What to do to prevent becoming a victim of financial fraud

March is Fraud Prevention Month. Whether we want to admit it or not, we’re all potentially vulnerable to financial fraud. Here are some tips to help identify potential scams and protect yourself from fraud.

In an ideal world, we wouldn’t need to talk about this or shed light on the topic, but fraud is a very serious issue, and is always worth discussing. How serious? According to the Government of Canada, between January 2014 and December 2016 fraudsters swindled approximately $290 million from Canadians. A study conducted by the Chartered Professional Accountants of Canada (CPA Canada) showed that nearly one third of Canadians have fallen victim to financial fraud.

More recently, a survey completed by the British Columbia Securities Commission (BCSC) asked residents how they would respond to an investment offering guaranteeing returns of 14 to 25% with no risk. Despite these unrealistic claims, a quarter of those surveyed said they would be willing to check out the investment. The most susceptible cohort was millennials, especially females; 47% of female millennials said they would consider the offer, while their male counterparts fared slightly better at 35%.

How to identify fraudulent investments

Some of the most common types of investment fraud include:

• Boiler rooms – Investors are told that they can buy into a company that is about to go public where they can expect the price to skyrocket when the event occurs. Unfortunately, no such company exists.
• Advance fee schemes – Victims are convinced to pay an upfront fee for a too-good-to-be-true investment, reward, lottery winnings, etc. Fraudsters may try to legitimize the scheme by setting up professional looking websites and email addresses. Once the money is sent, the fraudster disappears.
• Ponzi or pyramid schemes – This scam entices its victims with promises of big returns and early investors receive payments that live up to the promises. The intention is to attract more and more new investors into the scheme. However, there is no underlying investment and eventually fraudsters run out of money to maintain the illusion.

Identifying those schemes – or any other fraudulent investments – can be challenging. Here are four questions to ask yourself, which can help you identify the legitimacy of an investment:

1. Does it sound too good to be true?
2. Did it come from a ‘hot tip’ or insider information?
3. Did the person selling it to you use phrases like “high-return”, “no-risk”, or “once in a lifetime opportunity?”
4. Is the person selling it registered to sell investments?

If the answer to the first three questions is yes, and the fourth answer is no, then you may want to seriously reconsider the investment, as well as consult with a registered financial advisor.

How to protect yourself

First and foremost, follow your gut. If something feels off, listen to your intuition. In addition to that, here are some things you can do to protect yourself from becoming a victim of fraud:

1. Arm yourself with knowledge: learn to identify the warning signs of investment fraud. There are many resources available to help you fight fraud and prepare yourself in case it ever happens.
2. Do your homework: simply put, you should never feel pressured into making an investment. Ask lots of questions and get the facts. Speak with a trusted financial advisor and get his or her advice.
3. Don’t trust blindly: be aware that scams like Ponzi schemes rely on word of mouth. Fraudsters like to infiltrate groups such as ethnic or religious communities and gain the trust of members who can recruit their friends and family. It’s much harder to resist an investment when the recommendation is coming from someone you trust.
4. Suspect fraud? Report it: if you encounter any suspicious investment opportunities, or if there’s a chance you’ve fallen victim to fraud, contact your provincial or territorial securities commission. They’ll investigate the scheme to determine whether there’s a legitimate concern.

Want to test your investment knowledge to strengthen your guard against fraud? Try this quiz. Read about the benefits of working with a professional financial advisor.