Phantom Banks Bilk Investors Out of Millions : Fraud: Number of fake institutions is rising. Experts say deals too good to be true probably are.

Preying on small investors and businesses hungry for higher returns, sham banks that sell phony investments are cropping up around the country, bilking unsuspecting customers out of millions of dollars.

Using official-sounding names and fancy addresses, these phantom banks, as regulators call them, aren’t really banks but fake companies that exist only on paper.

Federal banking authorities say the scams are masterminded by con artists who promise investors huge rewards in return for a large fee or deposit. But when the time comes for investors to receive their payouts, the bank and investors’ money are nowhere to be found.

“It’s a major problem that has not abated,” said John Shockey, special assistant to the federal Comptroller of the Currency and an expert on banking scams.

In the last 18 months, several phantom bank schemes have caught the attention of regulators and law enforcement officials. Among them:

* A bank in Rochester, N.Y., claiming affiliation with a legitimate banking company in the former Soviet Union, sold millions of dollars of phony certificates of deposit.

* A Miami investor lost $2 million after people in Toronto claiming to represent a bank licensed on the Caribbean island of Montserrat sold bogus five-year CDs. Canadian banking officials said the crooks targeted Americans for schemes involving phony CDs and large loans requiring an upfront fee of $5,000.

* Investors in Germany and other European countries were bilked by a phony U.S. bank called First American Insurance and Banking Corp. that lured customers by advertising high-interest savings accounts in local papers.

Regulators say the scam banks may target wealthy people and pose as financial planners with a great investment opportunity. They also prey on elderly people, immigrants and people who can’t obtain loans from real banks because of bad credit history.

The number of phantom banks is on the rise, officials say, because real bank CDs pay low rates and investors are looking for better deals. Rogue banks lure customers with CDs or other investments that they claim have interest rates of 25% or higher.

Scams are also increasing because people are enticed by stories of high-yielding overseas investments. Many phantom banks claim to deal in securities or bank notes arranged by foreign banks or through offshore accounts.

Shockey said the schemes work like this: Criminals line up investors by placing ads in local and national newspapers about the investments themselves or about tax planning and brokerage services.

The investments range from CDs to so-called prime bank notes, a phony type of credit letter or debenture. The phantom banks usually require investors to buy the notes or the CDs and they promise big returns within a specified period of time.

Although they may have official-looking documents and may list addresses in major financial districts, the banks often don’t have real offices. Some use post office box numbers, while others are registered in the Caribbean.

“We’re seeing more of it,” said Larry Sweeny, in charge of special situations at the New York state banking department.

This summer the Federal Deposit Insurance Corp. sent to all banks it supervises a list of more than 60 entities that are conducting banking businesses illegally or without regulatory authorization. The Canadian government separately issued a list of over 200 entities operating illegally in both the United States and Canada.

But by the time these phantom banks make the watchdog list, the damage already has been done. The FDIC, the Comptroller of the Currency and the Federal Reserve Board usually find out about the phantom banks from real bankers whose customers have been contacted by the rogues or from consumers who have been victimized.

Although the agencies warn financial institutions about the phantom banks, consumers are often on their own.

Shockey said investors should be on the lookout for products that promise exorbitant returns.

“If it sounds too good to be true, it probably is,” he said.

It’s difficult to prosecute the criminals who run phantom banks because many times the victims are unwilling to press charges or the schemes take months to unravel, Shockey said.

To convince investors that it was legitimate, First American Insurance and Banking Corp. furnished prospective customers with a list of federally-insured banking institutions that had been purchased from the FDIC. It altered the list to include itself.

Carole Mesheske, chief of special activities at the FDIC’s division of supervision, said the bank was not insured by the federal agency.

First American, headquartered in Delaware with an office in New York, took deposits from numerous investors. But the investors found they couldn’t contact the bank when they wanted their money back, banking authorities said.

The bank’s Delaware and New York phone numbers are out of service, and its New York office, supposedly in a Fifth Avenue office building, doesn’t exist.

Mesheske said the agency has received numerous complaints from investors who have lost large sums of money through the bank.

The FDIC is working with banking and law enforcement authorities to track First American down, Mesheske said. In the meantime, the agency has issued a special alert to U.S. banks warning them to be extremely cautious of any transactions involving First American.

Warning Signs

Federal regulators say there are warning signs that can tip off consumers to phantom, or phony, banks:

* Newspaper ads, letters or pitches for letters of credit, prime bank notes, or other investments that promise returns beyond current market rates.

* Ads for loans that consumers can obtain despite a bad credit rating.

* Loans or letters of credit that require upfront fees.

* Methods of obtaining loans or bank notes that are overly complex or sketchy.

* Transaction involves the use of offshore accounts or financial institutions in the Caribbean.

* Name-dropping, or claims that the investments or loans are arranged or somehow backed by large, globally recognized financial institutions or a “big-name player.”

* Documentation looks amateurish, contains misspellings or grammatical errors.

* A bank is not listed or registered with state or federal agencies.

* A bank’s office is not at the address it gives out, and the phone number is either unlisted or out of service.