Central Bank warns investors

The Central Bank has noticed a change among unauthorised investment intermediaries targeting the Republic, from schemes involving share dealings to schemes involving lucrative foreign exchange dealings.

Highly unlikely returns, of up to 75 per cent in one week, are being held out as possible in foreign exchange dealings which are difficult for most people to understand and which, when studied, sometimes do not make sense.

The Securities and Exchanges Supervision section of the Bank has also noticed a tendency for unauthorised firms to return to individuals who have already made unsuccessful investments. The return contact, perhaps by an unauthorised company from a different jurisdiction to the one which made the original contact, often involves schemes to encourage the investor to spend more money in order to recoup losses made on the original scheme.

Since August 1st, 1998, when a provision in the Investment Intermediaries Act 1995 came into effect allowing the Bank to print notices warning the public about unauthorised firms believed to be selling into the Republic, notices about 35 such firms have been printed in national newspapers.

Most recently there have been notices published concerning GSG Securities, GKN Securities Corp and Oscar Gruss & Son Inc, firms which are registered in New York but which are not authorised to operate here.

GKN Securities Corp, a New York registered broker-dealer, was the subject of US Security and Exchanges Commission proceedings in 1997.

The company was accused of failing to supervise reasonably a number of registered representatives with a view to preventing securities law violations. The firm paid a $100,000 (€96,034) fine and consented to implement procedures to prevent and detect future violations.

The Central Bank here has been surprised to discover people, often professional or self-employed business people, have sent cheques for large amounts of money to offshore companies which have "cold-called" them at home or at work. Cold calling, where an investment company makes the initial approach to a prospective customer, is contrary to the terms of the licences given to authorised investment firms. In some cases the Bank has learned of people who have given six-figure sums to unauthorised investment firms.

In general the unauthorised firms seem to prefer self-employed people and often get personal details from databases such as share registers or mailing lists for foreign magazines. The share registers of exploration companies are a particular favourite. On occasion the firms have a considerable amount of financial information about the person they are calling.

The investment companies often produce expensive and impressive documentation which they may send by courier to persons they believe are interested in the shares or dealings being offered.

The Bank has noticed new companies producing brochures identical to companies which have been closed down, the new name being the only difference. The companies can tolerate significant costs because they are usually quite profitable, with temporary offshore operations sometimes netting many millions before they close down.

There is a small population of individuals who work for firms which set up in offshore locations, sell into other jurisdictions without proper authorisation, and close after a certain period. The individuals, who are paid high commissions, then move to new operations which are set up in the same or other jurisdictions, sometimes bringing client lists with them.

It is believed there is an agency in Canada which supplies experienced personnel to new operations.

Return approaches to investors who have already lost money can involve schemes whereby clients are told an investor wants to make a hostile takeover bid and needs the person's shares. The caller will say the investor wants to buy back the now almost worthless shares for the original purchase price, plus a percentage. All the Irish investor has to do is place a certain amount in an escrow account, or pay for insurance to cover the safe arrival of the share certificate.

Irish people have made investments in ramped up technology or health company shares which have subsequently plummeted in price.

Previously the firms would try to suck investors in by beginning with solid, legitimate investments before moving into more obscure shares, but this is no longer the case.

People have taken up offers to buy obscure Internet stocks, or shares in firms which allegedly own the patents to likely cures for AIDS.

Usually, the investment firm gets individuals in one jurisdiction to invest in shares from another jurisdiction, by way of sending money to a third jurisdiction.

The multinational framework makes it unlikely that prosecutions will ever be brought against the firms concerned.

In general, the advice from the Central Bank is to check that a firm is authorised before making an investment. Alarms signals to look out for are promises of huge returns, requests to send money to foreign jurisdictions, and, of course, cold calling, which is against the rules for authorised investment firms.

The Bank has a dedicated, low-cost number, 1890 200 469, for people who wish to make enquiries.

People who have been contacted by suspicious firms are also invited to make contact with the Bank, which is particularly interested in receiving documentary material received from unauthorised companies.