Beware of Websites with Too-Good-to-Be-True CD Rates
With deposit rates so low, many people may be tempted to invest their money with the help of questionable companies. In a recent comment, a person claimed "he invested with a great Hedge Fund that buys large blocks of CDs either FDIC or AAA European Banks. You can get FDIC rates as high as 5.3% APY." I'm not going to disclose the website address. The website claimed that the company has been around since 1999, but I could not find any history of this website on the Internet Archive. They don't claim to be a bank, but they supposedly work with US and European banks to obtain special CD rates. I cannot prove that this company is not legitimate. However, I thought this would be a good time to review a history of scams that have targeted conservative investors.
Recent Ponzi Schemes
Everyone probably remembers Madoff's Ponzi scheme, the largest Ponzi scheme in history. The disturbing thing about this case was that the SEC conducted investigations and weren't able to uncover the fraud. It wasn't until Madoff confessed to his sons in December 2008 that the FBI finally shut down the Ponzi scheme.
Less well known is the Allen Stanford alleged Ponzi scheme which involved Stanford International Bank CDs. According to the SEC, this foreign bank "sold approximately $8 billion of so-called 'certificates of deposit' to investors by promising improbable and unsubstantiated high interest rates."
The Securities Investor Protection Corp. (SIPC) is suppose to protect investors for up to $500,000 in securities and cash in case their brokerage goes bust. However, Madoff and Stanford investors have learned that there are several complications with this protection. Many of Madoff and Stanford investors may not receive anything back.
A much smaller Ponzi scheme involved CDs advertised online that were sold by a supposed Caribbean-based bank. In March 2009, the SEC shut down the "$68 million Ponzi scheme involving the sale of fictitious high-yield certificates of deposit (CDs) by Caribbean-based Millennium Bank."
The important thing to note of these Ponzi schemes is that the investments may appear to be working fine for many years. There may be no signs of problems until the Ponzi scheme goes bust all of a sudden.
Verifying FDIC and NCUA Deposit Insurance
As the above examples show, it can be impossible to know the legitimacy of a foreign bank. That's why I stick with U.S. banks and credit unions which are regulated by state and/or U.S. federal agencies. I described how you can verify a bank or credit union is federally insured by the FDIC or NCUA in this blog post.
There are ways for Americans to invest in foreign currency bank accounts. The best known bank to offer these is EverBank. I reviewed EverBank and two other banks in my post on Chinese Bank Accounts and Other Foreign Currency Accounts. It should be noted that even though the account may be FDIC insured, there may still be loss due to currency value fluctuations.
Investing in CDs without Banks
Not all safe CDs come directly from a FDIC-insured bank or NCUA-insured credit unions. You can get FDIC-insured CDs from brokerages. These are called brokered CDs, and they are available from all the major brokerages. As I described in my brokered CD review, this can be a safe way to invest in CDs especially if you stick with major brokerages like Fidelity, Vanguard and Charles Schwab.
There are also legitimate companies that provide CD placement services which help their clients find the best CD rates at FDIC-insured and NCUA-insured institutions.
There are also many financial companies that get most of their money from selling annuities and other insurance products. To get the attention of conservative investors, some of these companies advertise high-yield CDs in newspapers. They are able to advertise rates much higher than banks by providing a bonus payout that's added to the bank CD interest. The FDIC warned about these advertisements and described how these companies operate in their 2010 consumer news. I reviewed this and added more examples in my post Very High CD Rates Advertised in Newspapers.
You can get safe CDs through middle men like brokerages and CD placement services. However, these require more homework. It's important to be aware of red flags such as a promises of safe yields that are much higher than the competition. If you want to keep things simple with your CD investments, deal directly with FDIC-insured banks and NCUA-insured credit unions.