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How to Spot Financial Fraud

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. 

Nobody is safe! Even large institutions get caught in the trap, and many victims feel guilty or ashamed and simply refuse to press charges… The many horror stories we hear about 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 significantly reduce your tax liability. These are often opportunities that require a basic investment, but then promise to reduce the tax bill. To do this, fraudsters use schemes involving donations, tax losses or RRSP withdrawals.

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, as well as the tax and legal costs of untangling it all.

Financial fraud

Financial frauds, on the other hand, are offences committed in the financial field with the aim of deceiving investors in order to misappropriate 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 the issuance of 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 they are very complex. Many investors are cheated by misleading advertisements, products that are too difficult to understand and lack transparency, or simply by 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 

  1. 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. 
  2. 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 don’t know anything about their strategy…
  3. Thirdly, they will use allusions to famous people or a group of expert investors or any other “name-dropping” strategy to make you feel jealous! If the rich do it, then why not me? 
  4. 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. 
  5. 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 important to understand the full implications of an investment. 
  6. 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 amazing 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? 

In finance, as in many other areas, there are no free rides. 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 a lot of pain is this: if an opportunity seems too good to be true, then you have your answer. It probably is.

Often it is just a matter of checking on the Internet and with the professionals who are advising you, to uncover the scam. As a first step, when talking to a financial advisor, start by searching 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. 


  • Vincent Fournier, M.Sc., CFA
    Vincent began his professional career in 1999 and is a CFA charterholder since 2004. He holds a Bachelor’s degree in Business Administration and a Masters degree in Economics. Vincent has been an active member of the CFA Montreal society and was elected President in 2010-11. He joined Claret in 2002 and is a Portfolio Manager.

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