A blocked funds letter has some legitimate uses, but not in the banking sector. Fraudsters frequently use a blocked or reserved funds letter to quell investor worries, but the presence of this term should alert consumers to a possible scam. Investors should look for other signs of a scam, such as unusual terms or promises, to identify a fraudulent opportunity.
Governments and banks issue a blocked funds letter to stop the transfer of money out of a financial institution, but rarely does an individual deal with blocked funds. For instance, a government may block funds for political reasons, such as when the country goes to war with another country or during emergencies. A court may block funds because of the account owner's death or criminal activity. Some countries block foreign currency exchanges to control the value of their currency. Brokers, usually those outside of the United States and Europe, can legally trade in blocked funds.
Prime Bank Fraud
Con artists sometimes use a blocked funds letter to perpetrate investment fraud. In a typical scam, the fraudster claims he deals in a secret, highly lucrative and low risk market called "prime bank guarantees," or some other legitimate sounding security. The scam artist asks the initial victim to put money in a bank account to prove he has the available funds -- often in the millions of dollars. The fraudster then asks the victim to request a blocked funds letter from the bank, which requires the money stay in the account for at least a year, as proof of his ability to fund the investment. The bank usually agrees to issue this letter to please a valued customer, and the victim sees no risk because he is the only person on the account. The con artist uses the blocked funds letter to convince other victims to join him in a "surefire" investment.
The fraudster runs away with investor money and asks the initial victim for a trading fee of several thousand dollars. The first victim usually worries so much about the large amount of money in the bank account that he agrees to pay this fee. After weeks of waiting, the scam artist claims some bogus violation by the first victim that violates the trade and forfeits the fee.
Investment fraud schemes have several names and buzzwords attached to them. For example, the scam artist may call the investment opportunity a high-yield trading or roll program, standby letter of credit or International Monetary Fund Backed Security. The scheme may have a shadowy figure leading the investment and faulty documentation, which might contain some legitimate information to further fool the investor.
U.S. or European citizens should take extreme caution when attempting to trade currency with a country that blocks accounts to control its exchange rate. Criminals, especially drug dealers, use blocked-currency transactions to launder money. Thus, the government might view a legitimate blocked-currency transaction with suspicion.