Perpetrators of investment fraud scams, such as Ponzi fraud and investment banking fraud, rely on a persuasive and convincing pitch to fool victims into giving them money. These pitches can be so believable that investment fraud is on the rise in the UK. However, there are signs to look out for and we will break down the most common types of investment fraud in this blog post:
Pyramid or Ponzi Schemes
Pyramid or Ponzi fraud can be difficult to spot as many companies work around the legislation to be recognised as legal ‘Multi-Level Marketing’ or ‘Direct Marketing’ companies. These schemes can be so seductive that people in them might not realise they’ve been taken in by a pyramid scheme. There are, however, some key signs to look out for.
You’ll usually initially be contacted by a family member, friend or acquaintance who wants to tell you more about their new business opportunity. You may be invited to a recruiting event, coffee meeting, or propositioned via social media, email, phone or post. The rep will be friendly and enthusiastic and have an answer for everything- often, from a script. There may be attempts to entice you with perks such as flexible working, a company car, and a guaranteed income.
At first, you’ll be asked to invest big upfront costs for a ‘starter’ pack or products. You might receive a small commission for these items but will be promised a bigger return if you recruit others to join. This is because pyramid schemes rely on fees from new recruits and not from the sale of actual products.
Pyramid schemes are not sustainable and only benefit the people at the top of the scheme. The reason for this is that reps earn money from the recruits below them, but eventually, the member pool will dry up. When that happens, the top-level reps will walk away with substantial ‘earnings’ but newer recruits with fewer recruits below them will not only leave empty-handed but also having lost their initial investments. More often than not, if it sounds too good to be true, it is.
Fraudsters involved in affinity fraud typically target members of a group based on race, age, religion, etc. Often, the fraudster uses a Ponzi or pyramid scheme to reel members in and they might even pretend to be a member of the targeted group to gain trust. Notable cases of affinity fraud have involved fraudsters conning the leaders of religious groups who have influence over their congregations. Similarly to the warning signs of Ponzi and pyramid schemes, these con artists promise large profits and may pressure victims into making an investment.
Pump and Dump Fraud
Pump and dump is a type of investment baking fraud where fraudsters build a portfolio of potential investors and pitch them a deal on low-priced stock. The fraudster owns a large amount of the stock they are selling which might not necessarily represent a legitimate business. However, as increasing numbers of investors buy shares in this stock, the value suddenly rises – ‘pumping’ the stocks. This is when the fraudster ‘dumps’, selling their own shares before the value of the stock crashes. The conman then walks away with a large amount of money and the investors are left with worthless stocks.
Offshore scam artists will promise spectacular profits if you send sums of money ‘offshore’. This is because, in most cases, the aim is to avoid or lower taxes by sending money to a tax haven. The drawbacks of offshore scams are that you may end up owing the government money in back taxes, interest or penalties for taking part in a tax avoidance scheme. You may also struggle to recover your money if something went wrong overseas, which is why it’s best to be cautious of tax avoidance schemes.
Boiler Room Scams
Boiler room scams are a type of investment adviser fraud which is on the rise as fraudsters become increasingly convincing.
A fake stockbroker might contact you via telephone or online and share ‘insider knowledge’, pressuring you into buying shares which they know are about to become very valuable. In reality, the shares are worthless and the fraudster will sell them for a high price, leaving the investor with a financial loss and worthless, unsellable stock. Our blog post on the 10 signs of a boiler room scam provides more information to be aware of.
Advance Fee Fraud
Advance free fraud offers the promise of high returns in exchange for an advance fee. Usually, the scammer targets someone who is vulnerable due to their age, youth, or disability. Examples of advance fee fraud include ticket scams, loan scams, business opportunity scams, rental fraud, fraud recovery fraud, and more. For more information about the types of advance fee fraud, read our blog post which outlines the details of advance fee fraud examples.
If you think you’ve been contacted by an investment fraudster, you can check the Financial Conduct Authority (FCA) register to see if the company contacting you is regulated. If they aren’t, it’s important to report the scammer to Action Fraud.