For Lender
Times change and criminals change with the times.
Nigerian prince scam has become too well-known. So to persuade “the suckers” out of their money, today’s con artists have had to let their imaginations run wild. Some still trade in old-fashioned deception and impersonation, cold-call the vulnerable elderly, and help them out of their pensions and life savings. Some still trade in intimidation and coercion – selling worthless stocks over the phone in pump-and-dump schemes (see glossary below), and threatening victims with late fees and property liens if they renege on their “legally binding” purchase agreements.
But scams are increasingly growing more sophisticated and moving into the digital. Today’s con artists may have a professional-looking website, a mobile app, a financial dashboard, and offer what look like genuine investments. They may use professional images that signal trust, which some investors will take at face value and won’t look beyond the façade. Fraudsters have been known to peddle investments in eye-catching goods: from luxurious properties and sports cars to carbon credits or shares in Canadian cannabis companies.
As the times change, so do “the marks” of the fraudsters. To be sure, over-65s – for their accumulated wealth and deteriorating financial-management skills – remain the most financially abused group. But the wave of individual-targeted investment fraud – which has “reached epidemic proportions” in the UK – has another demographic group in sight – 36-55 year-old men. It seems that risk-taking attitude, overconfidence in one’s financial abilities and impulsivity – combined with the ability to summon large amounts for investment – makes one the perfect mark of a modern-day investment scam.
The success of a scam is often determined by how well it plays on the victim’s emotions. Old-fashioned greed is still potent. But some victims fall for the lure of an irresistible investment because they’re motivated by the gifts they could afford to their loved ones. Some fraudsters exploit the hopeless romantics in romance fraud schemes on online dating-platforms. Some target the ambitious by advertising fake jobs to recruit money mules to launder their ill-gotten gains.
Fraudsters sometimes groom their victims. Some Authorised push payment (APP) scams start at relatively low sums, slowly building up the trust of the sucker who, after dipping his feet in the water and seeing the returns, entrusts ever more money to the fraudsters. Once the losses, inevitably, start to roll in, some victims refuse to recognise they’ve been scammed and continue to invest hoping their luck will turn. Afterwards, some will never own-up to the fact that they’ve been exploited, preferring to think that only their investments went wrong, not their judgement.
Some fraud victims may later be contacted by “financial fraud experts” or “private detectives” who promise to recover the lost money if victims pay up an advance-fee to set the investigation into motion. Not surprisingly, instead of an independent inquiry, victims get their names put up on online “sucker lists”, to be exploited over and over again.
It is notoriously difficult to estimate the damage of investment fraud because victims rarely report it. In 2018, members of UK Finance, a banking trade association in the UK, have reported 84,624 incidents of APP fraud with gross losses of £354.3m. Sizeable as it is, this number should be taken as a serious underestimate of the actual scale of the problem.
To add to the gloom, if the victim demands an actual investigation, he may be in bad luck. Police officers are often reluctant to take up fraud cases – partly because fraud investigations are considerably more time-consuming. According to The Police Foundation, a policing think-tank in the UK, an average fraud offence takes a lengthy time-lapse of 514 days between reporting and charging. No other crime category comes close. For comparison, theft offences usually take 50 days.
Perhaps not surprisingly, according to reports by a police watchdog in the UK, some officers actively look for reasons to drop fraud investigations, because fraud doesn’t “bang, bleed or shout”. The great majority of fraud perpetrators walk free, and many victims have little hope for compensation or retribution. After the bank transaction has gone through, the money has most likely already been laundered, funnelled through shady shell companies, or moved overseas.
The scale of the problem and the sophistication of today’s fraud schemes is starting to shift some of the blame to banks for failing to block suspicious transactions. But, as things stand, the biggest finger is still pointed towards the victim for authorising the payment. Even Britain’s banks – some of which now abide by a voluntary industry code to reimburse victims of APP fraud – will not do so if the victim has been proved to be “grossly negligent” of the risks and didn’t take the adequate precautions beforehand.
It seems that to avoid fraud, we need to be vigilant ourselves.
Tell-tale signs of investment fraud
Unsolicited and questionable investment offers
Fraudsters’ offers mostly come out of the blue. They usually promise eye-watering returns, and downplay any risks associated with the investment. They try to lure in victims with stories of financial success and they may promise you that even if things go south, you will still be the owner of, say, the land, gold, or vine that you’ve invested into.
Openly cunning broker
Some fraudsters will promise to let you in on the secret of the rich if you don’t tell anyone else about it. Some will employ the rhetoric of a conspiracy theory against the little guy, or throw around unverifiable claims in their sales pitches – a technological breakthrough, a little-known company with a pending patent, a “fix” in the game, their special connections or insider information that is not privy to the general public.
Some might claim to have invested their own money into it and might suggest you invest a loan or, against every prudent investment strategy, put your entire life savings into this one company that is about to go public and will be the next Google. Fraudsters may brush aside the importance of disclosure documents as mere formalities, or encourage you to falsify information on your account application.
If you notice that the broker is flirting with brazenly illegal sales practices, don’t be polite – it’s a scam.
Manipulative sales practices
Fraudsters are known to employ emotionally-charged language and pressure their victims into making an impulsive decision. They might hook you by fear-of-missing-out. They’ll say it’s a time-limited offer and everyone is buying it. They might say that they simply don’t have the time to walk you through all the details, and they’ll encourage you to invest based on trust.
If you feel that the person doesn’t adequately disclose what they’re selling but is trying to intimidate or pressure you into making the purchase – this deviation from the professional standards of conduct is a dead giveaway.
