Island Bank King Profits as Industry Faces Scrutiny

Six years ago, Jerome N. Schneider was telling a skeptical U.S. Senate subcommittee about the honest workings of the shadowy world of private offshore banks.

An example of how it should work, Schneider said, was a bank he had established on the tiny Caribbean island of Montserrat and then sold to J. David Dominelli, an investment adviser who was the toast of San Diego back in 1983.

“J. David Banking is used as an intermediary for foreign exchange currency trading to channel investment dollars into the United States in a wholly legitimate manner,” said Schneider. “It is this type of activity that underscores the legitimate uses of offshore banks.”

In reality, about the only place J. David Banking channeled money was into Dominelli’s pockets. Today, he sits in federal prison in Pleasanton, Calif., serving 20 years for bilking investors out of $80 million in one of California’s most infamous fraud schemes.

Today, Jerry Schneider sits in a suite of offices in Beverly Hills, still the self-proclaimed foremost authority on offshore banking. He runs a thriving enterprise peddling personal offshore banks as a ticket to power, profit and privacy--starting at just $29,500, no experience required.

But offshore banks also can be a ticket to money laundering, tax evasion and assorted other frauds in the eyes of banking regulators and law enforcement authorities. So Schneider’s longstanding position as the most prolific creator of these entities has brought some unwanted attention to the intensely private, baby-faced Los Angeles businessman.

Federal investigators attend his seminars to monitor the advice he offers prospective buyers, and Schneider has become a prominent figure on many of the islands where he has helped create booming businesses in offshore banking.

The mud that the bad guys stir up occasionally splatters Schneider, although not enough has stuck to put a dent in his prospering operation. However, there have been some embarrassments, such as his ringing endorsement of J. David Dominelli.

Schneider says today that he was one of many people fooled by Dominelli. He says the background check his company does on all buyers found that Dominelli was clean. Anyway, he says, the bank was “merely a tool, just like his fancy offices,” in Dominelli’s massive fraud.

Often these shell banks are little more than props for scams, nothing but a brass plate on the door of an island lawyer and a license to steal. All sorts of con artists use offshore entities to issue reams of impressive-looking letters of credit, certificates of deposit and cashier’s checks that are not worth the paper they are written on.

Fraud Cases Investigated

In a case being investigated by the FBI and Scotland Yard, at least eight people paid nearly $450,000 in fees to a Montserrat bank with the promise of receiving loans of more than $55 million each in return. The loans have never materialized.

Among the apparent victims are a Chicago union official who invested his life savings in the hopes that the union could use the loan to buy the ailing railroad that employs its members, and some executives trying to rescue a troubled Los Angeles business, according to a federal law enforcement official.

A Southwestern bank recently cashed a $36,000 cashier’s check drawn on another Montserrat bank. Only after the customer and the cash disappeared did the bank discover the check was worthless.

In another case, a former California chiropractor who claims to be a former CIA agent has been sued by the state of Oregon for using two offshore banks to try to sell illegal certificates of deposit.

Tracking this flow of fraudulent paper and other problems is difficult. Victims are frequently too embarrassed to come forward, while others who lose money may have been operating on the fringes of the law themselves.

“Offshore banks have been a constant, continual problem that you know is out there and you just don’t know how much of it there is,” said Robert B. Serino, deputy chief counsel at the Office of the Comptroller of the Currency in Washington, the federal agency most active in monitoring offshore banks. “They give people credibility. They give people what looks like money that they can do deals with. They turn out to be worthless.”

College Dropout

Earlier this year, the Federal Deposit Insurance Corp. warned U.S. banks about dealing with 43 offshore banks, mostly chartered in Montserrat. But a federal banking regulator said that number is only a fraction of the problem banks that have sprung up in recent years.

At the center of this wave of offshore banks for more than a decade has been Jerry Schneider, a 38-year-old college dropout who is the president and sole owner of WFI Corp.

Schneider says WFI has sold about 700 offshore banks since 1975--including 200 in 1987 alone. Their names are often similar to well-known domestic banks--Chase Overseas Bank, City International Bank, Morgan Overseas Bank and First American Bank.

He also has written books on the subject, such as “How to Profit and Avoid Taxes by Organizing Your Own Private International Bank,” and conducts seminars nationwide for prospective buyers.

Schneider says offshore banks have legitimate uses for businesses and individuals, including tax advantages and financial privacy. He likes to point out that large U.S. companies and domestic banks operate profitable offshore banks.

A recent piece of WFI promotional literature proclaimed: “Owning your own Private International Bank may enable you to obtain hard-to-get loans, privileged credit information, free product samples, and access to political leaders and other VIPs!”

Pre-Printed CDs

Sample letters in the literature offer to help bank owners “open doors.” One letter seeks free product samples. Another demonstrates how to arrange an appointment with a member of Congress by identifying the bank “customer” as a wealthy depositor who contributes to political campaigns.

Schneider’s banks come equipped with an impressive leather binder that contains various corporate memoranda and such useful items as pre-printed certificates of deposit and letters of credit.

Domestic banks and some big corporations and investment houses do have legitimate uses for offshore banks. But banking regulators believe few individuals who purchase private banks find honest ways to use them, and there have been frequent calls for tighter regulations on them.

