Palms & Company Document

"Prime Bank Notes" Scam Hits Russia

by

Dr. Pyotr Johannevich van de Waal-Palms

OLD PRIME BANK NOTE SCHEME NOW BEING USED

IN RUSSIA AND THE BALTICS

Some people believe that if they can get a commitment of funds first from someone, using the representation (claim) of the availability of a "Prime Bank Guarantee", they will be able to use such committed (promised)funds to buy a "Prime Bank Note" (Guarantee) at a discount and keep the spread ( the difference between the funds and the cost of the guarantee).

Although it is possible that some Lithuanian or Russian banks might accept the "guarantee" of a another Lithuanian or Russian Bank, western Banks will not.

Although Lithuanian or Russian banks may sell their guarantees for 15% of their face amount, Western banks will not. That is because Western banks know that payment of their note can be enforced against them. Since it can, they might as well lend the money directly to the party who wants to buy their guarantee. Their risk is the same in any event.

Russian and Lithuanian banks know that payment cannot be enforced against them and so they consider the 15% income, without necessarily worrying about the contingent liability which would arise to another bank that accepts their note as collateral for a loan to a third party. Such liability would exist in the event the third party who borrowed from another bank did not repay the loan. One could say that Lithuanian banks only consider their guarantee worth 15% at the time of issue. If the third party does repay the loan and retrieve the collateral it also leave open the question that they now have a right to demand full payment of 100% of such note from the original issuing bank. This is insanity.

Some people believe that Western banks will sell their guarantees for less than the full face amount. They believe the bank will do this because it can treat the "note" as part of its "paid in capital" and not as a liability. They further believe this capital increase permits the bank to make additional loans in an amount several times that of the note(capital). They believe further that because the bank can make profits from these loans the bank is willing to sell such notes for less than the ace amount.

I have personally discussed this with most of the 50, largest banks in the world and they say they have no interest in selling such instruments and can sell obligations at full face value without any discount and at interests rates much lower than those which are represented to be paid on such "prime bank notes".

The people who bring such proposals are never banks and never are able to first produce contact from the bank, which is purported to be the proposed issuer. They always want the guarantee of funds before they identify the bank which will issue the "prime bank note". In fact they usually just say it is a "group" of prime banks, or they say it is very secret and the bank will only deal through them and not directly with any buyer. But they hope to use the funds to buy the guarantee for a discount and keep the spread.

Of course if any bank was willing to sell a prime bank guarantee at a discount, I would simply buy the note. I don't need to let someone else buy it for a discount and keep the discount. No other bank needs to do this either. All banks know each other and if any bank wanted to sell a "note" for a discount other banks would buy it directly and not through an intermediary who wants to keep such a discount The assumes that such a discount is available from other banks, which it is not.

The mistaken believe of proposers, or the parties that tell the proposers these stories, is that they can bring together two banks, one a lender and the other a borrower and somehow they can retain a difference in the price so that they can keep some money for bringing these two banks together. It never happens.

This is not a question of credits for a company. It is loan brokering between banks. Banks don't need an intermediary to conduct loan brokering between banks. Unfortunately it doesn't exist. Ask any western bank or bank attorney.

I recommend our clients do not waste time on such proposals as they do not exist. If they did exist I would conduct them myself.

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Date last Revised: September 10, 1997