ATM & Kiosk: investment in ATM deployment "a fraud"

The USA's FBI has indicted Walter Netschi and Vance Moore II on charges of fraud and related offences including the traditional make-weight "wire fraud" after they created a scheme, which the FBI calls a Ponzi scheme. But, if the allegations are correct, it was much more than that.

The scheme relied on the growing demand for placement of ATMs in districts that are "underbanked" - and in places where people often run out of cash: bars, nightclubs, etc. where credit cards are often not accepted.

The rash of ATMs in supermarkets, shopping malls and even convenience stores has built a large, international, market for small, stand-alone machines. A rapidly growing market is airports where visitors can secure local currency on arrival without visiting a bureau de change. Sometimes, the machines are alone: other times they are in clusters.

ATM charges vary not just from bank to bank, but from machine operator to machine operator. Fees are charged for the use of the machine and for the interchange with the banking network. The fee covers the cost of the machine and its associated connectivity to hte network i.e. telecoms installation and maintenance, rental and the cost of filling up the machine. In many countries, the operator of the machine sets the fee applied. Sometimes this is made clear before the transaction is concluded and sometimes charges are shown in a small notice on the machine, or are levied by ambush on a completed transaction. Charges can range from a few pence to several pounds in local currency.

It is these charges that have led to the growth of independent ATM operators, some having "an estate" of thousands of machines. Get the right sites, and the returns are potentially huge as high traffic past the machines generates large throughput.

And, as bank card holders become increasingly concerned about the security of cards at point of sale, ATMs are widely seen as a convenient way of avoiding handing cards over in dubious outlets.

Also, in a wonderful irony, whilst petrol stations often reject card payments because card thieves are known to favour petrol as a purchase with a stolen or cloned card, ATMs in the same petrol station almost always pay cash on the card.

Even more: as money tightens, those working to a budget often prefer to withdraw the amount they allow themselves to avoid accidental overspending.

It was into this market that Netschi and Moore ventured, says the FBI. Netcschi built up an estate of machines, bundled them into a group and invited investors to put money into the group in return for a share of the fees generated.

It's a neat scheme, and worked well for those who were already warmed to the idea of packaged investments - but were looking for an alternative to the packaging of housing loans.

But all was not as it seemed. First, the pair skimmed a percentage off the top by using a "maintenance contract" with a company formed by Moore. In this way, all the work was outsourced for a fixed fee, investors were told. After that was covered, the only drain on distributed income were interchange fees.

The story was simple: we've installed the first batch, we'll use your money to install another batch, and so on, the pair told investors.

But the FBI says that the investors were actually victims. For the statements that showed the transaction histories and fees were fictitious. The profit share sent to investors was not generated by income from the machine, but from the sale of the next batch of machines.

The indictment says that the pair claimed to have an installed estate of approx 4,000 machines. But, says the FBI, 90% of those belonged to other operators - or were completely fictitious.

The FBI says that its investigation shows that the pair took in some USD80 million - although how much of that will, ultimately, be regarded as recoverable profit remains open to question given US court decisions that it's profit not takings that should be regarded as the proceeds of criminal conduct.

The FBI says that the paid conducted their business from 2005 until the end of January 2008 when a victim got fed up with excuses for non-payment of his shares and went to the authorities.

MOORE, 55, of Raleigh, North Carolinaand NETSCHI, 62, of McKinney, Texas are currently on bail and have pleaded not guilty.