How to Avoid Investment Fraud & Scams

If you're considering making an investment in a non-bank lending option, we understand that you want to have every confidence that what you're putting your hard-earned money towards is legal, legitimate and not in any way fraudulent - and it's fair enough too.

In 2019 alone, Kiwis lost over $33 million to online scams, triple the amount lost two years prior (2017) and counting. Of these online scams, investment fraud was actually identified as one the top three types of online scams making New Zealanders fall victim.

At Southern Cross Partners, we value security, and making sure that both our investors and borrowers are as safe and informed as possible. That's why we've put together this quick article to help you to identify a legitimate investment opportunity from a fraudulent scam. Of course, if you ever suspect something isn't quite right, make sure to consult with your financial adviser for advice.

Who is most at risk of investment fraud?

The short answer - anyone who's looking to investment money online could potentially be at risk of investment fraud if they don't do their due diligence and practice safe and cautious investing.

However statistically;

"over 48% of people scammed online in New Zealand last year were aged 65 years or older." - Netsafe NZ

Globally, the findings of those at risk are somewhat similar, with the UK Financial Conduct Authority (FCA) reporting that those most at risk are:

• “older, wealthier investors – generally male”
• “[Younger investors] may be more likely to be persuaded by ‘get rich quick’ schemes as they have little experience of financial services and seek to get a head start in life,”
• "Women for example are more likely to fall for ‘recovery fraud’ – where scammers demand a fee to retrieve ‘lost’ funds."

Depending on the specific type of scheme, all genders, from all walks of life tend to be susceptible to investment fraud schemes.

What are the common types of investment fraud to look out for?

As defined by the Australian Competition and Consumer Commission (ACCC), investment fraud is defined as; "investment schemes that involve getting you or your business to part with money on the promise of a questionable financial opportunity".

Investment fraud can present itself in many ways, which is one of the reasons that it can be so difficult to catch. From providing untrue or misleading information or fictitious opportunities that involve stocks, bonds, notes, commodities, currency or even real estate - there's an abundance of different types of fraud out there.

Here are some of the most common types of investment fraud to look out for:

Ponzi Schemes

Named after Charles Ponzi (a 1920s-era con criminal), a Ponzi scheme is when an investment hub uses the funds from new investors to pay purported returns to earlier stage investors - usually at a rate that far outstrips what a traditional bank would be able to offer.

For the earlier-stage investors, the returns immediately seem 'too good to be true', but once no new investors are on-boarded, the pool of money used to pay dividends dries up completely - leaving most investors high and dry.

Pyramid Schemes

You've probably heard of pyramid schemes before and perhaps associate them with health and nutrition brands - but these schemes come in all shapes and sizes.

Pyramid schemes promise to turn a small investment into large profits within a short period of time. But in reality, participants make money by getting new participants into the program. Eventually, once it becomes impossible to invite new participants to the scheme or it becomes widely known that the scheme is in fact a pyramid scheme, the pyramid will crumble - often resulting in financial loss.

Pump-and-dump

This is a scheme where fraudsters buy large shares of low-priced stock, and then deliberately spreads misinformation around the shares they own to increase interest in investment - in effect driving stock prices. Once fraudsters have effectively driven the price of the share, they then sell all of their stock at the highest possible price point, leaving tricked investors with large shares in worthless stock.

Advanced Fee Fraud

Often this type of fraud targets people looking to reverse or lessen the impact of a stock trade mistake, by offering to buy low-value stock at an enticingly high price. Eager to rid themselves of their stock 'burden', the victim agrees to pay a fee to lock them into the deal which is promised to be reversed upon completion of the trade. Of course, the trade never goes through and the fee is never reversed - leaving the victim out of pocket.

Investment Seminars

This type of investment fraud involves the promotion of a seminar featuring motivational speakers, investment experts, or self-made millionaires who will give you expert advice on investing.

While the seminars are usual real, they're designed to promote high-risk investment strategies such as borrowing large sums of money to buy property, or investments that involve lending money on a no security basis or other risky terms, and charge a large fee to be a part of the semina

Victims are left short their seminar attendance fee, and if they buy into the scheme promoted, often lose money.

Important Note

These are a few of the more common types of investment scams, but it important to note that new and different schemes emerge constantly and this list is ever-changing. For financial advice, please see a financial adviser.

How do you protect yourself against investment fraud?

So now that you're aware of who is most at risk, and the different types of investment fraud out there, how do you protect yourself from falling victim to a scam?

Awareness is one of the most important ways to protect yourself (so reading this blog is a great start!), but there are a number of excellent services available such as Net Safe, that offer excellent advice.

Here are the investment scam warning signs to look out for:

This advice from the Financial Markets Authority. An ‘investment’ is likely to be a scam if you are:

• Contacted about an investment opportunity by someone you don’t know.
• Promised very high returns with little risk. These promises are nearly always too good to be true.
• Given little information in writing. All legitimate investments must have documents explaining the investment.
• Told the offer is known only to a select few. This is often a ploy to make you feel special.
• Asked to keep the investment a secret. This is to stop the authorities hearing about it.
• Not told who is behind the offer or given a physical address. Legitimate businesses give names and full addresses.
• Promised access to ‘secret’ overseas banking markets supposedly offering very high returns. These markets don’t exist.

If you suspect you're being targeted by investment scams, here's how you can protect yourself:

Provided by Net Safe NZ.

1. Hang up on unsolicited phone calls bearing news of ‘too good to be true’ investments. Be ready with a polite excuse – if you want – but don’t engage the callers: they are trained to wear down your defences.
2. Research carefully any investment offer. A listing on the Financial Services Providers Register, for example, is no guarantee a business is regulated to carry out business in NZ. The FMA and the Companies Office ‘Disclose’ website provide lists of all licensed and regulated investment providers in NZ;
3. Only use FMA-licensed entities like Lifetime Retirement Income, for example. Lifetime has a managed investment scheme (MIS) licence from the FMA while all information about its products are accessible on the Disclose website;
4. Don’t invest without seeking expert advice; and,
5. Report all scams – the FMA publishes a warning list of known fraudulent providers but new ones are constantly popping up."

Where to check or report investment fraud:

If you ever uncover an investment fraud scheme or are worried that you've been targeted, it's usually in your best interest to act quickly and report the fraudulent activity (always seek advice from your financial adviser if you're not sure).

Here are some safe places where you can 'blow the whistle' and let the right people know what's happening:

• Netsafe scam report: Netsafe can’t open investigations or track scammers, but they can offer support and advice for people who have lost money in a scam or think they are about to.
• New Zealand Commerce Commission: you can report a scam to the NZCC if you feel that the scam has breached goods or services competition and consumer laws.
• Serious Fraud Office NZ: you can report any serious fraud for evaluation and escalation to the Serious Fraud Office.

Remember, if you have any concerns or are looking for advice before making an investment, please get in touch with your financial adviser.