The big Vanuatu fraud

The big Vanuatu-fraud

OVERVIEW

This Word file contains statements made by expert witnesses in criminal case number 07 of 1996 in the Supreme Court of the Republic of Vanuatu. The statements come from a document with the title "Introduction to World Bank Credit Instrument Trading." The expert witnesses were read sections from the document and then testified about those sections. I will put the sections from the document in all capital letters. The expert witnesses are:

Miss S. Kuo who at the time of the trial was Assistant Director of the International Chambers of Commerce (ICC) in the United Kingdom.

Mr. Gerald Halliday who at the time of the trail was the Manager of the Foreign Reserves of New Zealand.

Mr. J.W. Shockey who at the time of the trial had been working with the United States Treasurer since 1943.

THE STORY

IN MOST COUNTRIES, TRUSTS, INSURANCE COMPANIES AND PENSION PLANS ARE PROHIBITED FROM PURCHASING THE BANK DEBENTURE INSTRUMENTS FROM THE PRIMARY MARKET; INSTEAD THEY ARE RELATED TO THE SECONDARY MARKET.

PRIME BANK INSTRUMENTS ARE ISSUED ON AN ONGOING BASIS, USUALLY BY THE TOP 100 WORLD PRIME BANKS. MOST LOWER RANKING BANKS WILL HAVE TOP 25 OR 50 RANKING BANKS WRAP THEIR PAPER IN ORDER TO COMMAND A BETTER PRICE. THE ISSUANCE OF THIS TYPE OF CREDIT INSTRUMENT IS DONE IN EUROPE AND IN EITHER US DOLLARS OR DEUTSCHEMARKS.

BASICALLY, INSTRUMENTS (PAPER) ARE ISSUED IN USD 500 MILLION LOTS. WHEN A BANK DECIDES IT WANTS TO ISSUE PAPER, IT MAY BE IN LOTS OF 500 MILLION, 1 BILLION, 5B (NOT OFTEN), 10B (VERY RARELY). BANKS INTENT OF ISSUING PAPER WILL WORK THROUGH ONE OF A SMALL GROUP OF MAJOR BANKS THAT DEAL IN THIS AREA ADMINISTRATIVELY. THESE ADMINISTRATIVE BANKS DISTRIBUTE THIS PAPER BY MEANS OF SUPPLY CONTRACTS THAT EACH HAS ISSUED TO PRIVATE (NON-BANKING) ENTITIES KNOWN VARIOUSLY TO THE BROKER COMMUNITY AS COLLATERAL COMMITMENT HOLDER, SUPPLIERS, PROVIDERS ETC. A BANK WANTING TO ISSUE PAPER WILL PUT OUT (ALMOST LIKE AN OFFERING CIRCULAR FOR A STOCK OFFERING) TO ONE OF THE ADMINISTRATIVE BANKS (WHICH HAS A LOT OF CONTRACT HOLDERS) NOTICE OF AVAILABILITY OF INSTRUMENTS/NOTES/PAPER. THE ISSUING BANK VERY SIMPLY DRAWS UP A LETTER WHICH IT SENDS TO EACH OF THOSE ADMINISTRATIVE BANKS THAT SAYS THIS IS WHAT I HAVE AVAILABLE AND THEN IT GOES ON A MENU. WHEN CONTRACT HOLDERS (COLLATERAL COMMITMENT HOLDERS, SUPPLIERS ETC.) COME TO BUY PAPER ON BEHALF OF THEIR CLIENTS, THEY WILL FIND THESE NOTES ON THE MENU.

Kuo said:

This statement is not correct. The primary market does not exist; the secondary market does not exist.

Firstly, there are no Prime Bank Credit Instruments, so it is far from reality.

The second paragraph of 3.1 (starts with BASICALLY, INSTRUMENTS (PAPER) ARE ISSUED…) is not correct.

Halliday was not asked to give evidence directly on this point.

Shockey said:

There is no market at all. No primary market, or secondary market.

