Please stay with me as the title of this post will eventually become clear — sort of.
So I just read a really good article, entitled, How British firms built a pyramid scheme in China that lost millions. Had I written the article, I would have given it the title I have given this post, but then a lot fewer people would have read it.
The article is about a massive scam that used a London address to convince Chinese investors to invest millions into what now appears to have been a wholly fake currency hedge fund:
A London address helped draw Chinese investors to EuroFX. But the venture was not regulated in the UK. It was a scam that flourished in the gaps between national systems.
The scammers encouraged investment in EuroFX, a great sounding company name but a company that in fact may never even have existed. Needless to say, the scammers made the company look great by, among other things, using a prestigious London address and by printing “full-color Chinese brochures, seen by Reuters, which predicted fat returns”:
For an investment of $10,000, investors could expect a return of 6 percent a month. For $100,000, that climbed to 12 percent. A few months later, a separate EuroFX product offered up to 16 percent to anyone who invested $250,000.
The brochures boasted that EuroFX had 13 years’ experience in foreign exchange trading.
In fact, there was no company called “EuroFX.” Its brochure said EuroFX was a brand name for Euro Forex Investment Ltd. This was a dissolved company that an Australian businessman, Bryan Cook, had bought only the month before, according to Eurofinanzza, the company formation agent which arranged the transaction.
The mere fact the company was run by Europeans was enough for many of its Chinese investors:
He invested 800,000 yuan ($120,000), he said. He did not understand foreign exchange, but believed the scheme was regulated: “I trust Europeans not to lie to me.”
Other Chinese investors who put money into EuroFX also told Reuters they did so because Euro Forex Investment Limited was a company registered in Britain. They assumed it was regulated by Britain’s financial authorities.
It was not.
As someone who has been an international lawyer for quite some time, I have seen more than my share of scams. Scammers love conducting scams that cross borders because merely crossing a border usually increases confusion stemming from a lack of knowledge regarding language, culture, and regulation.
Now for the Best and the Brightest/ cognitive dissonance part. When I was in college, I read David Halberstram’s The Best and the Brightest as part of an international politics course. Wikipedia does an excellent job distilling the book in the following paragraph:
The Best and the Brightest (1972) is an account by journalist David Halberstam of the origins of the Vietnam War….The focus of the book is on the erroneous foreign policy crafted by the academics and intellectuals who were in John F. Kennedy’s administration, and the disastrous consequences of those policies in Vietnam. The title referred to Kennedy’s “whiz kids”—leaders of industry and academia brought into the Kennedy administration—whom Halberstam characterized as arrogantly insisting on “brilliant policies that defied common sense” in Vietnam, often against the advice of career U.S. Department of State employees.
My professor used the book as a platform for discussing the relevance of cognitive dissonance to politics. Cognitive dissonance is the following:
Leon Festinger (1957) proposed cognitive dissonance theory, which states that a powerful motive to maintain cognitive consistency can give rise to irrational and sometimes maladaptive behavior.
According to Festinger, we hold many cognitions about the world and ourselves; when they clash, a discrepancy is evoked, resulting in a state of tension known as cognitive dissonance. As the experience of dissonance is unpleasant, we are motivated to reduce or eliminate it, and achieve consonance (i.e. agreement).
As someone who is constantly contacted by people in the midst of being defrauded, I have become convinced it is their efforts to achieve cognitive consistency that often leads to their getting scammed. They so much want to believe they have entered into a good deal that they rationalize everything that should be telling them to get out. Sadly, this drive for cognitive consistency becomes stronger the deeper one has dug themselves into the deal. The more one has already spent, the more one wants to believe they have not just flushed away their money and the more willing they are to ignore key indicators they have.
When I first started practicing international law and would get contacted by people who I suspected were being defrauded I would flat out give them my opinion on this, without charging them a thing. But after doing this maybe twenty times and getting nothing but anger back in return maybe nineteen times, I started clamming up. The final straw was the following:
Some 66 year old farmer from rural Missouri sent me an email of his drop-dead gorgeous Russian “girlfriend” of about 22 years old who was on her way to Missouri to marry the farmer. But she was being held up at the airport because the Russian authorities were requiring her to put up a $15,000 bond to make sure she would eventually return to Russia. The farmer asked me if this made any sense to me and I immediately told him it did not make any sense at all and his girlfriend was scamming him. The farmer then accused me of being jealous because he was marrying such a gorgeous woman and the scam was clearly being perpetrated by the Russian authorities, not his girlfriend.
