Friday, April 15, 2011

Over the last few weeks the spotlight has been on some high profile New Zealand business people have been taken in by scams offering investment opportunities that are too good to be true.

Already this year, according to the Department of Statistics, there have been 400 complaints of such scams, and that is only the ones reported. While the Commerce Commission receives hundreds of complaints a year the overall financial loss is unclear.

Many people would have received a poorly worded letter, for example, from someone purporting to a Nigerian diplomat with access to millions of unclaimed dollars. The letter promises to share the money with you if you provide your bank account details.

Anyone who offers their support will find they are asked for some money upfront to cover legal expenses. Those who part with a few hundred or thousand dollars in anticipation of a share of millions will be very disappointed when their contact and the money disappears without a trace.

These fee advance scams are widespread and varied, and some so sophisticated that they appear to be legitimate investment opportunities. They can involve credible personalities with seemingly respectable organisations behind them, such as international banks.

A variation on the advance fee scams is the self-liquidating loan fraud. Contact is made with people seeking funding, promising them a loan from a bank which never has to be repaid. They explain that the bank, usually offshore, has so much cash and needs to move that money. For every dollar borrowed, a dollar will be invested in high yield bonds which will ultimately repay the loans advanced.

To participate in this win-win situation all people need to do is to forward a cheque to cover legal and administration costs. Of course there is no such bank and no such arrangement. Participants will soon find that they have paid real money up front to a scam artist.

Ponzi schemes have made the headlines in recent years, but the first such scheme and its namesake was started by Charles Ponzi in the 1920s. The way such a scheme works is that investors are encouraged to put money into a sure-win investment, the returns from which will be enormous.

Their money is never invested in any legitimate for-profit venture and the promised fantastic returns are simply paid to original investors from new investment money. The returns are unrealistically high so that new investors will be attracted. The initial investors actually get paid the promised returns and that attracts new investors. Ultimately the scheme implodes as it runs out of investors willing to support the structure.

Anyone who owns a computer with an active internet connection is vulnerable to the ever-growing variety of electronic fraud and the incidence of so-called malware is growing at such a pace that regulators and anti-virus software providers are struggling to keep up with.

The reality is that we all need to be aware of the very real existence of scam artists. A healthy dose of skepticism or suspicion may save you from losing your hard earned dollars to a scam artist.

Here are a few tips which may help you make your investment decisions:

• Question anyone who offers you a seemingly unrealistic scheme with a huge rate of return. If it sounds too good to be true it probably is.
• Understand the business model in which you are being invited to invest.
• Understand the risks involved and quantify them; never invest money into a scheme if you cannot afford to lose it.
• Research the personalities promoting the scheme; ask them for proof of identity and verifiable references; check the Companies Office website, Google search them and ask for a credit check.
• Do not invest blindly on the simple advice of a family member or friend; they may have also been duped and it may be your money paying their return in a Ponzi scheme.
• Check the Scamwatch websites and seek advice from the Ministry of Consumer Affairs.
• No matter how plausible the scheme sounds always seek advice from an accountant and solicitor. Tell the promoter that you plan to do that, and if they implore you not to or tell you it is not necessary, definitely do so.
• Look out for jargon. For instance, you may be told it is backed by a Prime Bank Instrument. It sounds impressive but there is no such thing.
• When the promoter purports that a major bank is involved, or some other legitimate agency, check with them. You will probably find that they are completely unaware of it.
• Never give passwords or pins to someone purporting to be your banker or legitimate service provider. Your real banker will never ask you to divulge that information.
• Do not use public computers such as in an internet cafe to transact on password protected websites.
• Make sure your computer has up to date anti-virus software and a robust firewall installed.

ENDS

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