10 minute read
A guide on how to avoid financial fraud
If something seems too good to be true, it most likely is not true
By Ahtesam Ahmad
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What would you do if someone came up to you and told you they had a great investment opportunity with quick returns? While only you can know yourself well enough to answer that question, what we can do is give you advice - run.
There are two key ingredients in everyday financial fraud. And no, we are not talking about the kind of financial fraud committed by high rolling bankers, corporate executives, or government officials. We are talking about the kind of scams faced by the everyday, working-man, investor. The first element in these scams is the desire to get rich quickly. The second is the desire to trust.
These two desires are basic. After all, who wouldn’t want to get rich and who wouldn’t want to believe that humans look out for each other? Wealth and trust are both evolutionarily wired into our brains. Yet both of these things can lead to complete financial ruin.
Essentially, the scammer in question scopes people and finds the easy ones to prey on. Usually, these scammers are fully aware of what they are doing and are doing it with malicious intent. If they are wiley, they choose weaker targets with liquid cash and very little understanding of how finance works. They get these people to trust them by promising big returns. Greed and blind trust are a bad combination, and the victims of these scams fall prey to the scammers that target their ‘get rich quick’ mentalities.
After all, the idea of getting rich overnight is wildly attractive and has been played out in entertainment media ad nauseum, from winning the lottery to a mysterious distant uncle leaving you a vast estate. At times this urge of instant gratification can be so overwhelming that people impair their ability of thinking straight and logically. Thus, end up being scammed.
While we’re all out there on our own, what we can give you is a list of common scams that someone might try on you, and some general rules on how to identify scammers and people that are lying to you. (Spoiler: If it sounds too good to be true, it probably isn’t true).
Advance Fee Scam
Advance fee scams are one of the most popular ways of scamming people (your spam folder will vouch for it) and believe me people still fall for it. These scams are usually orchestrated with the scammer making the victim believe that they have won some prize money or are entitled to some other benefit but they are required to pay charges upfront to claim their prize or entitlement. However, once these charges are disbursed, the scammer vanishes in thin air.
A very suitable local example was when Jeeto Pakistan’s (A popular comedy, ahm, I mean game show) name was used to fool people around the country into losing their money. An unknown group sent texts to random people claiming that they have won prizes in the game show.
For the supposed prize people were asked to contact a certain number and pay a certain amount. Once the victims paid up, the scammers would switch off their phones. However, to avoid being scammed by such perpetrators one should remember a few simple things. The language in these messages and emails is incoherent and most of the time grammatically incorrect.
Furthermore, if you get a call from someone claiming that you have won a prize, post a counter question about their identity, they will be taken off guard and most likely disconnect the call if you keep on insisting. Lastly, the most important thing is to not make an impulsive decision, research about the matter, try to call an official source to confirm about any possibility of lottery winnings.
Ponzi Schemes
Ponzi Schemes are basically structured in a way that involves the “Borrowing from Peter to Pay Paul” approach. The organizers of Ponzi schemes usually promise to invest the money they collect to generate supernormal profits with little to no risk. However, in the real sense, the fraudsters don’t really plan to invest the money. Their intention is to pay off the earliest investors to make the scheme look believable. As such, a Ponzi scheme requires a constant flow of funds to sustain itself. When the
organizers can no longer recruit more members or when a vast proportion of the existing investors decide to cash out, the scheme tumbles.
One of the most infamous fraudsters of our country, Sibtul Hassan aka Double Shah, also ran a Ponzi scheme. The con man quit his job in 2005 and reached out to his neighbors in Wazirabad to get them onboard for investing into his scheme which promised to double their money in 70 days. (No prizes for guessing where the name double shah came from).
Soon the scheme picked up and scores of people joined it with an estimated Rs. 5.4 billion being raised through this Ponzi method. The reason why people like these are successful is because they have a respectable stature amongst their target community. They draw on affiliation to gain trust and grow their network.
The clear red flags for such schemes are guarantees of abnormal returns, an urgency to invest and a reluctance to share a logical pathway for the investment scheme. People in their retirement age especially need to be wary of such fraudsters as they are usually a desired target.
The approach to follow when you are encountered with such a scheme is to research, to question the strategy and to ask for independent advice from a person that you believe has a better financial acumen than yours.
Pyramid Schemes
Apyramid scheme is another way of fraud, based on the members of the scheme recruiting others to buy in and promote the scheme. This way, everyone who joins the scheme has to deposit some amount of money and then they can start earning through commissions that are associated with bringing in more people to the scheme.
