September 26, 2018

What are the warning signs of online investment fraud?

A man swipes on his mobile phone while holding what looks like a credit card. A man swipes on his mobile phone while holding what looks like a credit card.

The growing popularity of online banking has made it easier to invest your money electronically. But that convenience comes with a price: it can also expose you, your money and your personal information to fraudsters.

Fraudulent investments are deceitful practices that influence people to invest their money based on false information. They can result in financial loss, impact your relationships, and affect your mental well-being.

According to Investopedia, the internet adds a troubling dimension to many longstanding investing scams, because “a fancy Web site can create the illusion of a large and reputable company, especially if it provides links to legitimate sites.” There are multiple examples of fraudulent investment practices online, including unsolicited, to-good-to-be-true email offers, stock-picking websites and investor bulletin boards.

The federal government estimates that from January 2014 to December 2016, Canadians lost over $290 million to fraudsters of all kinds.1 Here are a few signs to watch out for when considering an investment opportunity.

Investment fraud warning sign 1: Big payout, minimal risk

You’ve probably heard the saying that if it sounds too good to be true, it probably is. Well, you should also apply this idea to investing. The general rule is that to reap higher returns on your investment, you must be willing to take a chance on losing the money you’ve invested. In other words, the greater the potential risk, the greater the potential reward.

Investment fraud warning sign 2: The hot tip

The story of Fred and Maria Turbide represents a cautionary tale. The couple were featured in a CTV News documentary Opens a new website in a new window in January 2018 detailing how they lost over $300,000 after buying an online educational package that purported to teach them about investing.

The package acted as a gateway to a scheme that pushed investors into making progressively larger bets on stocks and currency trades. “There are no trades,” a former broker told CTV. “There’s no anything. It doesn’t exist. It’s just a platform, like a video game.”

There are some good reasons to think twice about acting on such so-called “hot tips.” For one, that information could be wrong. For example, it could be crafted by someone who stands to benefit from your investment and who has little interest in you benefitting from that investment.

Second, if the hot tip involves insider information – meaning it came from someone close to the company being invested in – it could mean you’ve engaged in an illegal activity and could face legal consequences.

Investment fraud warning sign 3: The hot seat

Unlike the hot tip, which promises insider information about an investment opportunity, the “hot seat” involves a potential investor being pressured to commit money within a short window. And while investing wisely can mean taking advantage of brief opportunities, it shouldn’t leave an investor feeling stressed or uncomfortable.

While the hot tip can be alluring, the hot seat is generally less appealing. Nevertheless, it’s a very effective scamming technique, particularly when employed by experienced fraudsters.
If it feels like someone is pressuring you to act quickly, there’s a good chance they don’t want you to learn more about the opportunity’s potential drawbacks. Take it as a warning sign and move on.

Investment fraud warning sign 4: The mysterious seller

People who have some mystery about them tend to intrigue us, but this is never a good thing when it comes to investing. The person bringing an investment opportunity to your attention should have a clear track record and must be registered with a provincial securities regulator.

Each province has a securities commission that can help you learn more about the person offering you an investment opportunity. In Ontario, you can use the Ontario Securities Commission’s “Check before you invest” tool.

If you live in another province, check out the “Are They Registered?” tool offered by the Canadian Securities Administrators (CSA) website. The CSA site also includes valuable resources you can use to choose the right financial security advisor for your specific financial situation, including a checklist of useful questions that you should ask during introductory meetings with potential advisors.

Investment fraud warning sign 5: The “investor alert”

One of the most valuable resources available through the CSA website is called “Investor Alerts”. According to the CSA, it’s designed to help the public do due diligence on potential investment opportunities.

Simply enter the name of the person offering you an investment opportunity and the site will let you know if they appear to be engaging in activities that pose a risk to investors. The CSA tool provides the ten most recent alerts, including the name of the investor or investment firm, the provincial regulator issuing the alert and the date the alert was issued. Should you find your seller on this list, you may want to think twice about moving forward.

This information is general in nature, and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor.

1. Fraud Facts 2017—Recognize, Reject, Report Fraud (http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04201.html)
 

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