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Six Key Questions You Should Ask When Assessing an Investment Opportunity for Fraud

Six Key Questions You Should Ask When Assessing an Investment Opportunity for Fraud

5 Minute Read

In our latest Fraud Prevention Month blog series, we take a look at steps to identify and protect yourself from fraudulent investment schemes.

Insight Forensics

Too many times I pick up the newspaper or find an article online that recounts a situation of a lovely couple bilked by a so-called friend or trusted advisor out of their entire retirement savings, only to further read that the investor has disappeared into thin air or cannot be reached and the now bankrupt company cannot repay its investors.

According to a Canadian Foundation for Advancement of Investor Rights (FAIR) report entitled “A Canadian Strategy to Combat Investment Fraud” published in August of 2014, “it is difficult (if not impossible) to gain an accurate measure of the prevalence of investment fraud in Canada.” Further clouding the issue is the fact that every investment carries with it the risk of loss. So the question then, is have investors suffered losses due to adverse market conditions or because of nefarious activities? Perhaps we may never have a true grasp on the financial losses and overall impact that investment fraud has in Canada. But we can aggressively continue to educate potential investors both on the red flags of potentially fraudulent investments and the nature of due diligence that should be conducted prior to making any investment.

Who is targeted?

Simply put, everyone. You don’t have to be independently wealthy to be a target of investment fraud. The only real prerequisite is that you have some money available for investment. The Canadian Securities Administrators estimate that approximately one third of fraud victims are scammed for less than $1,000 . That being said, there are some similar or common characteristics of fraud victims as identified by FAIR, including:

• Expectations of a high return on investment;
• Susceptibility to persuasion techniques;
• Self-assessed aggressive investing styles;
• A belief that most people can be trusted;
• Highly educated; and
• Frequent participant in lotteries and / or sweepstakes

What are the red flags of fraudulent investments?

There are many red flags to fraudulent investments, but oftentimes they are overlooked or only identified after the fraud has occurred. The reason for this is twofold. Firstly, oftentimes these frauds are perpetrated by an individual, a family friend or a member of the same community or social club who has gone to great lengths to win your trust. Secondly, the financial pressure faced by the victim or the allure of earnings clouds the judgement of the investor. Some of the more common red flags are:
• A promise of high returns above average market returns;
• Increased pressure to make a decision;
• Guaranteed return on investment or a no risk promise;
• Promises of tax-free earnings through offshore investments;
• Statements indicating that mutual friends or common acquaintances have already invested;
• Claims that opportunities are based on insider tips or that the investment is secret to secure returns

At the end of the day though, the best way to protect yourself from investment fraud is to do your due diligence before investing.

Do your homework - what questions should be answered before investing?
While there is no guarantee that you can protect yourself from all fraud, there are some questions that can help you make a more educated decision. Before investing, ask yourself:

1) Is it too good to be true? At the moment, a bank can lend your GIC money out as a mortgage at 3%. The GIC might pay 1%. Their 2% of earnings is ‘fixed’, but not guaranteed – there is the potential for default, particularly if the mortgage is not insured. If you’re being offered an extraordinary fixed rate of interest, you should consider how the money is going to be used. If it’s going to be lent to someone else at a higher rate of interest, why aren’t they just going to the bank and getting the 3% deal? If it’s being used to finance a business, how can that business sustain itself with interest costs that high? In other words, if you’re winning, who is losing?

2) Does the individual you are dealing with hold shares or are they a significant owner of the investment in question? A fraudster who holds a significant amount of shares in a company may be executing a ‘pump and dump’ scheme. Through this tactic, the fraudster persuades investors to invest shares in a company that is alleged to be under-valued, in an effort to artificially inflate its value, only to turn around and once the share price rises, sell their personal investment and walk away with the proceeds.

3) Are your funds going to remain in Canada? Offshore investment scams and internet fraud are difficult to successfully prosecute. Therefore, dealing with other jurisdictions increases your risk. In addition, while you may not be able to control whether a fraudster will transfer funds out of Canada, your ability to recover losses improves if the funds remain in Canada.

4) Have you recently invested your funds elsewhere or provided information to a party not involved in the present investment opportunity? Was the offer you are considering based on research you conducted or is this an unsolicited offer? Many fraudsters will sell or share lists of potential targets to other fraudsters.

5) Have you recently incurred a financial loss? Many fraudsters will try to take advantage of an investor repeatedly. A request for an advance fee to recover losses is often used.

6) Is there third party information available to support the potential investment? Don’t rely on information provided to you by the salesperson. Conduct your own research and follow up on any discrepancies noted. Don’t just rely on information provided to you by the salesperson.

The reality in this day and age is that many baby boomers are nearing retirement and there is increasing funds available for investment as they prepare for a life of leisure. Now more than ever, educated investment is critical in protecting individuals from losing their life savings.

1) Canadian Securities Administrators 2007 CSA Investor Study: Understanding the Social Impact of Investment Fraud


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