Who hasn’t heard of someone who lost money – or worse, all of their savings – in financial fraud? Unfortunately, despite all the safeguards put in place by regulators, investors are still at risk of being targeted by fraudsters.
Even large institutions get caught in the trap, and many victims feel guilty or ashamed and simply refuse to press charges. The horror stories we hear on the news are just the tip of the iceberg.
Financial fraud can take many forms. Here’s how to spot fraud and avoid becoming a victim.
Tax evasion schemes
Tax evasion schemes are plans or strategies that promise to reduce your tax liability significantly. These opportunities often require a basic investment but promise to reduce the tax bill. Fraudsters use schemes involving donations, tax losses or RRSP withdrawals to do this.
Beware because tax fraud can be a double whammy for taxpayers and have serious financial and legal consequences. Although the individual is a victim of fraud, he is committing tax offences unwillingly. He will still have to pay his taxes, which will be increased by penalties and interest, in addition to having to cover the loss related to the investment in the fraudulent scheme and the tax and legal costs of untangling it all.
Financial fraud
On the other hand, financial fraud is an offence committed in the financial field to deceive investors into misappropriating funds. They can include scams, frauds and market manipulation. According to the SEC, the U.S. securities regulator, the following is a list of the most common frauds:
- Pyramid or Ponzi schemes: illegal transactional or investment schemes in which profits are made by using money from new investors to pay a return to existing investors.
- Securities offerings that are fraudulent: companies that misrepresent or withhold material information in issuing new securities. This may involve investing in companies that trade on over-the-counter markets and the pink sheets. There are also “pump and dump” market manipulation strategies, as seen in the movie The Wolf of Wall Street.
- Binary options fraud: platforms that claim to offer binary options investments. Binary options may seem simplistic and very lucrative since they can only have two possible outcomes but are very complex. Misleading advertisements cheat many investors, promoting products that are too difficult to understand and lack transparency or being denied a refund.
- Cryptocurrency-related scams: Scams related to investing in virtual currencies can take many forms, but the most common methods are creating fake digital assets, holding fake initial coin offerings, pyramid schemes that use fake or invented cryptocurrencies, platform hacking and implementing ransomware or digital attacks.
Spot these 6 warning signs
- First, an emphasis on emotions. Scammers can use traditional social channels such as chambers of commerce, social groups and even religious groups to find their prey. They can also use online social networks with advertising or even develop their own network of contacts. They are usually very charming and friendly. Although their means of attack are very diverse, their weapon of choice is almost always to use people’s emotions to win them over to their cause. They try to make you fearful, envious, or desirous, or they use your empathy for a cause or a person. They will work on your feelings rather than your logic or wisdom.
- Second, most frauds are sold as unique or exclusive opportunities. Even scammers who try to lure their victims by plastering the Internet with false advertisements will tend to make you think it’s a well-kept secret. They’ll have you believe that the experts know nothing about their strategy…
- Thirdly, they will use allusions to famous people, a group of expert investors, or any other “name-dropping” strategy to make you jealous! If the rich do it, then why not me?
- Fourth, fraudsters will create a sense of urgency. Financial fraudsters may use aggressive sales techniques to get investors to act quickly. Scams are often offered with a short window of opportunity. The opportunities are presented as once-in-a-lifetime, exclusive investments that must be seized quickly. In general, they want to prevent victims from seeking the advice of a professional or someone close to them who knows what they are doing.
- Fifth, fraudsters may be reluctant to provide information about their business or investment. They will often cut their explanations short with imprecise and unclear information. We can’t say it enough; it’s essential to understand the full implications of an investment.
- Lastly, and here, we all turn on the sirens and flashing lights – the fraudster will offer you an exceptional return. Interest rates are at 2%; you will be provided 12%. If the rates go up to 5%, they will offer you 15%. And since these impressive returns will make you doubt that there might be something wrong, they will add a guarantee clause to the conditions! Of course, they can increase the returns if 15% is not enough to light the flame! They have seen 30, 50, and 100, and why not 200% returns?
There are no free rides in finance, as in many other areas. It is true that the wealthiest may have discounts on financial fees and may negotiate a slightly higher return on an investment or a better rate on a loan, but this is an economy of scale for the financial institution, and we are generally talking about a fraction of a percent.
The rule of thumb that will save you from much pain is this: if an opportunity seems too good to be true, it probably is.
Often, it is just a matter of checking on the Internet and with the professionals advising you to uncover the scam. The first step when talking to a financial advisor is to search the AMF website to verify the licensure of an individual and firm. It may also be a good idea to do a Google or LinkedIn search on the individual or firm approaching you to see if any red flags appear.
