There are many different types of investment fraud, including pyramid schemes and offshore scams. Recent investment frauds statistics, as published by UK Finance, show that over £50 million was lost due to investment scams in 2018. Perpetrators of investment fraud scams rely on a persuasive and convincing pitch to fool victims into giving them money. These pitches can be so believable, and investment fraud is on the rise in the UK.
So, we’re going to explain what is investment fraud, break down the most common types of investment fraud, discuss the key signs to look out for, and explain how to report investment fraud.
What is Investment Fraud?
Unfortunately, the investment market is extremely vulnerable to abuse by fraudsters so anyone can fall victim to investment scams. Essentially, investment fraud is the illegal activity of providing someone with false information so that they will invest in something.
Investment scams can come in many forms. Keep reading for further information on the different types of investment fraud:
- Pyramid Schemes
- Affinity Fraud
- Pump and Dump Fraud
- Offshore Scams
- Boiler Room Scams
- Advance Fee Fraud
1. Pyramid Schemes
The pyramid scheme is one of the most well-known types of investment fraud. Pyramid schemes can be difficult to spot because 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 it’s not uncommon for the people involved not to have realised they’ve been taken in by a pyramid scheme.
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 large 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, top-level reps walk away with substantial ‘earnings’. However, newer recruits with fewer recruits below them will not only leave empty-handed but also having lost their initial investments. Remember that if it sounds too good to be true, then it probably is.
2. Affinity Fraud
Fraudsters involved in affinity fraud typically target members of a group based on race, age, religion, etc. Affinity fraud is one of the types of investment fraud that shares close similarities with pyramid schemes. Often, the affinity fraudster uses a 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 pyramid schemes, these con artists promise large profits and may pressure victims into investing.
3. Pump and Dump Fraud
Pump and dump is a type of investment 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.
Cold calling traditionally was the most prevalent method of pump-and-dump schemes. However, with the rise of the internet, this illegal scheme has moved to online practices such as posting false claims online to lure in investors to buy stock quickly.
It is vital that investors complete their own research, such as checking the source and for red flags, before making an investment – no matter how tempting it may be.
4. Offshore Scams
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. It is likely that the company you believe you are sending your money to is fake or set up to merely funnel investor funds to the fraudsters. It is likely that the fraudsters will inform you that your money will flow in and out of your account and you witness this activity. However, it is also likely that your money is in fact going to a feeder account, which is clearing money out of your account.
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.
Types of investment fraud that are based offshore are especially risky as you may struggle to recover your money if something were to go wrong overseas. So, it’s best to be cautious of tax avoidance schemes.
Common characteristics of offshore scams include:
- Individuals are not registered with a securities regulator
- Promises of high returns, insider information or tax savings
- Provided documents do not contain audited financial statements or information regarding the investment or management
5. Boiler Room Scams
The term ‘boiler room scams’ refers to the idea that the sales environment creates the pressure of a boiler room due to the high pressure sales tactics utilised by the fraudsters. Boiler room scams are one of the types of investment fraud that are on the rise because fraudsters are becoming 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. As a result, the investor is left with a financial loss and worthless, unsellable stock.
The fraudster may request for the victim to transfer their money for the shares to an overseas bank account or even a UK bank account. The fraudster can make a profit from simply taking your money without handing over your shares, selling genuine shares at highly inflated prices or presenting you with a supposedly “valid” share certificate. What’s more, it does not always stop here, as fraudsters are also known to sell on their contact lists to other scammers. Therefore, potentially you victim to multiple related investment scams.
In order to effectively ensure that you are not falling victim to a boiler room scam, be aware of the common signs and ask yourself the following questions:
- Is there a high level of pressure to respond quickly to the individual?
- Is this contact unsolicited?
- Is the return on investment being promised to you potentially very high or unrealistic?
- Is the company you are being asked in unknown to you? Make sure you do your research!
Unfortunately, if the investment sounds too good to be true then it usually is. So, make sure you bear this in mind going forward to avoid investment scams.
6. Advance Fee Fraud
Advance free fraud offers the promise of high returns in goods, services and/or financial gains, for example, in exchange for an advance fee up front in order for the deal to go through. Usually, the scammer targets someone who is vulnerable due to their age, youth, or disability.
Examples of advance fee fraud include:
- Career opportunity scams
- Dating scams
- Lottery or prize draw scams
- Inheritance fraud
- Vehicle matching scams
- Loan scams
- Rental fraud
- Clairvoyant or psychic scams
How to Report Investment Fraud
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 investment fraud attempts to Action Fraud.