It is inaccurate even for legitimate securities. In many instances a pension plan is often the first lender.

No legitimate bank uses the word "prime", unless "Prime" actually appears in the name of the bank, e.g. "Prime Bank of …"

If the promoter uses the word "prime", it is a red flag.

The expression "Top 100 World Prime Banks" does not make clear whether it is by size or ranking.

I have not seen the term "wrap their paper" in legitimate banking at all.

I have never seen a $5 billion issue at all, let alone a $10 billion one.

I have never heard of the term "administrative bank" either in USA or Europe.

The term "menu" is not used in legitimate banking.

I have seen these terms in this type of promotion.

JUST AS SEVEN OF THE MAJOR EUROPEAN BANKS ACT AS ADMINISTRATIVE BANKS OR CLEARING HOUSES FOR BANKS ISSUING THIS PAPER, SO ALSO DOES THE FEDERAL RESERVE BOARD. IT IS ALL THE SAME PAPER IRRESPECTIVE OF WHETHER IT IS SOLD THROUGH THE FEDERAL RESERVE OR THROUGH THE EUROPEAN ADMINISTRATIVE BANKS. EACH ACTS AS AN UNDERWRITER WHO GOES OUT TO THEIR BROKER-DEALERS (CONTRACT HOLDERS) AND SAYS "SELL IT".

Kuo said:

I assume it refers to the US Federal Reserve Board, it is not correct.

The sentence beginning "IT IS ALL THE SAME PAPER …"; it is not a correct statement.

Halliday said:

It is very wrong in two respects. The Federal Reserve Board doesn't deal with anyone; it sets policy. Even the Federal Reserve Board of New York just doesn't do that.

Shockey said:

The entire paragraph is false.

The Federal Reserve Board, the Directors of the Federal Reserve Bank, are responsible for fiscal policy.

Federal Reserve board does not act as a clearing house. It does not sell securities. It does not act as an underwriter.

The Federal Reserve Board does not "make a commitment for paper."

ONCE A BUYER/INVESTOR WITH SUFFICIENT LIQUID FUNDS FINALLY FINDS A MASTER WHOLESALER (COMMITMENT HOLDER/SUPPLIER/PROVIDER) ABLE TO INSTRUCT (THROUGH HIS ADMINISTRATIVE BANK) A BANK TO ISSUE THESE INSTRUMENTS AT A DISCOUNT, AN INSTRUMENT CAN BE CREATED WITH THE FUNDS. UPON ISSUE AT A DISCOUNT ON THE PRIMARY MARKET, THE INSTRUMENT (WHICH IS NOW LIVE WITH CUSIP NOS. ETC. AND AVAILABLE IN HARD-COPY FORM) CAN BE TRADED IN THE PUBLIC (SECONDARY) MARKET AT A PROFIT. THEREIN IS THE MARKET AND THEREIN IS ANOTHER REASON FOR DEEP DISCOUNTS. DISCOUNTS ON THE PRIMARY MARKET HAVE TO BE STRUCTURED SUCH THAT THE TRADING ACTIVITY ON THE SECONDARY MARKET CAN BE MAINTAINED AND DISCOUNTS GIVEN TO SECONDARY MARKET PURCHASERS IN AN ADEQUATE AMOUNT TO GAIN THEIR INTEREST.

Kuo said:

It is total nonsense.

It is not how banks issue banks instruments. They are not being discounted. The whole thing is not true.

There is no market, so there is no reason for deep discounts.

Halliday was not asked for any evidence directly on this point.

Shockey said:

The term "live" is not known in legitimate banking.

There are no deep discounts in the real money world. If there are many discounts at all they are very small, less that 1%.

Discounts are dictated by market conditions so that there might be a slight discount, or premium.

Deep discounts? Absolutely not.

