September, 2009
The Second Opinion: Financial Frauds, Scams, and Flimflams

Financial Fraud

Recently, Winnipeg Police have uncovered yet another alleged Ponzi scheme in Canada. Like many other Ponzi schemes, the target appears to have been average seniors that have been bilked out of substantial savings that took decades of hard work and sacrifice to amass. Thus far, Winnipeg Police have identified 23 alleged victims with a combined loss of about $6.5 million. Obviously this pales in comparison to the $50 billion that Bernie Madoff admitted to taking from investors, or the $50 million that Earl Jones is accused of stealing from investors. Nevertheless, this more recent case allegedly took an average of about $280,000 from average citizens and yet barely got a whisper in the press – an indication as to how common financial fraud has become.

Harder evidence of the prevalence of financial fraud in Canada can be found in the statistics reported by the RCMP and other police agencies. According to the PhoneBuster’s website (a hotline for reporting fraud which is run, in part, by the RCMP), there were about 10,328 reported victims of identity theft in Canada in 2007 and 11,382 in 2008 – a 10% year-over-year increase. With 9,319 reported victims from January to August 2009, it is likely there will be even more victims in 2009 than in 2008 (about 20% more). What is perhaps most distributing about these numbers is that they include identify theft only – victims of the many other forms of financial fraud are not included in these figures.

Second Opinion takes these issues seriously, and our hearts are truly with victims of financial fraud everywhere. Putting our belief in the RCMP`s mantra of “Fraud; Recognize It; Report It; Stop It”, we dedicate the entire issue of The Second Opinion to educating our subscribers on the types of financial scams that are out there and the ways in which you can protect yourself from them.

By Carlo Palazzo, CFP, CIM

Common Scams

There are many financial scams in existence – too many to name. Nevertheless, we provide here a basic overview of some of the most popular financial scams.

Prime Bank Instruments

This type of scam typically involves an offer to participate in a secret trading regime and/or investment instrument that it not available to the general public, with the promise of abnormally high returns and little to no risk. Investors are lead to believe that the scammer is backed by a large international bank, sometimes called “Prime Bank”. Investors may be required to sign a non-disclosure agreement or another official looking document before they can participate in the instrument or trading regime.

There are many different versions of this, and they are often called different things, but the general idea is that you are investing in a non-existent instrument.

The best way to guard against this is to understand that there is no such thing as a secret investment in Canada.

African Letter Scams

This scam is normally carried out via a letter or email. The email will be sent by someone claiming to be a wealthy business person or government official from a third-world nation, commonly in West Africa. They claim that they are experiencing complications related to withdrawing money from an account or transferring money out of the country, and they say they need your help. They will either need a North American “business partner” or will require someone to pay the upfront taxes on their behalf, with the promise of sharing in a small fortune later. Whatever the excuse, they will ask you to deposit money in a bank account that can be accessed only by you and them. Then they withdraw the money from the account and disappear.

These letter scams take many forms. However, the common characteristic is that you are offered a large sum of money with the catch that you must first pay an upfront fee or tax.

If you receive one of these letters, do not reply to them as this will inform the sender that your email address is valid. Instead the RCMP’s website asks that you forward the letter or email to The Canadian Anti-Fraud Call Centre (a.k.a. “PhoneBusters”), which is operated by the RCMP and the Ontario Provincial Police (see contact details below).

Ponzi/Pyramid Scams

A Ponzi or pyramid scam normally will offer very high returns on investments, with a promise of little or no risk. Unlike Prime Bank scams, there is no secrecy. Instead, the scammer will offer you incentives for telling your friends and family about the investment opportunity. Because these people will trust you, if you provide a referral, they are easy targets for the scammer to take advantage of. The scam normally involves initial victims being paid with the investment dollars of subsequent victims. This makes it difficult for many people to resist. If they know someone who has already put money into the scam, and that person appears to have made money (on paper at least), it is difficult for them to believe that it is a scam.

These pyramid scams have the potential to be enormous. Bernie Madoff’s recent scam is one of the biggest in history, and it was a Ponzi scam.

Pump and Dump Scams

The goal of the scam artists in this scam is “pump” up the price of a stock with fake news reports or other techniques and then “dump” their position in the stock after the price has risen. The scam starts with the scammer buying a position in a stock, normally a “penny” stock. They will then start contacting random people, either by phone or by email, in order to promote the stock. Sometimes the promotion effort will include fake press releases and/or analyst reports. After they have convinced many people to buy the stock, the stock’s price will rise due to the spike in demand and the illiquidity of the stock. The scammers then sell their stocks at a profit, while the victims are left holding a stock that is now overvalued.

Identify Theft

Identify theft is when a fraudster steals your personal information – such as your name, date of birth, and social insurance number – and then uses that information to conduct one of many different types of fraud. They may attempt to take out a credit card in your name and max it out. Alternatively, they may steal your existing credit card and attempt to use it. If they have your personal information and are able to craft false identification, they likely will not have much of a problem.

Credit cards are not the only avenue for them to follow. Your debit card and log-in information to your personal banking website are also at risk.

