Seven tips for avoiding financial fraud
Tips
March 9, 2012
Save + Invest
Financial fraud can occur in many ways, at any time to people with any amount of and knowledge of money.
Being aware that anyone can be targeted, thinking about how these frauds work and how to protect yourself can be useful in avoid.

1. Remember, it could happen to you It is not only the wealthy who are targeted by financial fraudsters. Anyone can be a target. While high profile cases such as those of Bernie Madoff and Allen Stanford get a great deal of publicity, fraudsters can and do target even average earners. In 2010, a conman was convicted of a £34 million fraud which targeted small valley communities in Wales while in March 2012, the Irish National Consumer Agency warned against boiler room scams in its monthly newsletter. Around a fifth of respondents to a 2010 eZonomics poll said they had been a victim of financial fraud.

2. If it too good to be true... Offers of very high rates of return should ring alarm bells. The old saying “if it’s too good to be true, it probably is” should be heeded. Sometimes the offer may be framed in a way that makes the returns appear smaller and not arouse suspicion. For example, returns may be expressed at a monthly rather than an annual rate. A 2% monthly return is less eye-catching than 27% per year but is about the same. If the returns offered are well above those on commonly available products, think very carefully about the risks.

3. Ask, ask and ask again There is no harm in asking questions. Whoever is selling the product should be able to answer your questions to your satisfaction. Seek advice from somebody not connected with the investment. Consider speaking with an independent professional, your bank or even contacting the financial regulator in your country. Much of this advice will be free. However, even if a professional adviser charges a fee, this could be money well spent compared with the amount you could lose. If your friends or family have put money into the proposed investment, don’t necessarily follow their advice. Ponzi schemes often rely upon friends and family recommending the investment to each other.  

4. Check the seller’s registration People selling financial products often need to be registered. When asking questions, check that the person and institution selling the product is registered with the relevant authorities. Don’t take the seller’s word for this. The regulatory authorities in many countries keep lists of registered companies which are often publicly available.

5. Take your time Being pressured to make a decision quickly may increase the chance of making a poor decision. This is an observation by Nobel prize winner Daniel Kahneman in his book Thinking Fast and Slow. It takes time to research an offer and seek advice from appropriate people. If an opportunity is available only for a short time, make sure you devote enough time to look into it and ensure it can live up to its promises.

6. Check your computer With many transactions now carried out by computer, keeping software and virus protection up to date is important to reduce the risk of being a victim of cyber crime, such as phishing. The Anti-Phishing Working Group provides advice on how to guard against computer phishing and other forms of computer crime.

7. Get smart There are many forms of financial fraud. Being aware of them can be useful to avoid becoming a victim. The website of the Canadian Securities Administrators provides a useful list of common frauds and scams and other useful advice.