Types of Fraud
Being aware of common scams and schemes can give you an advantage if you or someone you know is being targeted by fraudsters. Although investment frauds are most common, real estate fraud is also prevalent, as are other types—wherever there’s money, there are unscrupulous people looking to make a fast buck. Information on each type of fraud listed below can also be found at the recognizeinvestmentfraud.com website.
- affinity fraud
- binary options fraud
- credit cards and investing
- cryptocurrency fraud
- forex scams
- insider trading
- mortgage fraud
- offshore investments
- Ponzi/pyramid schemes
- prime bank schemes
- pump and dump schemes
- Recovery room scams
- RRSP unlocking scams
Scam artists use victims’ religious, community or cultural identity to gain their trust. The scam artist will attend worship with the victims or volunteer with and attend social events for that particular group. Once they have established a strong relationship, they convince people to invest in their scheme.
Binary options fraud:
These scams direct people to binary options “trading” sites via social media, online ads and unsolicited phone calls. Binary options are a form of wager, where you bet on whether a stock or commodity will increase or drop in value within a very short time span. However, the overwhelming majority of these sites are rigged to lure in a victim with small early returns. Once larger sums are invested, the victim is bled dry as quickly as possible. Unauthorized credit card withdrawals often follow.
NO binary options firms are registered to trade anywhere in Canada.
Credit cards and investing:
Investors should know that most registered investment firms in Manitoba do not allow customers to use credit cards to purchase investments.
Borrowing to invest is considered highly risky. Making an investment purchase on your credit card or using a credit card for a cash advance is similar to borrowing money but at a very high interest rate.
Cryptocurrency scams can take a number of forms, such as multi-level marketing schemes, pump-and-dump schemes, or fake digital wallets.
In a multi-level marketing scheme, companies lure investors through the promise of high interest with low risk (for example, one percent daily returns) on a new virtual token or coin. Investors are incentivized to recruit more members through commissions. Promoters rely on online/social media advertising to hype schemes and attract new investors. Eventually, the company will shut down, and leave investors with nothing but worthless crypto coins or tokens.
In a pump-and-dump scheme, groups collaborate to buy a low-value cryptocurrency, and then heavily promote it on social media to push up demand and increase the price. Once a certain threshold is met, there is a sudden, coordinated sell-off. Those unaware of the scheme are left with the devalued cryptocurrency.
A fake digital wallet can be set up by a scammer to lure users into unknowingly providing their private key or code – once obtained, the scammer will steal all available cryptocurrency.
Fraudulent ICOs capitalize on a general lack of knowledge by the investing public on cryptocurrency and blockchain technologies. Exploiting people’s Fear Of Missing Out or FOMO on a new technology is one way these frauds will use a sense of urgency to get potential investors to make hasty, uninformed decisions.
Common concerns of investing in cryptocurrency include high volatility, a lack of regulation, no recourse if your money disappears, and is untraceable once lost. Unlike money in a bank or credit union, cryptocurrency is not ensured through Canadian depository insurance. Cryptocurrency is also highly vulnerable to hacking and theft.
These scams often find their victims through unsolicited phone calls or emails that direct the victim to a forex website. The websites look legitimate and offer what seems to be an exciting opportunity to invest your money in the foreign exchange (forex) market. You’ll be told the person or company investing your money has a great track record and you’ll be promised a high return. What usually happens is that your money is not invested in anything—the scam artist simply steals it.
Insider trading is the buying or selling of a security by an insider* who has access to non-public material information** about a publicly-traded company.
*An insider is typically a director or senior officer of a company or a person or entity owning more than 10% of a company’s voting shares.
**Material information is information about certain facets of a business that have not been made public but may affect that company’s share price once released. Material information can take many forms, including details of revisions to financial statements, pending regulator announcements, a corporate merger or a change in a company’s board of directors, etc.
A mortgage fraud occurs whenever someone lies about an important fact or fails to disclose an important fact in order to facilitate obtaining a mortgage loan. The misrepresentation can be either verbal or in writing. The fraudster could be stealing from the legitimate homeowner or the lender. They could also be using real estate to launder the proceeds of crime.
For more in-depth information on Mortgage Fraud:
Mortgage Fraud Part 1: Steering Clear of Mortgage Fraud
Mortgage Fraud Part 2: The Red Flags of Mortgage Fraud
In this type of scam, the fraudster will promise you a high return from an investment in another country. They will often tell you the investment is a great way to avoid taxes. What you may not know is that once your money is sent to another country and is in someone else’s control, you may not be able to get it back. The promised high return is often used just to attract your attention and is never paid.
The promoter promises investors high returns. They operate by paying interest to early investors with money brought in by new investors. These new investors are attracted by the stories of people claiming to be getting high returns, and in some cases by receiving small amounts of money in the early stages of the scheme. Inevitably the pyramid collapses and the investors lose their money.
Prime bank schemes:
Investors are asked to contribute money to use in the purchase and sale of letters of credit, prime bank notes or some other similarly named financial instrument. They are told that they can earn very high interest rates by buying and selling these instruments quickly.
Investors are often told that this type of investment is a secret transaction, normally available only to the very wealthy, and that they should keep all information confidential. The promoters explain that the money is invested offshore and they present investors with a complicated information document, which gives the impression that the scheme is legitimate. In the end, people lose their money.
Pump and dump schemes:
Pump and dump scams involve anonymous people talking up a thinly traded stock (which they own), often on Internet chat groups, quoting supposed “inside information.” People buy into the hype and start buying the stock and its value shoots up. The original promoters sell their stock at the inflated price and the stock price soon drops. The rest of the group is left holding stock that is worth far less than they paid for it.
Recovery room scams:
You can be a victim of fraud more than once. In fact, 25% of fraud victims are defrauded a second time. This is known as revictimization, or a “recovery room” scam.
RRSP unlocking scam:
A promoter advertises that their company has found a loophole in the tax law that will allow you to access your locked-in RRSP, RIF, LIF, RESP or LIRA funds tax-free. You are instructed to deposit money in a self-directed registered account and buy shares in a shell company. The company then lends you money and keeps the remainder of the funds as a fee. You are now in debt to the company and it could require you to repay it. If the company goes bankrupt, the receiver could require you to repay the debt immediately. Most investors don’t understand that they are buying worthless shares or that any money they receive will likely be taxable.