Citicorp Financial Services, or Liberty Bank and addresses from San Diego to Manhattan. There's only one problem: They don't exist. Regulators call them "phantom banks," and they are the bane of law enforcement agencies and investigative units at legitimate banks. Despite efforts to curtail them, they crop up year after year, perpetrating frauds that range from a couple of thousand dollars into the tens of millions. "They're a major problem," said a ranking federal regulator who asked not to be named. "Ask yourself: Just how many of the 90 million people out there using banks are going to call up a government agency to find out if the institution they're dealing with is legitimate?" "It's a growth industry," added a senior investigative official at the New York State Banking Department. "The ingenuity out there is unlimited." For banks, phony counterparts that use similar names can threaten their reputations. "Our name is a valued asset, and we are alert to any misuse of it," said Richard Mahony, a spokesman for J.P. Morgan & Co. "We have been quick to respond to instances where people have suggested they were affiliated with us." In the last two years, the Office of the Comptroller of the Currency has sent out alerts concerning 65 entities claiming without authorization to be or attempting to operate as banks. But regulators and law enforcement officials said this is only the tip of the iceberg. "That list covers only a small percentage of the ones out there, and only the ones that have been caught trying to do business in the United States," said one regulator. He and others estimated that several thousand such fictitious entities have been registered around the world and that several hundred are in operation. Many of these phony banks advertise their services in local newspapers and international business publications, offering loans for a large up- front fee and deposit accounts at higher-than-market interest rates. They often also sell false letters of credit or nonexistent securities such as "prime bank notes" or "prime bank guarantees." The frauds stretch across several countries via complex networks of shell companies, making investigation and prosecution even harder. Victims, many of whom transferred funds illegally out of their own countries, are usually reluctant to step forward. "By the time it comes to our attention, it's usually too late to do anything," said another official of the New York State Banking Department. If there are no American victims, he added, U.S. authorities lack grounds to prosecute. Although some names phony banks use are farfetched, many are close enough to those of well known financial institutions to create confusion - and headaches for the real banks until the fraud is exposed. "You tend to see names like Morgan tucked in the middle," said a banking lawyer who has been involved in a number of cases and who declined to be named. "A lot are intentionally designed to sound like they're affiliates of the legitimate guys." "Banks don't have copyrights on their names," pointed out one regulator. So criminals "play on words like First Security or Chartered American. There was even a Chase Manhattan registered in Montserrat," a Caribbean island. The latest round of phony banks is hardly the first and probably not the last, regulators said. Eight years ago, for example, international pressures forced Montserrat to cancel the licenses of more than 100 fraudulent banks, many set up by Americans who swindled victims out of tens of thousands of dollars in fees and deposits. Part of the problem, U.S. regulators said, lies in the ease with which a company with the word "bank" in its name can be incorporated in offshore banking centers which do little to verify the credentials of applicants or supervise their activities. They cited St. Lucia, Antigua, and Barbados in the Caribbean; Cyprus in the eastern Mediterranean; and the South Pacific island nations of Western Samoa, Nauru, and Vanuatu as among the locations where financial con artists are now getting banking licenses. "These countries have no supervisory or regulatory control, but they do have strongly enforced secrecy laws," the same regulator said. "That makes it virtually impossible to get information out of them that's essential to our investigations." Equally troublesome, some regulators said, are low fees and loose laws on incorporating companies with "bank" or "bancorp" in their names in states like Delaware, Wyoming, and Nevada. Nevada, for example, prohibits using the word "bank" unless it is approved by the commissioner of banking but allows using "bancorp." Some regulators said efforts to get laws toughened in these states are inadequate. But banking officials in the three states insist that current safeguards against incorporating phony banks are adequate. In Nevada, a senior official who declined to be identified acknowledged instances in which a company with "Bancorp" in its name had attempted fraud, but he said he knew of no legislative plan to change the law. Bruce Hendrickson, Wyoming's banking commissioner, emphasized that any group or person seeking authorization from the Secretary of State's office to incorporate using the word "bank" has to pass his scrutiny first. "We feel the procedures in place are adequate," Mr. Hendrickson said. He added that he was unaware of any abuse. Tim McTaggart, the Delaware banking commissioner, vehemently contested complaints from regulatory agencies outside the state. His office has regularly cooperated with other regulatory authorities in fighting fraud, he said, and a procedural change adopted in 1994 requires any entity seeking to use the word "bank" in its name to pass scrutiny by his department. "I'm a little concerned people say there are problems without identifying a specific matter," Mr. McTaggart said. "We've taken a tough position since the new procedures have been put in place, and to my knowledge there have not been any problems." Regulators and law enforcement officials said that, although they can hope to limit banking fraud, they will probably never be able to stamp it out. And they worry that their task may be made more difficult as Internet use increases. Three phony banks operating on the Internet have been uncovered by the Comptroller's Office, including "The First Bank of Internet," whose address is a Chicago post office box. "The Hip National Bank," based in Los Angeles, and "The First National Bank of Cyberspace," based in Rockville, Md., have also been discovered. "The Internet is going to become a major problem as legitimate banking cranks up on Web sites," said a senior federal regulator. "We're making a major mistake promoting Internet banking with no controls in place. That opens a fertile field for con artists."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.