Signature Affidavits and Agency Waivers for ‘Tied Loans’.
Tax shelter investment schemes cover a variety of businesses including; films, software, and property in typical start-up ventures. With guidance and the assistance of Bank funding, the financial instruments are usually registered with a Securities Commission Agency and have government approval for tax credits to investors. Each year, Banks and Financial Advisors encourage people to plan for retirement using ‘Investment Tax Management’ products that appear to be a good place for people’s savings.
As financiers, Banks have a vested interest in ‘Investment Product’ sales and may actively promote them in the market. As well as bankrolling the products sold, Banks have additional business opportunities in loans they can sell to investors for the purchase amounts they invest. That is, the payment of a lump sum into a financial instrument that promises high income payments and a secured return of capital based on projected growth, in this storybook example: commercial real-estate value. Such loans are know as ‘Tied Loans’ and they are supposed to be illegal if they are not fully disclosed to the purchaser in the transaction.
Globally, the industry has a history of hard selling tactics and deception: such products are often sold entirely on tax benefits with ‘No Cash Down’ and ‘No Carrying Costs’. Banks have a legal loophole to play the game.
Let the buyer beware!
There are generally two parties behind investment products. The first-party is the product provider that the investor enters the contract with. The second-party, almost invariably present, is a Bank that sells a structured derivative contract to the main product provider that exactly matches the benefits of the contract and, in some cases, also provides for any taxation payable by the provider.
The Bank is effectively a ‘Wholesaler’ and ‘Retailer’ set-up for third party operatives in dual roles of ‘Agents’ and ‘Promoters’. The cost of the matching derivative will be less than the lump sum received from an investor, the difference being used to fund any commissions payable to intermediaries and the administration and marketing expenses of the provider as well as an element of profit to the provider.
The products are often structured so that the returns are effectively linked to the proceeds of the underlying derivative i.e. any default on the obligations of the derivative provider is not absorbed by the product provider but passed straight on to the investor. While the Bank involved is often part of a well-known global banking group, the existence of this additional counter-party risk is often not appreciated by investors.
As far as investors sees it, the Bank is very much in the background and the legal contract and customer contact is all with the primary provider through selling agents.
Neither Banks that sell loans, nor Providers that sell investment products have an interest in divulging their collaborative business relationship. Indeed they may go to some lengths to disguise it. Especially if the investment is sold as a ‘No Cash Down’ and ‘No Carrying Costs’ opportunity … where the purchase payment to the provider is transferred from the underwriting Bank using undisclosed ‘Tied Loans’ in the names of duped investors.
Bank roles in sleaze requires collusion. Signatories to investment contracts sign up for certain debt. The deception is in the bundling of Bank documents in the details of the investment contract. The debt is deployed by ‘Sales Representatives’ who bear witness to investor’s signatures on Bank ‘Signature Affidavit’ forms that have to be legally notarized for a Bank to approve individual credit and advance purchase amounts against signed ‘Promissory Notes’ without any participation by, or validation with the debtors. Hence the industry branding people ‘Sitting Ducks’.
In the authors storybook scheme, a Bank agrees to fund several limited partnerships with an Equities Corporation defined as the ‘Agent’ and ‘Promoter’ with a sales force of accountants and tax management consultants in the activity columns of the following chart. Here, the investment promoter is also a lawyer and a ‘Commissioner of Oaths’ with a vested interest in notarizing each and every ‘Signature Affidavit’ brought in by dual-agents who themselves fill out and witness Bank loan applications for a sales commission from the ‘Promoter’.
Misled investors sign all the documents in a single meeting including the ‘Agency Waivers’ that absolves the Bank of any legal liability in the ingenious debt creating money making scheme.
It is a repeatable system and a common practice in the industry. In this arrangement the property developer has built an empire of some $500 million in thirteen commercial real-estate projects that involved property flip acquisitions that further bilk investors. In this story, the investments assessed by a forensic auditor involved 308 people in debt to some $20 million in ‘Tied Loans’.
The following chart describes the deployment of ‘Bank Loan Game Rules for Sitting Ducks’.
(Ref: Ph.D. Research Analysis Material - Tony Crawford Case)
