash will actually arrive the scammer will provide excuses. A “Treasury Department hold” on the wire transfer is a frequent excuse. At some point, the scammer will tell the business founder that the last step in the process is to pay the investor’s lawyers their “due diligence fee.” One paid, we’re told, the investment will arrive. If the business founder pays the “due diligence fee” (or “escrow deposit” or however the amount is titled) the scammer disappears.
In another variation on this theme, the scammer sometimes is an intermediary who is representing the investor through a daisy chain of introductions. The last link in the chain may have some distant acquaintance to the business founder but the next link in the chain may be a new introduction. In this variation, the “scammer” honestly believes the truth of what they are saying and are unaware that they are a catspaw in another party’s scheme.
A business founder who finds themselves bilked in a scheme like this has almost no recourse. The scammer they met has either disappeared or was an unwilling (and unaware) accomplice in a lengthy daisy chain of deceit. The connections between the individual involved is almost always consummated by telephone or (email) and the identity of the ultimate parties involved is impossible to prove.
I have found myself dozens of times having to convince clients who are convinced they have found a solution to their financing needs that they have been blue-pilled. The scam has been well-documented and there are FAQs to identify the scam’s fact patterns from the U.S. Treasury Department, the Securities and Exchange Commission and the FBI. Although convictions are few, when reported, they all fit the same pattern (UK conviction, New Jersey conviction, Florida conviction).
So, as a public service, here are the warning signs:
- The investment offer sounds too good to be true
- The ultimate investor is not identified (or cannot be met in person)
- The investor is not interested in your business plan or the terms of your investment
- The amount of the investment is more than what you were hoping or expecting to get
- The method of conveying the investment funds to you is complicated or unclear (there may be letters of credit, prime bank notes, or insurance wrappers, involved)
If you find yourself on the receiving end of a pitch that sounds like this, run away.