Phantom Banks Vanish With Investors’ Cash : Securities: United States and Canada warn of surge in rogue entities that offer incredible returns.

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 deposits.

* 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., which 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 senior citizens, 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. 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.

The investments range from CDs to so-called prime bank notes, a phony type of credit letter or debenture.

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 listed more than 200 entities operating illegally in both the United States and Canada.

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.