Investment scams have been running long before the advent of the internet. The term “Ponzi scheme” was coined in 1919 when Charles Ponzi started a postage stamp investment that collapsed with him owing investors the equivalent of $196 million in today’s money.
Bernie Madoff hit the headlines for the same reason in 2008 when Bernie L. Madoff Investment Securities LLC collapsed, owing investors $170 billion. Unlike Ponzi, Madoff initially ran the company with the best intentions, but greed and poor investment decisions led to him using new clients’ money to pay off old clients.
Regulators on both sides of the Atlantic have brought more restrictions on how legitimate firms can obtain business and trade. Following the economic collapse in 2008, many firms such as Morgan Stanley UK Ltd and Royal Bank of Scotland Plc were taken to task over their conduct, and a complete restructuring of the industry took place.
As a result, the UK finance industry is now one of the best and safest in the world. However, this has caused scammers to become more intelligent and more determined while driving rogue traders underground. Ironically, these traders act with impunity outside of regulated financial networks. However, these firms catch people by creating a veneer of legitimacy that only becomes transparent when it’s too late. Here are five red flags that indicate that an investment may be fraudulent:
The investment firm is evasive about its regulatory background:
In the UK, all firms undertaking financial business are regulated by the Financial Conduct Authority.
The FCA will have a list of all registered companies to undertake regulated activities, including offering investments for sale, so it’s a simple matter to ratify an investment firm’s credentials with the FCA. Any legitimate business will be happy to assist you when you undertake due diligence.
Scammers may pose as a “market introducer” for another investment to claim they are exempt from regulation, but this is a crucial indicator of a scam — there is simply no such thing.
Any offer of an investment on behalf of another is an act of brokerage, which is a regulated activity. If they’re not regulated, keep your money to yourself.
The investment has complicated international links:
Many legitimate firms will invest customers’ funds in markets abroad, but the investment will still be regulated in the UK.
However, unregulated and fraudulent operators use many foreign banks and organisations to circumvent UK regulation and launder ill-gotten money, so it cannot be traced back to its source. This means that the money will be difficult to recover if the investment is found to be fraudulent.
If everything seems unnecessarily complicated, the reason is to their benefit, not yours. Legitimate firms keep client money in a separate account in the UK even if they invest overseas, so never send your money abroad or deal with any firm that says they will.
It’s challenging to find details about the investment company:
Banks and legitimate financial institutions have a registered headquarters and registered directors. These details can be easily checked and verified, and these institutions will only be too happy to verify their legitimacy.
However, it’s pretty straightforward to set up a business with Companies House with a minimum of details, as there is no guarantee that the details of listed companies are correct.
Some fraudsters even clone legitimate, regulated financial institutions by setting up a business with a similar name. Similarly, the company directors named may not even be real people.
Once the scam has made enough money, these firms and their directors usually become physically non-existent, with the funds being laundered through an international network of associates.
Don’t rely solely on a listing with Companies House — dig deeper, and if you can’t find anything concrete, walk. The sketchier the details of the firm seem, the more likely it is to be a scam.
The investment is time-critical:
Any legitimate investment will plan to allow potential clients to consider their full range of options before investing. Any individual who rushes you into making a decision is doing to reduce the time you have to undertake due diligence.
Furthermore, the scammers will already be planning their great escape, so the sooner they get enough of the investors’ cash on board, the sooner they can dive underground without being traced by the authorities.
Anyone who uses high-pressure sales to get you to invest is probably a fraud. There’s no shortage of great investment opportunities out there, so take your own time.
If the investment seems too good to be true:
It probably is. Many sensible investors have ignored their misgivings in favor of the promise of huge returns. Be realistic: could any investment guarantee a ridiculously high return? The markets are the markets, and there are no “unicorn” investments, so treat big claims with scepticism.
Some investment schemes will pay the returns for a time, but they will be relying on new investments to keep the plan propped up. Even if you make the returns for some time, you will lose the bulk of your capital once the firm disappears.
Ponzi schemes are unsustainable, and their owners use investors’ money to fund their lavish lifestyle. You will always get out less than you put in.
If you’re looking to invest, remember: your money is safest in the bank. They may not pay the highest interest rates, but they will protect your money.
Regulated investment firms and banks are duty-bound to give you the best advice, outline risks versus benefits, and ensure your money is safely invested.
Your money is your own, and you should never be afraid to say no. If an investment firm is legitimate, they will respect your decision. If they don’t, that’s a sure sign that they should be avoided.
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