There are several ways in which your information may be stolen. One method is by way of a “phishing” website (this is also sometimes called “spoofing”). A computer virus or malicious email will direct you to a website that appears to be your bank’s website, but is really a website run by the fraudsters. When you sign into the site, the fraudsters obtain your log-in information, which they can then use to steal money from your account.

A second way is “dumpster divers”. These are people who literally dig through the trash on the side of the curb looking for old bank statements, credit cards, or credit card applications – basically, anything that contains your personal information. You should always ensure that anything you throw out with your personal information on it is shredded or otherwise destroyed.

A third way is known as “shoulder surfing”. This is when someone looks over your shoulder as you enter your PIN number at a bank machine. By installing a device into that bank machine, fraudsters can get your bank card number. Once they have your bank card number and PIN number, they have everything they need to empty your bank account. This type of scam is also sometimes done in convenience stores and gas stations – with the help of the store owner. A pinhole camera is installed above the ATM machine to capture your PIN number. The best way to protect yourself from this is to always cover the key pad when you input your PIN number.

As a testament as to how prevalent identify theft has become, recently The Chairman of the Federal Reserve, Ben Bernanke, became the victim of identity theft. If it can happen to one of the most knowledgeable and powerful financial gurus of our time, it can certainly happen to you – so beware, and don’t feel too ashamed to report it if you fall victim to it.

Other Scams

This is only an overview of some of the scams. More scams are created all the time. At the end of this newsletter we provide additional resources for more information on scams listed above and information on other scams.

By Carlo Palazzo, CFP, CIM

Do's and Don'ts

There are several things an individual investor can do to avoid being the victim of financial fraud. Obviously, learning about the scams that are out there will help you avoid them, but there are other steps that can be taken as well.

We have compiled a list of things to do and things not to do in order to avoid being the victim of a scam.

Do:

  • Review your financial records for suspicious activity
  • Be skeptical of smooth-talkers
  • Be skeptical of pressure to “act now”
  • Avoid anything that sounds too good to be true
  • Check the credentials of those you are dealing with
  • Be skeptical of anyone offering gifts
  • Be skeptical of get-rich-quick schemes
  • Ask to see a prospectus
  • Get a second opinion
  • Ask many questions
  • Read anything that you sign

Don’t:

  • Buy/Sell based solely on websites
  • Deal with strangers from foreign countries
  • Buy “secret” investments
  • Buy anything guaranteeing high returns with no risk
  • Buy securities from an unregistered person
  • Be rushed into making a decision
  • Send money out of the country to someone you don’t know
  • Deal with anyone who requires an up-front payment to be part of secret group or club of investors, with promises of future fortunes

As identity theft is perhaps the fastest growing scam, and is now one of the most prevalent forms of fraud, we also present here an excerpt from the RCMP’s website on protecting yourself from identity theft in particular:

  • sign all credit cards when you receive them
  • never loan your credit cards to anyone
  • cancel credit cards you do not use and keep a list of the ones you use regularly
  • immediately report lost or stolen credit cards and any discrepancies in your monthly statements to the issuing credit card company
  • never leave receipts at bank machines, bank wickets, in trashcans, or at unattended gasoline pumps; ensure you destroy paperwork you no longer need
  • never provide personal information such as SIN, date of birth, credit card numbers, or PIN [numbers] over the telephone unless you initiate the call
  • promptly remove mail from your ‘secure’ mailbox after delivery and do not leave pieces of mail lying around your residence or work site
  • shred or otherwise destroy pre-approved credit card applications, credit card receipts, bills and related information when no longer needed
  • avoid keeping a written record of your bank PIN number(s), social insurance number and computer passwords, and never keep this information in your wallet or hand bag
  • avoid mail or telephone solicitations disguised as promotions or surveys offering instant prizes or awards designed for the purpose of obtaining your personal details including credit card numbers

This excerpt has been taken from this RCMP webpage.

By Carlo Palazzo, CFP, CIM

Additional Resources

There are several resources that can help you stay abreast of current scams and tips on how to avoid them. These include:

Royal Canadian Mounted Police (RCMP)

The RCMP have two good guides for avoiding scams:

Phone Busters (The Canadian Anti-Fraud Call Centre)

Joint Venture Between the RCMP, the Ontario Provincial Police (OPP), and the Competition Bureau of Canada. Their website follows the RCMP’s mantra on fraud:

  • Recognize it – lists 25 popular scams to help you recognize fraud.
  • Report it – lists phone numbers and email addresses to report scams or fraud that you may have become a victim of.
  • Stop it – lists local organizations across Canada that are involved in preventing fraud

General site: http://www.phonebusters.com/english/index.html
Toll Free: 1-888-495-8501
Email: info@phonebusters.com

RECOL (Reporting Economic Crime On-Line)

  • Operated by the RCMP
  • Allows you to report fraud online
  • Also offers statistics on fraud and education on scams
  • http://www.recol.ca/

SafeCanada.ca

  • Website run by the Government of Canada
  • Has tips on protecting yourself from many different types of financial scams
  • Fraud and Scams page is here
  • Identity Theft page is here

By Carlo Palazzo, CFP, CIM