Now when I get these, I am far far more circumspect and my usual response is that for us to be able to help, we need to be paid x dollars to conduct our own due diligence regarding the players and the deal. And here’s the thing: on the rare occasions when these people do pay us for the due diligence and our due diligence (pretty much every time) shows they are being scammed, they believe us. What’s the difference? They have a stake in believing us because they paid us. In other words, it takes a countervailing cognitive consistency desire to overwhelm the previous one.
Just a few weeks ago a medical doctor wrote me attaching what at first glance looked to be a fake Chinese government document and he asked whether the Chinese government charges a $15,000 fee for X. My response was that I didn’t know whether that particular branch of the Chinese government charges a $15,000 fee for X but I very much doubted it. I then said our China lawyers would be happy to check that out for him at our regular hourly rates but that at first glance the document he sent me looked like a fraud and I was concerned he might be getting scammed. His response was to essentially question my abilities for not knowing off the top of my head what some (obscure) government agency charges for some (obscure) action and to essentially demand I make up for my ignorance by telling him who he can talk to who actually knows these things. I very nicely suggested he should keep trying with other China attorneys. Cognitive dissonance.
The following are representative of some of the scams our international lawyers have seen over the years:
- Company documents showed a subsidiary in the Marshall Islands, yet always spelled the country as Marshal Island. It had no such subsidiary. Why would a company not know how to spell one of its locations correctly? I mean, come on.
- Company claimed to have a multi-million dollar account at a non-existent bank. It was a bank in Australia and five minutes on Google revealed the bank did not exist. We did the search because we thought the banks’ name (an Ocean not contiguous with Australia) was very strange for a bank allegedly in Australia.
- Company claimed to have a branch office in a particular city, yet its documents on that branch office (including supposed government documents) put that city in the wrong province. Again, come on.
- Company claimed to be bringing in twice as much product as physically possible on a particular ship. When I first saw the amount of product involved I thought “this must be a massive ship.” I then thought, gosh, I didn’t realize Cambodia had ships of this size. So I spent about five minutes checking out this particular ship on the Internet and quickly realized it was not nearly large enough to carry the cargo it claimed it had carried.
- Company claimed to have been shipping out product on a particular ship that did not exist during the first few years when the product was allegedly being shipped.
- Company claimed to have won an IP lawsuit in a country’s Supreme Court (they produced the Supreme Court’s decision and everything), but there had never been such a case. Had a lawyer friend check this out in the applicable country (Russia).
- Saw a judgment from a federal judge in Florida and the court’s order struck me as funny. So I did a search on the judge and learned there was no such judge in the court listed on the order.
A year or so ago, a company sent me some documents to get an estimate from us on what we would charge to represent it on a deal. Within ten minutes I wrote back saying we would not be interested in representing it on the deal because the alleged Chinese company was a scam. I instead suggested this company retain us to conduct basic due diligence on the company to determine its bona fides. The potential client (who no doubt had dollar signs in its eyes) seemed a bit offended and sought to challenge my suspicions of fraud. My response to his challenge (with some key identifiers changed) was as follows:
I spent less than ten minutes looking at just the proposed contract you sent me and from that one document and in that short amount of time I noticed the following:
- If a company is named China, it is almost always huge. Massive. Very unlikely that sort of company would have reached out to you out of nowhere for a $350,000 order when there are so many other potential sellers in other countries (including within China) it could have contacted. This makes no sense.
- The Chinese company with this name is in the X business. Why would a company in the X business be looking to buy Y product? This makes no sense.
- The bank is in Shenzhen. The company is in Shandong Province. It would be like you in Nashville using a small bank in Seattle for your banking. This makes no sense.
- Your contract is not a contract at all. Standing alone, this is not a sign of fraud but it does not make sense for a large company (which this company purports to be) to send out a document like this because it is not even close to being a real contract.
After the American company got over its anger at my questioning their deal (which they saw as the start of something really big), they had us conduct due diligence on the Chinese company and the situation and within a week, they too were convinced they were being scammed. No deal, but no massive losses either.
So what’s the trick to not getting scammed? Stay tuned for part 2.