Too many times I pick up the newspaper or find an article online
that recounts a situation of a lovely couple bilked by a so-called
friend or trusted advisor out of their entire retirement savings,
only to further read that the investor has disappeared into thin
air or cannot be reached and the now bankrupt company cannot repay
its investors.
According to a Canadian Foundation for Advancement of Investor
Rights (FAIR) report entitled "A Canadian Strategy to Combat
Investment Fraud" published in August of 2014, "it is
difficult (if not impossible) to gain an accurate measure of the
prevalence of investment fraud in Canada." Further clouding
the issue is the fact that every investment carries with it the
risk of loss. So the question then, is have investors suffered
losses due to adverse market conditions or because of nefarious
activities? Perhaps we may never have a true grasp on the financial
losses and overall impact that investment fraud has in Canada. But
we can aggressively continue to educate potential investors both on
the red flags of potentially fraudulent investments and the nature
of due diligence that should be conducted prior to making any
investment.
Who is targeted?
Simply put, everyone. You don't have to be independently wealthy to be a target of investment fraud. The only real prerequisite is that you have some money available for investment. The Canadian Securities Administrators estimate that approximately one third of fraud victims are scammed for less than $1,0001. That being said, there are some similar or common characteristics of fraud victims as identified by FAIR, including:
- Expectations of a high return on investment;
- Susceptibility to persuasion techniques;
- Self-assessed aggressive investing styles;
- A belief that most people can be trusted;
- Highly educated; and
- Frequent participant in lotteries and / or sweepstakes
What are the red flags of fraudulent investments?
There are many red flags to fraudulent investments, but oftentimes they are overlooked or only identified after the fraud has occurred. The reason for this is twofold. Firstly, oftentimes these frauds are perpetrated by an individual, a family friend or a member of the same community or social club who has gone to great lengths to win your trust. Secondly, the financial pressure faced by the victim or the allure of earnings clouds the judgement of the investor. Some of the more common red flags are:
- A promise of high returns above average market returns;
- Increased pressure to make a decision;
- Guaranteed return on investment or a no risk promise;
- Promises of tax-free earnings through offshore investments;
- Statements indicating that mutual friends or common acquaintances have already invested;
- Claims that opportunities are based on insider tips or that the investment is secret to secure returns
At the end of the day though, the best way to protect yourself from investment fraud is to do your due diligence before investing.
Do your homework - what questions should be answered before investing?
While there is no guarantee that you can protect yourself from
all fraud, there are some questions that can help you make a more
educated decision. Before investing, ask yourself:
1) Is it too good to be true? At
the moment, a bank can lend your GIC money out as a mortgage at 3%.
The GIC might pay 1%. Their 2% of earnings is 'fixed', but
not guaranteed – there is the potential for default,
particularly if the mortgage is not insured. If you're being
offered an extraordinary fixed rate of interest, you should
consider how the money is going to be used. If it's going to be
lent to someone else at a higher rate of interest, why aren't
they just going to the bank and getting the 3% deal? If it's
being used to finance a business, how can that business sustain
itself with interest costs that high? In other words, if you're
winning, who is losing?
2) Does the individual you are dealing with hold shares or
are they a significant owner of the investment in
question? A fraudster who holds a significant amount of
shares in a company may be executing a 'pump and dump'
scheme. Through this tactic, the fraudster persuades investors to
invest shares in a company that is alleged to be under-valued, in
an effort to artificially inflate its value, only to turn around
and once the share price rises, sell their personal investment and
walk away with the proceeds.
3) Are your funds going to remain in Canada?
Offshore investment scams and internet fraud are difficult to
successfully prosecute. Therefore, dealing with other jurisdictions
increases your risk. In addition, while you may not be able to
control whether a fraudster will transfer funds out of Canada, your
ability to recover losses improves if the funds remain in
Canada.
4) Have you recently invested your funds
elsewhere or provided information to a party not involved in the
present investment opportunity? Was the offer you are
considering based on research you conducted or is this an
unsolicited offer? Many fraudsters will sell or share lists of
potential targets to other fraudsters.
5) Have you recently incurred a financial loss?
Many fraudsters will try to take advantage of an investor
repeatedly. A request for an advance fee to recover losses is often
used.
6) Is there third party information available to support
the potential investment? Don't rely on information
provided to you by the salesperson. Conduct your own research and
follow up on any discrepancies noted. Don't just rely on
information provided to you by the salesperson.
The reality in this day and age is that many baby boomers are
nearing retirement and there is increasing funds available for
investment as they prepare for a life of leisure. Now more than
ever, educated investment is critical in protecting individuals
from losing their life savings.
Footnote
1) Canadian Securities Administrators 2007 CSA Investor Study: Understanding the Social Impact of Investment Fraud
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
