How to know if you’re the target of a fraud attempt
March is fraud prevention month, and it’s a great time to remind readers that the financial sea is full of sharks, circling the naïve and unprepared, and ready to take you for every cent you’ve got. The bad guys are sophisticated and clever in developing new ways to commit their crimes, now using digital tools and online access like never before. Luckily, there are experts who are even more sophisticated and a lot more clever than the bunko artists. Your financial advisor can spot a scam a mile away, so consult them before you give a stranger your money. Meanwhile, there are a number of warning signs that are typical of a financial scam in the making.
Investment frauds rely on gaining the victim’s confidence. Hence the term “con” man. Often, fraudsters will gain entry to a pool of marks through affinity with an organized group of some sort, say, a seniors’ club, a business group, a religious community, or a charitable organization. Investment seminars are another way of enticing people to part with their money on, at the very least, sketchy ventures. Most common now are phone calls, email come-ons, and solicitations through social media like Facebook, LinkedIn, and Twitter.
Though scams can vary in the supposed riches they offer, there are some basic characteristics they all share, and these are good markers to watch for that you may be the target of an effort at fraud.
First and foremost, scams rely on the greed of the victim. So they typically get down to offering some sort of incredible yield, for example, 12% a month, guaranteed! The only guarantee here is that this kind of yield is flat-out impossible. That’s 144% in a year. If it were possible, investors in such a scheme would soon have all the money in the world.
Playing to your vanity
Another typical marker of a potential scam is that the investment is the so called “exempt security” that is available only to “accredited” investors, with the added pressure of being available “for a limited time.” All you have to do is lie about your income.
Normally, a legitimate investment offered to “accredited” investors means that no prospectus legally setting out the nature and terms of the deal, and the individuals behind the deal, is required. Accredited investors have a very high net worth already – and don’t have to lie about it – and are assumed to be financially sophisticated. They and their advisors will insist on seeing exhaustive financial statements, legal information pertaining to the investment, liquidity, and mechanisms for selling the investment, usually far beyond what a prospectus would supply in any case. The last thing scam artists want you to see are financial statements of any kind.
The offshore mystique
Another fairly common marker of a possible fraud is that the alleged investment involves some type of offshore holdings. This may sound appealing on the surface, evoking images of swaying palms and tax havens. But the dark underbelly is that it’s very difficult to get reliable information about the legal ownership and financial viability of assets held offshore. For forensic accountants and commercial crime law enforcement, “offshore” is simply a euphemism for “dodgy.”
However, financial-scheme scammers rarely target highly sophisticated investors. They often use the “accredited-investor” status ploy I mentioned above to avoid having to provide much financial detail to their marks about their “investments.” They count on the marks’ vanity, financial naiveté, and greed.
The big payout scam
The common thread to these types of schemes is that the con artist will attempt to persuade you that if you just give them as much money as you can, you’ll get it all back five-, ten-, twenty-fold in a very short period. Variations on this theme include the pension scam by which they try to persuade you that for that huge upfront fee, you can “unlock your pension and pay no tax.”
Another twist is the pump-and-dump stock scheme, by which the fraudsters promote some worthless stock to a handful of investors who unknowingly bid up the price. They then sell their own large holdings at the top of the market, while the value of everyone else’s shares then plummets.
The “binary options” scam is another more recent type of fraud perpetrated on the greedy and ignorant – think of it as the online, digital version of the fake bookie shop fraud shown in the classic movie The Sting.
How not to become a victim of fraud
If you encounter these types of solicitations, the best advice is simply to avoid them altogether. It’s easier to say “no” now than to try to get your money back later. The sad history of financial fraud proves that while scammers may sometimes end up in jail, most victims never recover their money.
There are many useful online resources to help you identify and avoid the many types of fraud being perpetrated today. The government’s Canadian Anti-Fraud Centre has a long list of different categories of active scams, and is well worth consulting if you suspect you might be a target of a potential fraud.
The Centre also provides a useful checklist to help you avoid becoming a victim of a fraud or scam in the first place:
Get independent advice. If an offer involves money, information, or time from you, get independent advice from a qualified professional, such as a lawyer, accountant, or financial planner.
No guarantees. There are no guaranteed get-rich-quick schemes. If it sounds too good to be true, it is.
Never submit to sales pressure. Get independent advice. A legitimate investment will still be available tomorrow or next week or next month.
Do your due diligence. Never sign anything, hand over money, or reveal personal information (bank accounts, credit cards, brokerage accounts), or sign anything until you’ve researched the offer and checked the credentials of whoever it is making the offer.
Ignore testimonials. Look at a company’s books directly, examine its historical financial statements, and check out the physical operations in person. Be deeply suspicious if the person selling you an investment attempts to discourage you from bringing in an independent advisor.
Don’t get click happy. Never click through links to websites provided in unsolicited or spam email, text messages, or Tweets. If you’re interested in a product, service, or investment, navigate to the site page directly through your browser.
Where to get help
If you’re in doubt about an investment offer, or if it sounds too good to be true, consult a qualified independent financial advisor for a second opinion. To learn more about avoiding investment frauds in the first place, check the Ontario Securities Commission website. Many people who have been scammed are too embarrassed to admit it. But this only leaves the criminal free to continue perpetrating frauds on other people. If you believe you’ve been scammed, report it to the Canadian Anti-Fraud Centre, a provincial securities commission such as the OSC, the Government of Canada Competition Bureau, or your local police fraud squad.
© 2018 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.