BUYERS IN THE SECONDARY MARKET ARE THOSE WHO NORMALLY PURCHASE LOWER YIELDING MONEY MARKET SECURITIES AND COMPRISE SUCH GROUPS AS PENSION FUNDS, COMMERCIAL AND INVESTMENTS BANKS, MUTUAL FUNDS, TRUSTS, CHARITIES, MONEY MANAGEMENT FIRMS ETC. THE SECONDARY MARKET IS THE HIGHLY LIQUID PUBLIC MARKET IN WHICH MOST PLAYERS ARE EITHER UNFAMILIAR WITH OR PROHIBITED FROM PARTICIPATING IN THE PRIVATE PRIMARY MARKET WHERE SUCH INSTRUMENTS COULD BE BOUGHT AT MORE ATTRACTIVE YIELDS.

THERE ARE MANY SIGNIFICANT INSTITUTIONAL PLAYERS WHO ARE NOT PERMITTED TO DEAL IN THE PRIMARY MARKET. FOR EXAMPLE, BANKS, PENSION PLANS, MUTUAL FUNDS AND US-BASED INSURANCE COMPANIES CANNOT BUY IN THE PRIMARY MARKET. BANKS AND INSURANCE COMPANIES CANNOT PURCHASE BANK SECURITIES DIRECT FROM THE ISSUING BANKS BY LAW. PENSION PLANS AND MUTUAL FUNDS ARE PRECLUDED BY LAW FROM PURCHASING A SECURITY THAT DOES NOT EXIST (IN OTHER WORDS THEY CANNOT CREATE THE INSTRUMENT).

Kuo said:

(Of each of these paragraphs) It is not true.

Halliday said:

(Of the sentence beginning BANKS AND INSURANCE COMPANIES CANNOT PURCHASE BANK SECURITIES FROM THE ISSUING BANKS BY LAW): As a generalization, it's rubbish.

(And of the next sentence, PENSION PLANS …): It's rubbish.

Shockey siad:

Keeping in mind that paragraph 4.3 relates to prime bank debentures and letters of credit, there is no secondary market.

The wording is difficult to understand. A legitimate secondary market is like a Stock Exchange.

The document is being promoted in the phony money world.

When you have a legitimate bank issuing a debenture, they are very careful to select experienced legal counsel to draw the document. This document is not consistent with the way legitimate banks formulate their documentation.

(Of the sentence beginning THERE ARE MANY INSTITUTIONAL PLAYERS WHO ARE NOT PERMITTED TO DEAL IN THE PRIMARY MARKET. FOR EXAMPLE, BANKS, PENSION PLAN, MUTUAL FUNDS…): pension plans, mutual funds and US insurance companies are the person involved in the primary markets.

Pension plans, mutual funds, and insurance companies could buy a Vanuatu Government issued bond if they so wished.

In US a bank would not take another bank security, that is accurate.

In many countries an insurance company can engage in a direct purchase e.g. Turks & Caicos.

Trust divisions of banks have a large number of different types of account. If it is a trust account in which the donor controls policy, it could be very well be involved in direct participation in the primary market. If the bank has control it could still have direct participation (in the primary market).

(Of the paragraph WHEN PENSION PLANS OR MUTUAL FUNDS WISH TO INVEST IN BANK INSTRUMENTS, A THIRD PARTY MUST FIRST HAVE PURCHASED A NEWLY-CREATED (FRESH-CUT) INSTRUMENT IN THE PRIMARY MARKET AND THEN HAVE ON-SOLD THE EXISTING (LIVE) INSTRUMENT IN THE PUBLIC SECONDARY MARKET TO THE PENSION PLAN OR MUTUAL FUND. ANY ORGANIZATION DEALING WITH FIDUCIARY MONEYS (INCLUDING THE TRUST DIVISIONS OF BANKS AND BROKERAGE FIRMS) IS PRECLUDED FROM DIRECT PARTICIPATION IN THE PRIMARY MARKET): all this is false.

ANY ORGANIZATION DEALING WITH FIDUCIARY MONEYS (INCLUDING THE TRUST DIVISIONS OF BANKS AND BROKERAGE FIRMS) IS PRECLUDED FROM DIRECT PARTICIPATION IN THE PRIMARY MARKET.

