Fed Warns of New 'Prime Bank' Loan Scams

The Federal Reserve Board is warning banks about the latest reincarnation of the so-called "prime bank" swindle, saying in a June 11 advisory that the scam appears to be proliferating.

"The Federal Reserve is not aware of any legitimate use of any type of prime bank financial instruments," the Fed said in the advisory.

Con artists have sold consumers millions of dollars of so-called "prime notes" - and there is no such thing - promising enormous returns for a small investment. The schemers, however, pocket the money, often never paying the investor a dime.

In the most recent scams, the criminals have claimed that the Federal Reserve is backing the investment. The criminals claim the Fed is administering the loan program and supervising prime bank traders.

The Fed said these claims are completely false. "The Federal Reserve does not participate in any manner in any prime-bank-related investment program," the Fed said.

A Fed official said the con artists are not targeting financial institutions. But he said any banker who learns about a prime bank scam is required by law to refer the matter to law enforcement officials.

Prime bank swindles grabbed headlines in the early 1990s, when the World Bank and central banks around the globe first uncovered the scandal. That prompted the Fed in 1993 to issue its first prime bank advisory.

The Fed said some of the most common names for prime bank notes include: Prime Bank Guarantees, Prime Bank Letters of Credit, Prime European Bank Letters of Credit, Prime World Bank Debentures, and Prime Insurance Guarantees.

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