Investment Frauds and Scams
Be Aware of the Warning Signs - Common Characteristics of Frauds and Scams:
- You are guaranteed a high return with little or no risk
- There is a cap on the maximum amount of participation
- Secretive behaviour
- You must make a quick decision or the opportunity will be lost
- Additional pressure tactics
- The request is for a small amount of money hoping the person contacted won't notice, doesn't care or won't do anything about it
- Information on the investment is never mailed to you
- Promises of legitimacy are made
- You are overloaded with information to create confusion
- There is a request to sign blank documents
- Behaving as if they know you and you can trust this person
- Investment sounds too good to be true
Listen to your instincts. If an investment sounds too good to be true, then most likely it is too good to be true.
Common types of Frauds and Scams:
- West African Letter Scam - Letters and/or e-mails are sent from what appear to be high-ranking government officials from a developing country. They claim that they have access to large sums of money and require assistance in getting the money out of their country. All they need from you is your bank account number so that they can transfer the money and in return, they offer a thank you gift of a portion of this money. The individuals then empty the bank account and are never heard from again.
- Affinity Fraud - This fraud occurs in a group setting such as ethnic groups, sports associations, religious groups and social clubs. Scammers will establish credibility by joining groups where they can share common interests. Once trust is gained, they'll ask if anyone is interested in investing but ask that you keep the information secret because it's such a great opportunity. Once the scammer collects money from individuals in the group, they disappear.
- Boiler Room Scams - These scams are called "boiler room scams" because the con artists who call to offer you a "once in a lifetime deal" are usually calling from a room, called a "boiler room", filled with other con artists on the phone doing exactly the same thing. These scams involve individuals placing calls to people claiming to represent a brokerage house. They use high-pressure sales tactics, while offering investors an exceptional deal on stock. The group working the boiler room typically owns most, or all of the stock, which it actively promotes to drive the price up. Once the group has sold all of its holdings, it discontinues promoting the stock. The price of the stock then falls drastically and you lose your money.
- Ponzi Scheme - Also known as a "pyramid scheme" because the people who invest first are at the top of the "pyramid". They make their money by encouraging participants to recruit more investors to the scheme. There is no actual investment; money from previous investors is used to pay new investors to make it appear as if money is being made. The people who join the scheme later on and make up the bottom of the "pyramid", lose out when the scheme runs out of new investors.
- Promissory Notes - Often sold as insurance products, these are short term loans that promise high returns for borrowing money from you at no risk. The companies offering the 'investments' are usually non-existent. Once they have your money, you never hear from them again.