Kuo said:

It is not true.

(In addition, when asked to comment on the term "fresh cut", she said, this is not a term used in instrument banking.)

Halliday said:

It's rubbish.

Shockey did not give direct evidence on this quotation.

WHERE GOVERNMENTS ARE CONCERNED, IT IS POSSIBLE TO LEVERAGE THE LINE OF CREDIT RAISED AGAINST THE CENTRAL BANK GUARANTEE FROM 1:1 TO 2:1. THE AMOUNT TO WHICH THE BANK MAY BE PREPARED TO LEVERAGE WILL DEPEND LARGELY UPON THE ATTITUDE OF THE BANK AT THE TIME AND WILL DEPEND UPON BANK TREASURY MATTERS SUCH AS HOW MUCH IDLE CASE THE TREASURY HAS AVAILABLE, HOW MUCH OF THIS EXTRA CASH IT MAY WISH TO TIE UP IN THIS TYPE OF TRANSACTION FOR A 12 MONTH CONTRACT ETC. WITH A GOVERNMENT GUARANTEE, A 2:1 CREDIT LINE IS ALWAYS SAID TO BE AVAILABLE.

Kuo said:

It is not true.

It is not consistent with commercial reality that the guarantee will be returned unencumbered.

Halliday said:

It is an irrelevant proposition; I've not heard of it.

Shockey said:

To sum up this paragraph, it is an unsupported hypothetical.

Not all Central Banks are alike. The Bank of England, or France or Germany, is not the same as a Third World Central Bank.

It is not at all true that you can get 2$'s for every 1.

2:1 credit line could not possibly always be available.

BANKS CANNOT PURCHASE OTHER BANK'S CREDIT INSTRUMENTS IN THE PRIMARY MARKET BUT MUST COMPETE WITH OTHER INVESTORS IN THE SECONDARY MARKET. FURTHERMORE, THE BANK CREDIT INSTRUMENTS ARE IN DIRECT COMPETITION FOR THE DEPOSITS OF THE CUSTOMERS OF BANK - WHICH IS MAIN REASON WHY THEY ARE SELDOM AVAILABLE IN UNDER USD 10 MILLION LOTS. THE BANK CREDIT INSTRUMENTS ARE USEFUL BECAUSE THE DOLLARS HELD BY CASH EQUIVALENTS - WHICH THESE INSTRUMENTS ARE (AS THE INSTRUMENTS ARE BANK GUARANTEED WHICH MEANS THAT THE ISSUING BANK GUARANTEES TO PAY ON A PARTICULAR DATE WHICH THEREBY MAKES THE INSTRUMENTS EQUIVALENT TO CASH).

Kuo said:

This paragraph is contradictory to itself. Legitimate banks do not have a role to play in this market, because the market does not exist.

The paragraph is not a correct statement.

Halliday was not asked for evidence directly on this point.

Shockey said:

It's just a bunch of garbage. It's garbage language.

THE FOLLOWING COMPUTATIONS ILLUSTRATE HOW THE TRADING PROGRAM CAN RETURN A GROSS PROFIT OF 360% PER ANNUM

ASSUMPTIONS VALUE OF GOVERNMENT GUARANTEES USD 100 MILLION LINE OF CREDIT (80%) 0.80 X 100 = USD 80 MILLION BUY NOTES AT 87.60% OF FACE VALUE FACE VALUE (VALUE AT MATURITY) 80/0.876 = 91.32 USD MILLION SELL NOTES TO WHOLESALE MARKET AT 92.6% OF FACE VALUE PROFIT PER TRADE [92.6-87.6] = 5.0% OF FACE VALUE 0.05 X 91.32 = USD 4.566 MILLION 4.566/80 = 5.71% OF LINE OF CREDIT LINE OF CREDIT LEVERAGING 2.1 NO. OF TRADING WEEKS/ANNUM 40 NO. OF TRADES/WEEK/LINE OF CREDIT 1 GROSS PROFIT PER ANNUM 1 X 2 X 40 X 7.71% = 456% 1 X 2 X 40 X 4.566 = 365 MILLION

Kuo said:

With regard to the computation to illustrate hoe the Trading Program can return a gross profit of 360% per annum, I have never seen such a figure in bank documentation.

