With the promise of "offshore banking on-shore," First Americans Bank was able to take in more than $6 million from Web-surfing customers in 1997 and 1998, according to court records.
The problem, according to a U.S. prosecutor in Oklahoma, was that First Americans, which had set up an office on Apache tribal land and lacked a federal or state bank charter, existed only to defraud people.
After a two-week trial in April, the two organizers were convicted of mail fraud, conspiracy to commit mail fraud, and money laundering. They are awaiting sentencing. And most of the "depositors" cannot expect to get their money back.
Welcome to bank fraud in cyberspace. Though instances of fictitious banks' bilking customers over the Internet are still relatively rare, regulators and others are watchful, expecting the problem to worsen in coming years.
"The Internet is a wonderful tool, but unfortunately it has created a new way to perpetrate fraud and to be defrauded," said Mark Calloway, a U.S. attorney in North Carolina involved in a recent Internet bank fraud case.
For legitimate banks, Internet fraud casts a shadow on their efforts to build honest relationships with customers in cyberspace. That is partly because many of the illegitimate banks play on the names and reputations of the established ones.
"When you walk into a bank branch you know what you're dealing with," said Thomas Vartanian, head of the financial services practice and Washington managing partner of the Fried, Frank, Harris, Shriver & Jacobson law firm.
He said a question naturally arises on-line: "When you log onto a bank site, how do you know it's that bank? It could be a couple of kids in a garage having fun."
Federal and state banking regulators are stepping up efforts to crack down on fraudulent Internet sites.
Last year Federal Deposit Insurance Corp. investigators found nine suspicious bank-like institutions soliciting business on the Internet, said Jeffrey M. Kopchik, an FDIC senior policy analyst. The names of those institutions were handed over to the Federal Bureau of Investigation, he said.
In time, federal authorities determined that the principals of two phony institutions-First Americans of Anadarko, Okla., and Netware International Bank of Mooresville, N.C.-should be prosecuted.
Court documents in both cases suggest that customers surfing the Web were lured by pitches that, in hindsight, were too good to be true.
According to the First Americans indictment in the U.S. District Court in Oklahoma City, the defendants-Californians Ronald Sparks and Owen Stephenson-posted a Web press release announcing the opening of a "sovereign bank ... authorized under the laws of the American Indians (sic) Nation."
The release stated that "First Americans establishes offshore banking on-shore."
Materials sent to prospective customers also falsely said accounts held with First Americans were "insured."
"What made this bank attractive was the promise of privacy," said Hank Hockeimer, assistant U.S. attorney for the Western District of Oklahoma, who prosecuted the case.
In the Netware case, the fraudulent bank's organizers were said to have established a Web site in late 1996 that offered customers 20% annual returns on savings and other benefits, according to the indictment.
In addition, the indictment said, Netware told customers that they could buy certificates in the bank giving them the right to its profits as long as it existed.
Customers completed "Netware International Distributor Certificates" and faxed or mailed them with their checks for payment to the phony bank.
The indictment also said the principals used the proceeds to buy themselves a boat, an airplane, and a Jeep Grand Cherokee.
Though the organizers-David Allen Bear and James Lee Skeen-initially were charged with wire fraud, mail fraud, and money laundering, they ended up in February pleading to the lesser charge of selling unregistered securities. They await sentencing.
Cases like these may lead legitimate banks to try to assure Internet customers that they are the real thing.
One method under consideration is digital certification, a kind of electronic seal of approval that would indicate to a customer that the institution on a Web site is what it says it is.
The American Bankers Association has set up a for-profit subsidiary, ABAecom, to develop a digital certificate business for banks. Its first service is SiteCertain, which authenticates bank Web sites.
"Banks need to be vigilant," said Thomas sGreco, president of ABAecom. "We are at a nascent time in the market, and if bad things happened it could hurt the development of Internet commerce."