Financial Scams

1. Stay away from opportunities that seem too good to be true. That means: Avoid offers which guarantee large profits for small investments, with little or no risk. There’s risk in ANY investment, nothing “always goes up”, and if you can make so much profit – ask yourself why no-one else is making the money?

2. Don’t send any money unless you’re sure that you are dealing with a reputable company. Check with the government agencies in your area (UK=Department of Trade and Industry / Financial Standards Authority, US=Securities and Exchange Commission / Better Business Bureau). Only send money if you are completely certain about the person or company you are dealing with. Try to avoid paying for anything upfront if possible.

3. Don’t deal with anyone you can’t verify the authenticity of. The more background you know, the safer you are. Investment history, or who the person is / their address / and their trading history. Have a look on Google for any horror stories or troubles that have been experienced by anyone else. Even though a company may be reputable, financial losses on their side could see you being left out of pocket.

4. Never give sensitive information out if you don’t know where it’s going or what it’s going to be used for. This includes social security numbers, bank account numbers, credit card numbers, signatures.

5. Be particularly careful making purchases online – through websites or ebay. Take advantage of payments protection systems such as those on credit cards and through paypal. Keep a track record of “due diligence” to give to the payment processing company, to attest that the scammer seemed reputable.

Common schemes to watch out for (from wikipedia):

The protection scheme:
There are con artists out there. The con man tells the mark that there is a web site you can register your credit card number on to keep it safe from stolen identity. The mark then willingly gives the con man their credit card number. The con man is then never seen again.

Phishing:
A modern form of scam in which the artist communicates with the mark, pretending to be from an official organization that the mark is doing business with, in order to extract personal information that can then be used, for example, to steal money. In a typical instance of phishing, the artist sends the mark an email pretending to be from a company (such as eBay). This email is formatted exactly like email from that business, and will ask the mark to “verify” some personal information at their website, to which a link is provided. The website itself is also fake but designed to look exactly like the business’ website. The site will contain an HTML form asking for personal information such as credit card numbers. The mark will feel compelled to give this information because of words in the email or the site stating that they require the information again, for example to “reactivate your account”. When the mark submits the form, the information is sent to the swindler.

Advanced fee fraud – including the 419 / and free lottery winning fraud:
The ‘investors’ are contacted, typically with an offer of the type “A rich person from the needy country needs to discreetly move money abroad, would it be possible to use your account?”. The sums involved are usually in the millions of dollars, and the investor is promised a large share, often forty percent. The proposed deal is often presented as a “harmless” white-collar crime, in order to dissuade participants from later contacting the authorities. Similarly, the money is often said to be the embezzled funds of a recently deposed or killed dictator. The operation is professionally organized in Nigeria, with offices, working fax numbers, and often contacts at government offices. The investor who attempts to research the background of the offer will often find that all pieces fit perfectly together.

If they then agree to the deal, the other side will first send several documents bearing official government stamps, seals etc., and then introduce delays, such as “in order to transmit the money, we need to bribe a bank official. Could you help us with a loan?” or “In order for you to be allowed to be a party to the transaction, you need to have holdings at a Nigerian bank of $100,000 or more” or similar. More delays and more additional costs are added, always keeping the promise of an imminent large transfer alive. Sometimes psychological pressure is added by claiming that the Nigerian side, in order to pay certain fees, had to sell all belongings and borrow money on their house, or by pointing out the different salary scale and living conditions in Africa compared to the west. Most of the time, however, the needed psychological pressure is self-applied; once the victim has put money in toward the payoff, they feel they have a vested interest in seeing the “deal” through.

In any case, the promised money transfer never happens. The money or gold does not exist

The Pyramid Scheme:
A pyramid scheme (also known as “Pyramid Scam” ) is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered. Pyramid schemes have existed for at least a century. Matrix schemes use the same fraudulent non-sustainable system as a pyramid; here, the victims pay to join a waiting list for a desirable product which only a fraction of them can ever receive.

There are other commercial models using cross-selling such as multi-level marketing (MLM) or party planning which are legal and sustainable, although there is a significant grey area in many cases. Most pyramid schemes take advantage of confusion between genuine businesses and complicated but convincing moneymaking scams. The essential idea behind each scam is that the individual makes only one payment, but is promised to somehow receive exponential benefits from other people as a reward. A common example might be an offer that, for a fee, allows the victim to sell the same offer to other people. Each sale includes a fee to the original seller.

Boiler Room Fraud:
A boiler room usually has an undisclosed relationship with the company being promoted or undisclosed profit from the sale of the house stock they are promoting. The boiler room starts the process off as a bridge loan. Where a small company is looking for financing, looks to an investment bank to raise capital. Usually this is a legal procedure but most boiler rooms perform this function for companies that don’t exist. After the managers of the boiler room invest money through the phony company or shell. They can either (A): Underwrite an IPO (Initial Public Offering) or (B):back the phony company into a “shell” company that has gone out of business and no longer trades. Usually on the OTC pink sheets or the Bulletin Board market that carries many small and thinly traded stocks. Then a boiler room promotes (via telephone calls to brokerage clients or spam email) thinly traded stocks where there is no actual market. The brokers of the boiler room actually “create” a market, that gives the people who did the bridge loan/Private placement or owners of the company enough volume to sell their shares. The managers of the boiler room usually have close ties to or the same owners of the company whose stock is being promoted. After the selling force of the boiler room sell their clients on the idea of the IPO, they are not allowed to sell the shares that the customer invested in because there is no real “market” for the shares. And any shares sold create a large loss in the price of the stock, due to it being thinly traded and has no public support.