Security: Articles

This part of the site includes news and analysis on potential threats to your money from a variety of sources.

Cross-border financial fraud is a booming business. Despite the millions of dollars being spent by banks on improving security procedures, both they and their clients continue to be the victims of specialist fraudsters. Wealthy expatriates with large sources of ready cash are particularly targeted. Perpetrators of international fraud come in all shapes and sizes, ranging from individuals to large organised crime rings. And with the advent of the Internet, fraudsters are becoming even more sophisticated, and capable of targeting victims on the other side of the world.

As part of our service to our subscribers, Fintactica will keep you abreast of some of the most recent scams, and will seek to disseminate warnings against frauds that are still 'active'. Please feel free to contact us about any other financial scams of this nature you may have come across.

West African 419 scams

Also known as 'advance fee fraud', this is one of the most common international fraud schemes known, and has proliferated with the use of email. It is particularly popular with Nigerian and related West African criminal organisations. It gets its name from the relevant section of the Nigerian criminal code.

You will usually be contacted by an individual claiming to have, for whatever reason, large amounts of money tied up in a bank account, commodities (oil is a favourite) or securities of some description. This is usually because of a coup, civil war, death of a political leader, or some other crisis, they will claim. They will say they need to use a bank account which you control to help them move the assets out of the country where they are held, and will promise you a share in the proceeds in return. At some point you will be asked to pay an advanced fee of some kind. Victims who do this will be strung along as further false complications arise requiring further payments. These frauds generate millions of dollars for Nigerian crime syndicates every year, and their close connections with the government there mean that you are very unlikely ever to see your money again.

If you receive a 419 solicitation, do not respond to it. Most of these approaches are speculative, and it is unlikely you will hear back from them. If you do receive further communication, then report the incident to your local law enforcement authorities. They are more likely to take you seriously if you have actually lost money, but given the huge number of these schemes generated every year, and the lack of organised response from the Nigerian government, do not expect much in the way of further investigation.

High yield investment programs

Also called 'prime bank' scams, these frauds claim to offer you access to 'prime' or 'high yield' investment instruments. Frequently they will purport to be linked to major international financial institutions. They often claim that the securities concerned are part of a discreet market in which major banks regularly participate in order to reap massive profits. Such a market does not exist. These schemes have been quite widely and openly advertised in the past, including in major US newspapers. Promoters will offer seemingly amazing returns, sometimes as high as 200% per month. They will even name major international agencies like the International Monetary Fund or the World Bank as issuers or guarantors in some capacity.

The perpetrators will shroud their scheme in extreme secrecy, claiming that major banks will deny knowledge of it if asked, and making it difficult to take references from their other clients. They will also be evasive about exactly where the money is going, or how such high returns are achieved: the excuse is usually that the instruments themselves are too complicated to explain to a layman.

Similar schemes will try to sell you shares in 'the next big thing': past examples include eel farms, wireless communications, and an ethanol plant in the Dominican Republic.

Embezzlement

Embezzlement of your money by your bank, fund manager, financial adviser, or accountant is devastating when it happens, but can be avoided by using a few simple procedures. The smaller the bank or the business, the more vulnerable it is to fraud. In addition, if you are using a niche financial services provider that is not regulated, or is domiciled in a jurisdiction in which there are no compensation schemes in place, you stand a higher chance of losing your money. Sometimes even large banks in respectable jurisdictions can run into trouble through their own negligence, or internal fraud, and assets you have booked with them could be threatened. Central banks will only bale out banks that it would be expedient to rescue, like major savings banks with hundreds of thousands of local clients (and potential voters). Clients of smaller independent private banks are not necessarily protected by the government.

Do not allow your accountant or financial adviser to handle your money for you: that is your bank's job. Too many brokers have disappeared into the night with their client's fortune in a suitcase for this to be sensible practice.

Fund managers should not handle your money either: when you invest in a fund, the assets are booked with a custodial bank, an independent banking institution that looks after cash and securities in a fund's portfolio. Always make sure which custodian a fund is using, and that it is a reputable one. Your money should pass between the custodian bank and your personal bank. Letting your fund manager handle it confers risk to you, especially if it is a smaller fund management business, like a hedge fund, for example.

Pyramid schemes

These are one of the oldest investment scams around, and proliferate all over the world. If you are a sophisticated investor, they will most likely try to sell themselves to you as a 'hot new investment opportunity', possibly an initial public offering (IPO) in a revolutionary new company.

Called 'penny stock' schemes, and popular during speculative boom periods like the late 1980s, they are merely empty 'shell' companies that are marketed on the basis that investors could potentially realise massive profits in the wake of an upcoming merger between the shell company and a private firm. There is no real company doing business at all. Examples of sectors in which these companies claim to be doing business include bio-sciences, information technology, and cutting-edge scientific research.

Only 20% of the shares are sold to investors, with the insiders retaining 80%. When the shell company is sold, the insiders make a fortune with their 80%, and the 'investors' are left out in the cold with only a fifth of the net worth of the company divided between them.

The fraud attains its 'pyramid' characteristics when the brokerage company buys the initial tranche of shares back from the first wave of investors for a 50% profit on their part after only a couple of weeks (as false evidence that the scheme works). The brokers already have new investors lined up to buy these shares at twice the price. They also make a profit by charging their victims commission and transaction fees. Even if the merger with a privately-held company also owned by the brokerage goes ahead, the scheme is really being fuelled by the massaging of the share price by the brokers, not by any underlying profits the company is making. Eventually the scheme comes to an end when the sellers cannot find enough new buyers to continue to ramp the price up, at which point the share price collapses, and those holding shares at that point find they are worthless. Such schemes can even survive a collapse, with the brokers buying back their stock and going on to re-sell it again.

The easy way to protect yourself against these schemes is to scrutinise what you're investing in. Investigate the opportunity, try to acquire independent corroboration of what the investment opportunity really constitutes. Any lack of transparency, whatever the excuse given, should be viewed with extreme suspicion.

Internet fraud

The Internet has, unfortunately, become a tool for financial fraud. As a sophisticated investor, open to new opportunities, you must be particularly cautious about any financial schemes being marketed actively via the Internet. For example, many so-called investment newsletters are used to drive up the price of stocks by giving them unfounded positive coverage. Often the editor of the newsletter will be paid by those promoting the stocks. Similarly, fraudulent investment schemes can also be aggressively marketed via e-mail ('spam') or on Internet bulletin boards. The US Securities and Exchanges Commission (SEC) advises investors not to buy the shares of companies based on information received via e-mail or on bulletin boards, especially if they are small, thinly-traded, and do not file regular reports with the SEC. Be particularly cautious about investment schemes being actively marketed over the internet from offshore jurisdictions.

The Golden Rule

Shared by many specialist fraud investigators and journalists specialising in this subject: "If it sounds too good to be true, it probably is." Every investment opportunity should be scrutinised with these words in mind.