6 Common Types of Investment fraud You should be aware of

Written by Wellington Ayugi

At one point or the other, you may have thought about investing in the money markets, land or a business venture. You may have looked at your present financial situation and considered working towards being financially secure, something a paycheck alone can’t guarantee. Alternatively, you may have heard stories or met people who have dabbled in stocks and land and have cashed in big time.

Motivated by such tales you begin looking around for investment opportunities, and since you know a little about finance, you aren’t worried about losing money to potential fraudsters. Well, you may find out too late that nobody is actually immune from investment fraud.

A common misconception about investment fraud is experienced investors are less susceptible to investment fraud which is hardly the case. The fact is in today’s marketplace, fraudsters have become more sophisticated utilizing the internet to come up with realistic investing schemes which capture the attention of investors. Many investors are falling prey to get-rich-quick money schemes due to greed.

Types of Investment frauds

The fact is it’s really hard to distinguish what is a fake investment and what is real these days. Here are some common types of investment fraud and how you can avoid them.

Stock broker fraud

This is probably one type of investment fraud that rarely gets any attention, yet it affects many local investors. The thing is if you don’t know what warning signs you are looking thus making it hard to detect. What you should remember is not all brokers out there have your best interest at heart. Some may take advantage of your limited knowledge on stock trading to enrich themselves.

To begin with, you should make sure your broker is licensed by the Capital Markets Authority.  Also, try to scrutinize statements from your broker for unexplained charges, unauthorized trades, and any other financial irregularities. A brokers aim should be to create returns for your money in exchange for a fee, and anything to the contrary you should be wary of.

That being said, just because your investment is losing money doesn’t mean your stock broker is defrauding you. Markets sometimes fluctuate, and the resulting losses are a normal part of the process. Stock brokers do not insure you against market risk. Therefore, it falls upon you to differentiate between normal investment losses and what constitutes stock fraud.

Advance fees fraud

This scheme involves a victim being persuaded to pay money upfront in order to take advantage of an opportunity that can generate significant returns. The objective of the fraudster is to steal the advance fees you have paid and cease all communication.

For instance, you may be asked to put up some money upfront for a bargain stock that ultimately never appears. Alternatively, you may be offered an interest-free loan from an overseas bank or non-profit if you pay an application fee in advance.

A new trend has begun to emerge with fraudsters targeting investors who have lost money in risky investments. They will contact you with an offer to help recoup your losses on the previous investment. They will claim to be able to purchase or exchange the investment at a considerable profit to you. However, you must first pay a “refundable fee”, taxes or deposits. If you send more money, then you end up losing that too.

Boiler room fraud

Boiler room fraud is usually pulled off by a group of people who set up a temporary office, from whence they perpetrate investment fraud. To get you on board they might direct you to the company website, which seems professional. They might also set up an address and provide you with a toll-free number to make the company look legitimate.

In truth, the company doesn’t exist. The office is just a makeshift office or postal office box. By the time you realize the entire set up was a fraud, they will have already closed shop and moved to the next scam.

Ponzi schemes

Another type of scam is to watch out for is a pyramid scheme, often referred to as a Ponzi scheme. This is usually run by individuals rather than companies. These people will recruit you through ads and emails that promise you the world while working from home and getting quick returns in the range of KES 1,000 to KES 1,000,000. You may even get an invitation from someone you know to join an exclusive group of investors who are about to make a killing on an investment.

Large payments made to initial investors makes the entire set-up seem credible and this adds to the appeal of the group. In truth little or no investing takes place, and the scam comes tumbling down when the market regulator steps in or a small number of investors are admitted, to pay off existing investors.

Affinity Groups

This type of fraud can simply be defined as a case of mistaken trust. The fraudsters will exploit their victim’s religious beliefs, age, ethnicity, professional identity or sexual orientation to bypass our natural distrust for strangers. This method involves enlisting a leading member of a group ( who isn’t an investment expert ) to convince other members of the targeted group.

For instance, a respected church leader is sold an investment. The fraudster then informs the church leader should his congregation also buy into the investment, the proceeds will benefit the church. The church leader will unwittingly promote the fraud to his congregation as he believes it is for a good cause. The congregation will invest into the venture as they trust in their leader’s judgment. The fraudster will have used the affinity of the group for to perpetuate the scam.

Land Banking

This involves companies that subdivide the land into smaller plots and sell it to investors with the pitch that once it’s available for development the value will rise. However, in most cases, the land in question does not exist or is owned by another party, or is in an area of historical or cultural significance and has no chance of being developed.

In Kenya, land banking is becoming one of the more common types of land schemes. Fraudsters collect their victims contact details from shareholder lists, public records, and gate pass registers. They use high-pressure sales tactics that can come via emails, phone calls, word of mouth, seminars and even exhibitions. While not all land banking schemes are fraud it is often hard to differentiate them and it is better for you to research thoroughly if any approaches you.

The list above represents some of the more common investment frauds any investor should be aware of, and there are still other types of investor fraud out there. Here are some signs you can look for when someone is trying to sell you an investment:

  • He guarantees you quick and high returns on your investment
  • Pressures you to make a quick decision or you will miss out on the deal of a lifetime.
  • Is not licensed by the relevant agencies
  • Claims to be associated with a reputable organization in order to improve his credibility.
  • Claims to be a portfolio manager or a professional broker may and sound professional but could just be following a script.
  • Provides you with glossy brochures, prospectus, receipts, share certificates or refers you to an attractive web page.

Always keep in mind that a glossy brochure does not mean an investment deal is good. If you spot any of these signs or feel anything is off, do yourself a favor and walk away from it. If they are persistent report them to the relevant authorities.

Finally, no one will ever look after your money better than you. Working with brokers, agents and advisers means taking control of your finances, and not surrendering your control. As long as you remember that and take steps to protect yourself, the more you can work towards being an intelligent investor.

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About the author

Wellington Ayugi

Wellington Ayugi handles Business Development at Covered and has a passion for personal finance, microfinance, and developments in financial technology