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Recognizing Fraud Risks

Financial Institutions in the United States have reported an increase in consumers being scammed by fraudsters in 2024. Some are more secure than others, but no bank or credit union in the world is completely bulletproof.

Fraud threats come in various forms, but what is so nasty about many scams is that they deceive victims in a way that they voluntarily provide fraudsters with money. Perhaps the most damaging type of scam financially and emotionally is when a personal relationship is exploited. This is the first of a three-part series on consumer scams.

This article focuses on investment scams. Recognize that the appeal of such a scam is the promise of: 1) a high rate of return, 2) no apparent risk, and 3) a quick turnaround. What is crucial for a fraudster to ensure that an investment scam will be successful, though, is to gain the trust of the target. Unusual elements of a given investment deal are often ignored by an investor-victim if they have a personal relationship with the person who presents them with the deal.

Fraud prevention teams at financial institutions report hearing the same thing from members who have been defrauded in investment schemes:

• “I knew the investor for years.”                                                                                                          
• “I thought they had money at risk too.”
• “My friend recommended this to me.”
• “I was shown great returns on the investment.”
• “I trusted the investor because we have a similar background.”
• “I didn’t understand what the investment was, but I liked the investor, we connected.”
• “The investor knew I needed money, and they cared about me.”

Investing with a Verified Brokerage

The average investor typically goes to an established brokerage like Charles Schwab, Edward Jones, Fidelity, Vanguard, Merrill Lynch, Raymond James and a host of others. Information readily exists to verify the reputation of these organizations. In their respective websites or promotional material, they list the regulatory agency to whom they report (such as FINRA, SEC, or NAPFA).

Going to those agencies’ websites will provide information as to whether there have been disciplinary actions, complaints, or lawsuits against the organizations. Investor reviews can also be searched on the internet, with a search as simple as “is it safe to invest with XYZ brokerage?”

Individual reviews are subjective, but the more reviews available provide more support that a given organization is a genuine brokerage. Further, to invest with one of these brokerages will involve reviewing some type of prospectus, which discusses the nature of the investments (income-focused versus equity-focused, high-risk versus low-risk, tax implications, etc.) along with multiple documents providing disclosure and acknowledgement of risk that must be completed by the investor.

Once a client of such a brokerage, individuals can expect monthly statements, online account access, an annual tax statement, and a local representative for ongoing contact as needed.

Investing with a “Friend”

Now consider the alternative that has been reported by recent victims of investment scams (“investor-victims”).

Investor-victims have reported being approached by new friends; someone they met within the last year. Typically, the investor-victim has never met the friend in person, instead friending them through social media (i.e., the “internet friend”). Alternatively, investor-victims have been approached by long-time acquaintances who act as an intermediary for a newfound internet friend.

The internet friend talks about an investment they have made over what can be a period of multiple months. The talk starts off more as bragging than recruitment but that changes over time. Eventually, the internet friend will let the investor-victim know they can buy into the investment if interested.  The investment strategy is not simple, like a hot stock pick. The investment is something harder to track and confirm independently like international currency conversion or trading in precious commodities (such as gold). In particular, recent scams have involved buying cryptocurrencies. How the investment returns are earned is often vaguely described other than promising a rate of return that is quite high and only requires a short investment period, such as a 15% return (or better) within 90 days.

Investor-victims are ushered along by the internet friend to provide funding for the investment, usually without documentation, without an explanation of tax implications, and sometimes without even receiving direct online access to an account. This leaves the investor-victims with little to no proof that they are invested in anything, only that they transferred money to an unknown bank account. Additionally, the investor-victims have little to no ability to personally track the investment’s supposed growth.

Realization that the investment is a scam comes quickly – sometimes after a month, sometimes after a couple of weeks. The recognition commonly starts when the investor-victim can no longer reach by phone, email or social media the internet friend who recruited them for the investment. Next, whatever limited access – if there was any – to the investment account activity is closed.

The final confirmation comes when the investor-victim looks to reach the entity who brokered the deal and finds that it’s located in an offshore tax-haven country, or worse, does not exist at all. And in those instances when the investor-victim was recruited by a long-time acquaintance, they find out during the realization period that the acquaintance has lost their own investment.

Losses reported by investor-victims have been substantial, ranging from tens of thousands to hundreds of thousands of dollars.  Recovery of the investment is highly unlikely as the internet friend was really just a voice, someone the investor-victim has never met in person.

Remember that making an investment is every bit the business transaction that buying a home or car is. Those are not events you would make on a handshake – research is required. The same caution should be followed in making an investment, regardless of whether or not a “friend” has introduced you to the idea.