Fraud Avoidance: Truth About Monetizing Leased Instruments

Leased financial instruments, such as Standby Letters of Credit (SBLCs), Bank Guarantees (BGs), or Medium-Term Notes (MTNs), are often marketed as tools that can be monetized or used as collateral for loans. However, this concept is fundamentally flawed and often associated with scams. Below is an educational piece explaining why leased instruments cannot be used as collateral by a lessee, and how fraudulent schemes exploit this misconception.

Why Leased Instruments Cannot Be Used as Collateral

1. Ownership and Control:

   - Leasing a financial instrument means the lessee pays for the use of the instrument for a specific period, but ownership remains with the lessor (the party leasing out the instrument)[1]. 

   - Financial institutions require proof of ownership and control over any asset pledged as collateral. Since the lessee does not own the leased instrument, they lack the legal authority to pledge it as security for a loan.

2. Legal Restrictions:

   - Just as a leased car cannot be sold or used as collateral because the title belongs to the leasing company, leased financial instruments cannot be pledged for loans. The lessor retains all rights to the instrument, making any attempt by the lessee to use it as collateral fraudulent.

3. Risk to Lenders:

   - If a loan is secured using a leased instrument and the borrower defaults, the lender has no recourse to recover funds because the lessee does not own the instrument. This makes such transactions unviable for legitimate lenders.

Common Scams Promoting Monetization of Leased Instruments

Fraudsters often exploit misconceptions about leased instruments by promoting schemes that promise loans or monetization opportunities. These scams typically involve upfront fees and result in financial losses for victims.

1. Charging Leasing Fees for Useless Instruments:

   - Scammers charge victims significant fees (e.g., 3% of the face value) to lease financial instruments under false pretenses that they can be monetized or used as collateral. In reality, these instruments are worthless for such purposes.

2. Upfront Lending Fees:

   - Victims are often required to pay an upfront fee to secure loans purportedly backed by leased instruments. After collecting these fees, fraudsters either disappear or make excuses about delays in funding.

3. Fake Escrow Accounts:

   - Fraudsters may set up escrow accounts requiring victims to deposit initial fees before leasing an instrument. The escrow terms often favor the scammer, allowing them to withdraw funds without delivering on their promises.

4. Misrepresentation of Ownership:

   - Scammers claim that leased instruments can enhance credit or serve as proof of funds for loans. They obscure the fact that lenders will reject such instruments upon verification of ownership.

Red Flags to Watch For

To avoid falling victim to these scams, watch out for the following warning signs:

- Unrealistic Promises: Claims that leased instruments can easily secure large loans or be monetized.

- Upfront Fees: Requests for large leasing fees or initial payments before any transaction occurs.

- Lack of Transparency: Difficulty verifying the authenticity or ownership of the instrument.

- Pressure Tactics: Urgency to proceed without proper due diligence or legal counsel.

Conclusion

Leased financial instruments cannot be used as collateral for loans because they do not confer ownership or control to the lessee. Scammers exploit this misconception by promoting fraudulent schemes involving leasing fees and promises of monetization that never materialize. Always seek professional advice and verify ownership and authenticity before engaging in transactions involving financial instruments.

For these reasons, Mountbatten Global does not accept leased assets for its loans, only those that the borrower can verify that they own.