A Tale of 4 Companies - Mini Bonds Example
A Tale of 4 Companies a fictitious example of how a mini bond scam operation may operate with various linked companies loaning and borrowing money from each other.
Imagine for a moment that someone decides to setup 4 separate companies
All the companies are new startups and have no capital
Saver E sees an advert by Company D offering a bond that gives 8% interest on the capital.
It is unregulated and could lose all his money but he is reassured that Company A says it's asset backed and therefore protected
Saver E decides to invest £100,000 of his savings in the bond offered by company A
Company D passes the bond application to company A and in the process gets 10% commission from Company A.
Company A gets £100,000 from saver E and passes £10k back to company D as their commission
Company C wants to buy a plot of land they've seen. It's worth £90000 as it might be possible to build on it
Company B asks Company A to borrow £90,000 to buy the land and agrees a rate of 10%.
Company A agrees to lend company B the £90,000 secured on their assets
Company B makes a loan to company C for £90,000 to buy the land at a rate of 20%
Company C now has £90,000 cash and company B has a loan outstanding of £90,000 but no other assets.
Sometime later Company C realise that they won't be able to get planning permission so the land is only worth £10,000 so decide not to go ahead. They pay back the interest using the loan money and use the rest of the money to fund the company and pay directors.
Company A have loaned £90,000 to company B yet the only asset is a loan that may not be repaid.
After 3 years Company C has paid 3 lots of interest of £18000 = £54,000 to Company B.
Company B has paid 3 lots of interest of £9000 = £27,000 to company A.
Company A has paid 3 lots of interest of £8000 = £24,000 to Saver E
Everyone is happy, Saver E has their 8% return and there have been no defaults. YET!
Saver E has invested £100,000 in a bond yet the only asset backing it is a loan that can't be recovered. They have potentially lost £100,000 minus the interest received of £24,000. The winner is Company D with £10k profit in the bank and Company C that has spent all the remaining £36,000 on running costs! The assets owned by company B will never recoup the money owed.
Company A has no money but loan for £90k outstanding to company B
Company B has loan outstanding for £90k but owes £90k to company A)
Company C owes £90,000 to company B but has spent this on interest payments £54k and fees £36k so no assets
Company D has £10,000 cash from commission
Saver E has invested £100,000, received interest payments of £24,000 but can't get their original money back so has lost £76,000.
These are the real dangers of dealing with unregulated investments where your capital is at risk!
Imagine for a moment that someone decides to setup 4 separate companies
- Company A
- Company B
- Company C
- Company D
All the companies are new startups and have no capital
- Company A decides to offer bonds to suitable investors
- Company B wants to offer loans to buy property
- Company C wants to buy some land
- Company D decides to market the bonds that company A is selling
Saver E sees an advert by Company D offering a bond that gives 8% interest on the capital.
It is unregulated and could lose all his money but he is reassured that Company A says it's asset backed and therefore protected
Saver E decides to invest £100,000 of his savings in the bond offered by company A
Company D passes the bond application to company A and in the process gets 10% commission from Company A.
Company A gets £100,000 from saver E and passes £10k back to company D as their commission
Company C wants to buy a plot of land they've seen. It's worth £90000 as it might be possible to build on it
Company B asks Company A to borrow £90,000 to buy the land and agrees a rate of 10%.
Company A agrees to lend company B the £90,000 secured on their assets
Company B makes a loan to company C for £90,000 to buy the land at a rate of 20%
Company C now has £90,000 cash and company B has a loan outstanding of £90,000 but no other assets.
Sometime later Company C realise that they won't be able to get planning permission so the land is only worth £10,000 so decide not to go ahead. They pay back the interest using the loan money and use the rest of the money to fund the company and pay directors.
Company A have loaned £90,000 to company B yet the only asset is a loan that may not be repaid.
After 3 years Company C has paid 3 lots of interest of £18000 = £54,000 to Company B.
Company B has paid 3 lots of interest of £9000 = £27,000 to company A.
Company A has paid 3 lots of interest of £8000 = £24,000 to Saver E
Everyone is happy, Saver E has their 8% return and there have been no defaults. YET!
Saver E has invested £100,000 in a bond yet the only asset backing it is a loan that can't be recovered. They have potentially lost £100,000 minus the interest received of £24,000. The winner is Company D with £10k profit in the bank and Company C that has spent all the remaining £36,000 on running costs! The assets owned by company B will never recoup the money owed.
Company A has no money but loan for £90k outstanding to company B
Company B has loan outstanding for £90k but owes £90k to company A)
Company C owes £90,000 to company B but has spent this on interest payments £54k and fees £36k so no assets
Company D has £10,000 cash from commission
Saver E has invested £100,000, received interest payments of £24,000 but can't get their original money back so has lost £76,000.
These are the real dangers of dealing with unregulated investments where your capital is at risk!
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