However, the authorities have found no illegalities in the way WFI charters and sells banks, despite frequent government scrutiny. Indeed, one ex-federal investigator said he attended a WFI seminar a few years ago and saw undercover observers from three other government departments scattered among the audience. A federal securities lawyer who was among about 200 people at a recent WFI seminar in New York said he found no evidence that speakers, including Schneider, advocated violating the law.

Further, the sales agreements used by WFI caution buyers to consult an attorney before engaging in any banking activities in the United States.

40-Day Jail Term

“Obviously, an offshore bank can also be used for illegitimate purposes--but, as is the case with almost every business entity, any misuse is a function of the motives of the people controlling the bank, rather than of the bank structure itself,” said Schneider. “And, we counsel and advise our clients only on the legitimate uses of offshore banks.”

Schneider declined to be interviewed by The Times, although he responded in writing to written questions about his business and his background.

Schneider, who lives with his wife, Joan, in the Hollywood Hills, grew up in the Cheviot Hills neighborhood on the West Side of Los Angeles and graduated from Hamilton High School. His father owned a shoe store in East Los Angeles and his mother was a homemaker.

He has said he studied film, business and engineering at two colleges and UCLA in the late 1960s and early ‘70s without obtaining a degree.

In 1972, Schneider pleaded guilty in Los Angeles Superior Court to stealing equipment from Pacific Telephone and he served a 40-day jail term. He admitted tapping into phone company computers, ordering material delivered to company sites at specific times and dispatching men to arrive early and take the material, which was later re-sold.

Schneider told a Times’ reporter in 1973 that the scheme netted $1 million worth of equipment; the phone company put the figure at $65,000.

After jail, Schneider tried to profit from his expertise by teaching companies how to protect themselves against computer theft. But there apparently were few takers and he moved to New York, where he says he worked as a financial adviser to private clients.

1980 Lawsuit

Upon returning to Los Angeles in 1975, he set up Jerry Schneider & Co., the predecessor to WFI, and soon found his calling selling offshore banks to individuals.

In 1980, Schneider ran into a little legal trouble again. The Los Angeles County district attorney sued him for failing to substantiate claims by WFI in two Wall Street Journal advertisements. Schneider paid a $2,500 fine and agreed to refrain from future claims that could not be substantiated, according to court records.

In May of 1983, the U.S. Senate Permanent Subcommittee on Investigations held hearings on the boom in crimes using offshore banks.

The committee subpoenaed Schneider as a witness. Under some unfriendly questioning, he defended offshore banks and said he had sold 150 of them, including the one to Dominelli.

He told the panel that he was paying $350 per bank charter in the Marshall Islands, where he was operating at the time, and records show he was selling them for $20,000 each.

A chief sales tool then and now are the sales seminars sponsored by WFI and other promoters. As many as 300 prospects pay $385 apiece to attend, and promising candidates are invited to post-seminar cocktail parties to discuss their interests individually with Schneider and others.

Mint Owner’s Experience

Alfred Letscher, a Lancaster business executive, was invited to such a cocktail party in October of 1984 in WFI’s offices after expressing interest in owning a bank in the Marshall Islands. He spelled out how the system works as part of a lawsuit he later filed against WFI.

Letscher operates a small mint in Lancaster, along with several other businesses, and was negotiating to produce coins for the chain of islands in the Pacific Ocean. He thought the bank would be a vehicle for helping sell the coins.

In a sworn statement in connection with his suit, Letscher said he met briefly with Schneider and longer with WFI’s executive director at the time, Robert G. Buchsbaum. In his own statement, Schneider recalled that Letscher pulled $2,000 in cash out of a money belt hidden in his sock as a down payment.

WFI was to supply a registered agent who would represent the new bank in the islands, the court papers said. The man was identified as Toke Sawej, a former finance minister for the islands. He received $500 per bank per year to represent institutions sold by WFI.

In response to a Times’ question, Schneider said that Sawej was hired at the suggestion of Amata Kabua, president of the islands at the time. He said Kabua told him that WFI’s previous agent had fallen out of favor, for either “personal or political” reasons.

Sued for Refund

Not long after Letscher paid for his bank, pressure from U.S. banking regulators caused the Marshall Islands government to enact stricter regulations for offshore banks, including requiring owners to put up $250,000 in capital instead of the previous $10,000.

Letscher felt he could not afford the $250,000, so he asked WFI to return the $20,000 he had paid for the bank plus the $10,000 he had put up as capital. When he did not get all his money back, Letscher sued WFI in Los Angeles.

Schneider said in response to a Times’ question that WFI had refused to return Letscher’s money because the company felt it had fulfilled its obligations to him. The lawsuit was recently settled after an arbitrator awarded Letscher $35,000.

The new regulations in the Marshall Islands meant that WFI had to look for a more receptive island for its bank charter business, but that has rarely been a problem. Lured by promises of becoming a financial center, many islands have opened their doors to offshore banking at Schneider’s urging.

Some islands have found that the revenue was not worth the international notoriety that accompanies the description “offshore banking haven,” and they have tightened restrictions and sent WFI packing.

Nonetheless, Schneider’s business has continued to boom. He said he sold 200 banks in 1987 alone. And the price has risen to $29,500. Recent purchasers say other fees and costs push the price to $35,000.