The paragraph is false.

Halliday said:

A return of 360% per annum is just ridiculous; it's preposterous. There is no such market.

We trade all year and we make about 0.2%. We are fairly careful.

Nobody can make that amount (360%) risk free, or even 1/50th of that amount risk free.

Some Central Banks make more than 10%. The Reserve Bank of Australia may have made 10%, but they will also have lost it. It is impossible to make it risk free.

It's just fiction to talk about deep discounting like that.

People are trying to arbitrage a spread. They claim you can arbitrage a spread of 5% 40 times a year, or 80 times a year. It just doesn't happen.

If it were possible we would do it.

The calculation is mathematically inaccurate. It is logically inaccurate.

Shockey said:

There is no way possible.

But there are no such Trading Programs. Since it's a myth you can choose any figures you want.

HOWEVER, THESE INSTRUMENTS ARE SOLD ONLY IN PRIVATE TRANSACTIONS IN WHAT IS SOMETIMES CALLED THE PRIMARY MARKET. TOP WORLD BANKS ARE CONTINUALLY ISSUING THESE CREDIT INSTRUMENTS WHICH ARE PURCHASED MOSTLY BY VERY WEALTHY PEOPLE OR LARGE INVESTMENT GROUPS WHO HOLD THEM UNTIL THEY MATURE. THE RISK IS LOW AND THE RETURN IS GOOD. THIS MARKETPLACE IS A PRIVATE MARKET PLACE BECAUSE IT IS ACCESSED THROUGH NON-BANKING CORPORATIONS THAT SPECIALIZE IN THAT MARKET. THIS PRIVATE MARKET PLACE IS ALSO VERY DIFFICULT TO ACCESS.

Kuo said:

This statement is totally incorrect.

The sentence THIS PRIVATE MARKET PLACE IS ALSO VERY DIFFICULT TO ACCESS is also not true, because it does not exist.

Banks issue credit instruments continually, but they are not for sale.

Halliday was not asked for evidence directly on this point.

Shockey said:

There is no primary market. There is no secondary market.

There is no Trading Program. There is no market.

This paragraph repeats what I've already considered.

To read it literally is very difficult. Pensions plans can create debt instruments. There is no market for the type of instrument referred to.

SECONDLY, WHILST THERE ARE MANY SIGNIFICANT INSTITUTIONAL GROUPS WHO HAVE THIS MONEY TO INVEST, VERY FEW ARE PERMITTED TO DEAL DIRECTLY IN THIS MARKET.

Kuo said:

This is not correct.

Halliday & Shockey did not give evidence directly on this point.

THE RESTRICTED ACCESS TO THE PRIVATE, PRIMARY MARKET CREATES OPPORTUNITIES FOR INVESTORS WHO WISH TO BUY INSTRUMENTS FROM THE PRIMARY MARKET AND ON-SELL TO THE SECONDARY MARKET. PENSION PLANS, MUTUAL FUNDS ETC. CANNOT BUY DIRECT FROM THE PRIMARY MARKET BECAUSE THEY ARE PRECLUDED BY LAW FROM PURCHASING A SECURITY THAT DOES NOT EXIST (IN OTHER WORDS THEY CANNOT CREATE THE INSTRUMENT). SIMILARLY, INSURANCE COMPANIES AND BANKS CANNOT BY LAW PURCHASE BANK SECURITIES DIRECT FROM ISSUING BANKS. THUS BOTH TYPES OF INVESTORS ARE RESTRICTED TO BUYING IN THE SECONDARY MARKET.

