How to Detect (and Recover From) an Investment Scam
John Powers, CFE, president of Hudson Intelligence, shared insights on fraud prevention in a recent interview with The Balance, a sister site of Investopedia with expert advice on personal finances.
Proper due diligence is the best approach for making sure your assets are safely and securely invested, but not all forms of fraud are readily recognizable on the front end.
In addition to comprehensive personal and business asset searches to support financial recovery for fraud victims, Hudson Intelligence leads fraud examinations to evaluate suspect offerings, gather and analyze evidence, and identify and locate perpetrators.
Read below for an excerpt adapted from the interview:
What are the most common investment fraud schemes?
When it comes to fraud, there’s a new flavor every month. Fraudsters want people to believe they’re getting involved in something new and exciting. They often pretend their schemes are based on actual market conditions, recent news, or financial innovations. A major trend this year has been investment scams related to Covid vaccine development and pharmaceutical stocks.
Ponzi schemes – in which money from new victims is used to pay purported “profits” to the original investors – are perhaps the most common and well-known investment scams. These pyramid-like schemes can run for years without detection. Tracing assets after the implosion of a Ponzi scheme can require forensic analysis of fraudulent transfers to family members, associates, trusts, and special-purpose entities, as well as asset searches in foreign and offshore jurisdictions.
Affinity fraud is a form of fraud that targets specific communities, including religious and ethnic groups. Fraudsters take advantage of the trust and goodwill among members of a tight-knit group, persuading victims to recruit their friends and family. The financial fallout can be catastrophic.
Another common fraud that originates online is the advance fee scam. Victims pay a relatively small amount upfront, after being promised a huge payout in the future. Fraudsters continually increase their demands for more money, inventing an endless litany of fake fees – taxes, insurance, tariffs, bonds, etc. – that must be satisfied to complete the deal.
What characteristics do fraudsters look for in targets?
Scam artists can be very adept at identifying the weak spots in our natural defenses. They take advantage of people who are emotionally vulnerable, financially stressed, socially isolated, or prone to making impulsive financial decisions. Yet they also exploit areas of human nature that we generally regard as positive, such as our capacity for hope, trust, and optimism.
Having high personal net worth isn’t a prerequisite for victimhood. Fraudsters will try to squeeze whatever they can get from any victim. We have seen working people make rash decisions – like liquidating a 401(k) or college savings account – in exchange for the promise of huge profits “guaranteed” by a fraudster.
What are the red flags of fraud?
Investors should ask themselves: Does this deal sound too good to be true? Did the offer come unsolicited from a stranger? Did they promise profits with zero risk? And are they applying pressure to act fast, before the so-called “opportunity” disappears? If so, take a deep breath and put away your wallet and checkbook.
For online fraud in particular, one of the biggest warning signs is being instructed to wire funds to someone’s personal bank account – or to the bank account of a business that is clearly not a registered brokerage firm. The bank accounts of so-called “money mules” are commonly used to receive money from victims, which is then wired overseas to scammers in a foreign country.
What should you do if you suspect investment fraud?
Don’t let personal embarrassment prevent you from seeking justice. Fraudsters can fool intelligent and financially sophisticated people, including professional brokers, bankers and investment advisors. They may seem charming, at first, but they are predators. For online frauds, there is often a whole team of professional criminals employed to manipulate their victims. Cheating and deceiving is their full-time job.
Notify your bank immediately if you sent money to the fraudsters by bank wire or automated clearing house (ACH) transfer. There is a very narrow window of time during which fraud-related wires and ACH transfers can be frozen and reversed by the sender’s financial institution.
If the fraud scheme was online, file a complaint with the FBI’s Internet Crime Complaint Consortium (IC3). These tips help authorities identify and pursue major fraud schemes. Filing complaints with the enforcement units of other regulatory agencies such as the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and state securities boards may also be appropriate, depending on the nature of the scheme.
Investors who have lost significant sums should consider consulting an attorney to discuss options for seeking restitution, which could include civil litigation, arbitration, or criminal complaint. It may also be appropriate to retain a private investigator specializing in financial fraud investigations to identify perpetrators, obtain evidence, locate witnesses and trace missing assets.