CYBERSCAM ARTISTS FIND CANVASES WORLDWIDE: INTERNET FRAUD AIMED AT MORE U.S. INVESTORS

European Union Bank billed itself as the “world’s first offshore bank on the Internet.” The three-year-old institution, incorporated on the Caribbean island nation of Antigua, offered depositors “total privacy” — along with interest rates up to 10 times higher than those at other banks.

It didn’t take long before hundreds of depositors from around the world poured more than $10 million into its coffers.

There was just one hitch: It was a scam. Last August, the bank went into receivership and its two Russian-born owners went into hiding, leaving investors high and dry.

European Union Bank is a prime example of what U.S. regulators say could pose the single greatest threat to U.S. investors: offshore cyberfraud. With the number of non-U.S. Internet users climbing, so is the number of offshore scamsters taking aim at gullible — and greedy — U.S. investors.

Offshore cyberfraud is more vexing to U.S. regulators than the home-grown version. Not only do cases involving foreign entities or individuals force regulators to confront complex jurisdictional issues, they also are much more difficult — and expensive — to prosecute. Recent cases have been all over the map, from England and Germany to the Cayman Islands.

Regulators have mounted a belated but increasingly vigorous counterattack. The International Organization of Securities Commissions formed a task force in December to address a host of Internet-related issues, fraud being at the top of the list. The Securities and Exchange Commission, the Federal Trade Commission and the National Association of Securities Dealers have stepped up their efforts, too.

not enough money

“There’s simply not enough money being spent on law enforcement with regard to the Internet,” says Parry Aftab, managing partner at Paramus, N.J.-based Aftab & Savitt, which specializes in Internet law. “The SEC, or any of these other agencies, just doesn’t have the funds, or people, to do something about (fraud) at this point.”

While no hard figures exist on the amount lost to offshore cyberscams, they account for an ever-bigger chunk of the estimated $40 billion drained by fraud every year, say regulators.

The National Consumer League’s Internet Fraud Watch, a telephone hotline and World Wide Web site for consumer complaints, finds that reports of Internet fraud have tripled in its two years of existence, from 32 a month to nearly 100.

Up to 15% of the 110 e-mails the Securities and Exchange Commission’s enforcement division receives each day from investors involve offshore fraud, says John Reed Stark, chief of the agency’s new Office of Internet Projects and Investigations.

Another obstacle is the burgeoning popularity of the Internet. Dataquest, a New York market research firm, estimates that 82 million computers worldwide were linked to the Internet at the end of 1997, up a staggering 71% from the previous year. It predicts that the figure will triple to 268 million by 2001.

“The Internet is spreading across the planet,” says the SEC’s Mr. Stark.

It doesn’t help matters that cyberspace is cheap. In pre-Internet days, orchestrating fraud across borders was expensive. Now, anyone with $50 can put up a web page capable of reaching millions of people all over the world. A few more bucks will buy the e-mail addresses of thousands of potential investors.

“For a fraudster, the cost of doing business on the Internet couldn’t be lower,” says Win Treese, director of security at Open Market, a Burlington, Mass.-based company that develops secure systems for accessing the Internet.

85 volunteers

But U.S. regulators are undaunted. The SEC recently assembled a force composed of 85 enforcement officials who volunteered to scour the web in search of illegal or unethical activities. On a more formal basis, the commission established the Office of Internet Projects and Investigations two years ago. So far, the SEC has brought about 25 Internet-related civil enforcement actions.

Before the summer, the NASD plans NetWatch, a computerized system to police the web automatically, spitting out sites that contain suspect words or phrases like “the next Microsoft” or “guaranteed money maker.”

“It’ll give us more regulatory intelligence,” says Michael W. Robinson, an association spokesman.

The FTC, which prosecutes companies and individuals using the Internet in violation of fraud and truth-in-advertising laws that govern other media, is also aggressively going after offshore scam artists.