Con artists use a variety of investment schemes to separate unwitting investors
from their hard-earned money, including: Ponzi schemes, pump-and-dump
schemes, affinity scams, off shore scams, and pyramid schemes, just to
name a few. With the numerous scams out there and new ones popping up
every day, it can be difficult to know a legitimate investment opportunity
from a fraudulent one. Fortunately, there are six characteristics almost
all investment schemes have in common. Knowing and recognizing them can
help protect you and your investments.
#6. Promises of Offshore Tax Benefits.
U.S. citizens are required to pay income taxes on income received, regardless
of whether or not the money is housed in a U.S. account. According to
a 2009 WSJ article, the IRS recently increased its scrutiny of offshore
accounts and foreign income in order to catch tax evaders. "The penalties
for offshore income violations are now among the toughest in the tax system.
Those who have inadvertently failed to report offshore income, even just
a few hundred dollars, could be subject to a $10,000-a-year penalty going
back several years," reports Laura Saunders. If a sales agent or
broker claims an investment will provide you with an offshore tax haven,
#5. Claims of Privileged Information.
Many con artists trick investors with claims that the investor is one of
"only a few" who are aware of the current opportunity. By cultivating
a sense of secrecy (often coupled with a sense of urgency: "Act now.
This deal won't last long!"), fraudsters can gain an investor's
trust by making them feel like a part of a privileged minority. Research
such offerings very carefully.
#4. Lack of Registration.
A majority of investment schemes involve unregistered brokers or agents
selling unregistered securities. Before investing in any security, you
should check with both the SEC and FINRA to make sure the security and
the agent are properly registered.
#3. Missing Documentation.
Legitimate investments should include proper documentation that fully discloses
all relevant aspects of the investment necessary for an investor to make
an informed decision about the product. If you cannot obtain a prospectus
(for a stock or bond) or an offering memorandum (for a private placement
product), then that is a good indicator that something may be amiss.
#2. Guaranteed Returns.
Investments are risky. Some are more or less risky than others, but none
(other than an insurance policy) can provide a guaranteed return. Promises
of a guaranteed return should be a red flag.
And the most common indicator that an opportunity is really an investment scam:
#1. Promises of Overly High Returns.
returns in order to garner investor interest and make potential investors
believe the opportunity is too good to miss. Research the typical rates
of return for the securities in which you want to invest. If someone is
pushing a security with a proposed rate of return that is significantly
higher than the industry average, the investment is likely a scam.