5 Ways to identity fraudulent schemes

Investment fraud has grown and it targets investors of all incomes. Through common sense and a sound approach, the risk of getting swindled can be greatly reduced.

Investment fraud takes many different forms. From internet pyramid schemes to the outright selling of fake insurance policies, investment fraud feeds on eager and optimistic investors.

Research shows that con-artists are experts at the art of persuasion, often using a variety of influence tactics tailored to the vulnerabilities of their victims.  Common tactics include phantom riches (dangling the prospect of wealth, enticing you with something you want but can’t have), source credibility (trying to build credibility by claiming to be with a reputable firm or to have a special credential or experience), social consensus (leading you to believe that other savvy investors have already invested), reciprocity (offering to do a small favor for you in return for a big favor), and scarcity (creating a false sense of urgency by claiming limited supply).

Take for instance the prominent businessmen to pensioners countrywide who lost R155 million to the pyramid investment scheme queen Maureen Clifford. She convinced the wealthy farmers of the Eastern Cape, advocates and medical specialists she was running a private bank, getting them to invest around R155 million and paying return on investments of up to 15%. The scheme seemed to work for about five years before news broke that she was defaulting on repayments. Clifford with all the people that she worked with including a former ABSA bank employees, were charged with fraud, alternatively theft, and with contravening the Bank Act.

Most investment fraud occur with less sensationalism. Phone calls, websites, and often friendly acquaintances are just as capable of soliciting credit card numbers and checks from the eager and unsuspecting people.

Investment fraud is not always clearly illegal, however. Sometimes the company or security is legitimate, but unknown commissions are charged to the investor that can be really high. In many cases, the fraud lies in the fine print.

Some fraud is modest and difficult to identify, even after it has occurred. For example, boiler rooms sole purpose is to convince or ‘tip’ anxious investors on a stock. If enough investors take the ‘tip’, the stock price is unrealistically inflated, and the tippers sell out at a profit. Investment fraud is not always as clear as day. Sometimes it may be losing 10% on that risky stock tip you took last month.

Here is how to identity fraudulent schemes?
  1. If it sounds to good to be true, it probably is. Promises of high returns with low risk is a warning sign for skeptical investors.
  2. Pressure and persistence from unknown solicitors should also be red flags for the cautious eye. Scam artists use this tactic to pressure you into making a quick decision. In this scheme, a fraudster will suggest they have secret information about a company that the general public doesn’t have. Take your time to research an investment advisor, salesperson, company, and investment before you invest.
  3. Just because your friends and family members are invested in it doesn't mean that it's not a scam. Scam artists target religious, ethnic, or close-knit groups by working their way into organizations and befriending members. Fraudsters often exploit the trust and friendship that exist in groups of people who have something in common. Always do your homework. 
  4. Always avoid an investment if the salesperson will not provide you with anything in writing. Similarly, sloppy offering documents that contain typographical, spelling, or other errors can be a red flag that the investment could be a scam.
  5. Be very careful when you receive an unsolicited – meaning you did not ask for it – investment offer.  Whether from a total stranger or from a friend, trusted co-worker, or even family member, always consider the motivation of the person offering the investment.   
In general, if your gut feeling is that you might be getting solicited, just walk away. Investment fraud is costly for your pocket. Be level headed and use common sense so that your hard earned savings won’t become another statistic of fraud.