The money from the recruitments are paid to recruiters as well as a share going to the founder of the schemes. However, it becomes extremely difficult to recruit more people as the scheme grows.
For example, in a pyramid scheme, the founder recruits six people, sells a product to them and sets a target for everyone to recruit further six more people to sell a product to and expand the chain of agents in order to earn profits. Those six, recruit and sell to six more taking the number to thirty six and the chain goes on.
By the time the twelfth round is completed, the total members of the scheme would be more than 2 billion and they would need to recruit around 12 billion people to turn profits, more than the Earth’s population. (Good Luck with finding someone on Mars).
This means that ultimately, participants won’t be able to recruit more people and lose out on their deposited money. That would be the case with the majority taking part in the scheme.
A recent example of this type of fraud in Pakistan was the B4U group of companies. The investment wing of the company ran a scheme under which it gets $50-$75 investment from each investor while asking them to bring more investors on board to earn more profit. One investor has to get seven more investors to complete the first step. After this, the profit of the first investor would double to 14%. This chain of investors would continue and each investor would have to bring seven more investors.
This structure screams of fraud but people still fell for it. According to FIA and NAB the scam was able to rack in more than Rs 119 billion. The question here is how to avoid falling prey to such schemes? The answer is to look for early red flags.
The first one is time pressure, don’t fall for statements like “hurry up or you will miss a once in a lifetime opportunity”. Furthermore, promises of large amounts of money should ring an alarm and the last logical thing is that a legitimate business would never ask for deposits from people working for it.
Pump and Dump Schemes
A“pump and dump” is a form of securities fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price.
To explain, let’s use a simplified example of a stock that is valued at Rs 10. How this scheme works is that insiders (part of the fraud) send signals to buy the stock. They pump in the money for the stock and send out false tips that encourage retail investors to jump in. The market catches on to the increased interest in the stock and prices shoot up to say Rs 15 and then those “Insiders” pull out their money which leads to stock prices to fall sharply and the only loser is the retail trader. (Basically, Insiders are asking retail traders “Aam Khayega Aam?”)
Last year, in February, the Pakistani market saw a trade of more than billion shares in a single day. A rare occurrence and one that last happened 16 years ago in 2005. However, many experts stated it as a pump and dump exercise that was used to artificially hype up the market.
But why so? The reason for this is the fact that most shares were traded for two companies, World Call and K-Electric, both of which are worthless stock with companies struggling with debt and barely keeping afloat. These types of shares are a favorite target for scammers as they are easy to manipulate because of large volumes available at a considerably low price.
The easiest way to identify such schemes is to look out for some red flags; The past performance of the stock, the general market sentiments about it (Google it) the reputation of the company, if you have received unsolicited advice to invest in the company and the advisor is adamant that you will make huge gains thus, you need to invest immediately and is there any reason for the hype, has market conditions or company’s performance changed drastically?
Most of these red flags need to be looked out for if you are trading in other securities like Crypto also. The less the market is regulated the more it is susceptible to such frauds.
Coaching Schemes
Another unique scam that is out there are these coaching schemes. These schemes promise to teach shortcuts to earn money and lure in customers with promises to turn their life around but in reality they fail to deliver. (No need to worry “Millionairon” we got you covered). Such scams are actually very difficult to distinguish from legitimate coaching programs as they are trading knowledge in return of money.
The perpetrators who run these scams are great salesmen. They have a compelling rags to riches story to win over the audience and they bring in people to give fake testimonials of how the scheme changed their life. Furthermore, they try to create exclusivity by using phrases like “only for select people” or “Hurry up before the secret gets out”.
Overtime, these courses get more expensive as once you have taken part in one of the courses you are encouraged to opt-in for another one and so on until you have realised that there is no actual gain of knowledge. For anyone that has been living on this edge and is now realising what has happened to them, yes Waqar Zaka falls within this ambit. (All these well orchestrated fraud schemes occur at major moments of change. They strike when people are vulnerable due to volatility. They see War, Pandemics, Recessions and waves of Technological change as an opportunity.
Like in the case of cryptocurrency, many people rushed in with their investments just out of FOMO. This led to some fraudsters creating fake coins and fake crypto investment schemes that people followed blindly. The major red flag in all these cases is that the perpetrators heavily emphasise on the fact that “They are not a fraud” (Typical chor ki dari mein tinka).
Furthermore, it is extremely important to report these frauds. In Pakistan, complaints against such schemes can be launched online with SECP or FIA. If you have been scammed, you might feel embarrassed to tell anyone but the fact is that the sooner you file a complaint the higher are the chances of the fraud being caught and your money being returned. n