Obfuscation of information and lack of transparency
Fraudsters might offer investment options and strategies that are complex and obscure by design. They could bombard you with legal and financial jargon in an attempt to deter you from looking behind the façade and pressure you into submitting to their authority and expertise.
Legitimate brokers and investment advisers can explain their practices and need to ensure you fully understand what you’re investing in. If your broker can’t, or won’t – there’s a reason behind it.
Additionally, watch out for non-traditional payment choices and unprofessional contracts that employ vague or imprecise language, are carelessly worded or contain spelling mistakes.
Similarly, your investment account should be in your name, held separately by a third-party custodian – not pooled, aggregated or commingled with other investors.
Obscure business model
Be especially wary of fraudsters that peddle investments to small, less sophisticated investors, even as their high-returns/low-risk investments – were they legitimate – would attract the attention of bigger institutional investors. Usually, even as it would be easier and less costly for them to raise money from institutional investors, fraudsters choose smaller investors because they rarely carry out their due diligence before investing.
Additionally, always question how the seller himself will make money. Knowledge and awareness of the most common scams goes a long way (see glossary below). Watch out for the obvious signs: if the investment involves recruiting your family members and friends as investors (Pyramid scheme), investing in some obscure penny-stocks (pump-and-dump), or transferring a small payment in advance (advance-fee scam) – their business model is quite obvious.
Practical advice:
Assume that every link you receive leads to a phishing website. Never press any link you are sent – always make your way to the desired website using your own link.
Assume that every unsolicited investment offer you receive is a scam. Reputable companies don’t cold-call people or approach them with offers out of the blue.
If you’ve been cold-called before – your number is now most likely in the cold-callers lists. Consider installing a call-blocker.
Don’t trust the information if it doesn’t come in direct response to your inquiry. Assume that every unexpected correspondence you have is with an impersonator, and don’t disclose any sensitive personal information.
Check the credentials of the company you’re thinking of investing with. Almost every country has a list of registered companies, which are licensed to sell investments.
Do your own due diligence and never trust the testimonials you’ve heard from the salesman or have seen on their website.
Refuse to make an impulse purchase. Always insist on some time to obtain independent advice before making an investment decision. Never conflate the soundness of an investment with the voice of the broker or the tone of the email.
Do not assume that your education, business-savvy, or financial success will protect you from falling prey to investment fraud. Anyone with some savings is a potential mark.
Have you already been scammed?
If you suspect you’ve been scammed – contact your bank immediately. It is crucially important that you know what to say in such an instance as every minute counts.
Demand to speak to a member of the fraud team and explain you’ve been a victim of an Authorised Push Payment (also known as bank transfer) fraud. Ideally, your bank should stop or reverse the payment.
Afterwards, contact the bank of the fraudster (which you can find out from their sort code) and explain your situation. The recipient’s bank might be able to freeze the account of the scammers before they get your money out of it.
Lastly, report the crime to the police and, if possible, your country’s national fraud agency.
If you’ve been affected or implicated in a scam – don’t be embarrassed to report it. People have fallen for sillier things. After all, Victor Lustig managed to sell the Eiffel Tower – twice. And, more recently, Bernie Madoff’s Ponzi scheme fooled thousands of individuals – celebrities, universities, and even financial institutions. Kevin Bacon, Steven Spielberg, and New York Mets owner Fred Wilpon are only some of the high-profile victims.
Remember that if you stay silent, your scammers will continue to prey on other unsuspecting victims.
Glossary:
Advance-fee scam – a fraudulent scheme in which fraudsters ask investors to pay an up-front fee (sometimes described as a tax, a commission, or a refundable deposit) in advance of receiving some goods that never arrive. Advance-fee scams are very similar to purchase scams in which a fraudster convinces the victim to pay in advance for the goods that never arrive.
Authorised Push Payment (APP) fraud – any scam in which the victim is manipulated into making a real-time payment to the fraudster. This category of fraud is contrasted with unauthorised fraud, in which a fraudulent transaction is carried out by a third party.
Boiler room – a call-centre where high-pressure brokers or salespeople cold-call lists of potential investors (“suckers”) to sell highly speculative, sometimes fraudulent, securities.
Cold-calling – solicitation of a potential customer who had no prior interaction with a salesperson over the phone.
Investment fraud (also known as securities fraud) – deceptive practices that induce an investor to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of securities laws.
Penny-stock – small company’s stock that has an extremely low share value.
Money mules – recruits, who allow their bank accounts to be used to help launder the profits of crime.
Pump-and-dump scheme – a fraudulent scheme that attempts to artificially boost the price of a stock through sales based on false, misleading or greatly exaggerated statements. The perpetrators of this scheme already have an established position in the company’s stock and sell their positions after the hype, leaving naïve investors holding worthless stocks.
Ponzi scheme – a scam based on fraudulent investment management services. Investors contribute money to the “portfolio manager” who promises high returns. “Interest cheques” are paid from the incoming funds contributed by later investors. The manager in charge of the operations forgoes any real investment activities and only transfers funds from one client to another. Ponzi schemes usually collapse when the pool of new investors dries up.
Pyramid scheme – a scam that is very similar to a Ponzi scheme, but is usually structured so that the initial schemer must recruit other investors who will continue to recruit other investors, who will continue to recruit other investors and so on. This recruitment is usually structured around the right to sell some products, and a percentage of all sale proceeds are shared with those at the higher level of the pyramid structure.
Romance Scam – a fraudulent scheme in which a con artist confesses romantic interest, establishes a relationship and then attempts to extract money or sensitive information out of the target under false pretences.