WHEN THE ABOVE INSTITUTIONS WISH TO INVEST IN A PRIME-BANK INSTRUMENT, A THIRD PARTY MUST FIRST PURCHASE FROM THE PRIVATE PRIMARY MARKET AND THEN ON-SELL THIS NEW INSTRUMENT (NOW CALLED A LIVE INSTRUMENT) IN THE PUBLIC SECONDARY MARKET TO THE PENSION PLAN OR MUTUAL FUND.

Kuo said:

The first paragraph is totally nonsense.

The paragraph beginning "When the above institutions …" is not correct.

Halliday did not give evidence directly on this point.

Shockey said:

"live" instrument is not consistent with normal legitimate banking terminology.

DEEP DISCOUNTING OF THE FRESHLY ISSUED NOTES RESULTS IN LARGE SPREADS BETWEEN THE BUYING PRICE AT THE POINT OF ISSUE AND THE RETAIL PRICE TO THE HOLDING INVESTOR (WHO IS ALMOST INVARIABLY AN INSTITUTIONAL INVESTOR). MANAGERS OF SUCH APPROVED TRADING PROGRAMS BRIDGE ALL THE USUAL INTERMEDIATORIES CAPTURING THE FULL SPREAD FOR THEMSELVES AND THEIR INVESTING CLIENTS. FURTHERMORE, ELECTRONIC TRANSFER OF THE INSTRUMENTS COUPLED WITH THE FACT THAT THE BUYING AND SELLING IS HANDLED COMPLETELY BY DEDICATED PERSONNEL WITHIN THE TRADING BANK, ENABLES INVESTMENT MONEYS TO BE TURNED AROUND AT LEAST 40 TIMES PER ANNUM. THE INVESTOR'S MONEYS ARE COMPLETELY PROTECTED BY THE TRADING BANK WHICH USUALLY EFFECTS THIS PROTECTION THROUGH THE SUPPLY OF A ONE-YEAR, TOP 25 WORLD PRIME BANK, GUARANTEE FOR 110% OF THE INVESTMENT PRINCIPAL WITH THE INVESTOR AS BENEFICIARY.

Kuo said:

Most bank instruments are not being sold, and there is no discounting.

The sentence beginning MANAGERS OF SUCH TRADING PROGRAMS … is fiction.

The sentence beginning FURTHERMORE ELECTRONIC TRANSFER … 40 TIMES PER ANNUM is not true.

The sentence beginning THE INVESTOR'S MONEYS … is not true.

Halliday said:

This has nothing to do with my understanding of the market.

Shockey said:

Nobody approves Trading Programs.

The entire paragraph is absolute fiction.

"COMPLETE PROTECTION" I don't think that there could be complete protection in any program, whether normal or abnormal, and certainly not in this type of program.

You could not get a 110% guarantee for the investment.

AS IMPLIED ABOVE, THE BANKING COMMUNITY WILL PERMIT GOVERNMENTS OF APPROVED COUNTRIES TO PARTICIPATE IN THESE TRADING PROGRAMS.

Kuo said:

It is not true.

Halliday did not give evidence directly on this point.

Shockey said:

The banking community has no domain over any government.

In one word, the sentence is false.

The above concludes the direct testimony by the three expert witnesses in this case.

SUMMARY

The Reserve Bank of Vanuatu did issue ten Bank Guarantees. The total sum guaranteed for payment was US$100,000,000. In addition to the amount, maturity date, and value date, the following was printed on each Bank Guarantee.

This Guarantee is governed by the Uniform Customs and Practices as set forth by the International Chamber of Commerce, Paris, France, latest revision.

This Guarantee shall be governed by and construed in accordance with the laws of the Republic of Vanuatu and the regulations governing the Issuing Bank. The place of jurisdiction is the Republic of Vanuatu being the seat of that Institution.

This Guarantee is transferable, assignate and divisible.

Kuo did testify about the Bank Guarantee. She testified that the ICC have no Uniform and Practices. She said, this type of error is exactly what she often saw in fraudulent documents made by people promoting this type of thing. She confirmed that as to the guarantee which contained reference to the ICC, the document is made by someone who had no experience in International Bank Tradings.