Spotting a Financial scam – ‘Get rich quick’

One of the advantages of the Celtic Tiger, was that investors learned that greed does not pay. Sooner or later, there is a price to pay. For those that can restart their lives eventually there were a few lessons to be learnt. The least of which was realising that if something looks too good to be true, it ALWAYS is! Spotting a financial scam however is not always clear-cut.

So what should investors seeking high investment returns be wary of? The answer is the length of the proverbial piece of string. Though not exhaustive, here is a summary of the main tactics con artists use to deceive and swindle:

Financial Scammers tactics

Unrealistic returns

1. Anybody who suggests that they have a risk free investment offering is probably lying. Even cash in a bank carries risk. Just ask the many thousands who withdrew money from the Irish banks during that period because of the fear of a bank collapse.

2. Someone who has says that they have the magic touch and produces consistent returns even when the markets do not facilitate such investment performances.  This is usually reinforced by them stating that their approach and knowledge is proprietary and will not be disclosed to third parties. All regulated investment companies will never make such claims.

3. If someone is promising high investment returns, then why do you actually need private investor monies? If the deal is that good any self respecting fund manager would jump at an opportunity of getting an investment that gets higher than normal investment returns.

4. In my experience the offer of an unusually high rate of return is usually the most consistent hook used by scam artists. This preys, in particular, on either people’s greed or a desperate attempt to make up losses from another bad investment. Indeed, it is somehow sad to see certain individuals get conned several times by the same type of scam. This is because they find themselves in desperate straits in the first place.

Lack of Regulatory oversight

5. Any investment adviser that maintains direct custody of client assets is potentially suspect. Unless there is an independent, third party, custodian to maintain control over client assets, conmen can easily compromise such monies. Large, well recognized custodians are to be preferred as they make a serious business out of providing independent trustee services. Furthermore, it is quite likely that they will have large professional indemnity insurance cover that will pay out to cover any unanticipated losses.

6. Auditors have a similar capacity to either enhance or destroy a scam artist’s reputation. In the USA for example, one of the reasons that the Madoff fraud remained undetected for such a long period of time was due to the lack of a credible auditor.

In Madoff’s case his company was audited by a tiny accounting firm with only a few employees. This was something which was totally disproportionate to the funds of $50 billion that Madoff was supposedly managing. Spotting a financial scam of this magnitude can on occasion be a specialist field.

7. Financial Cons only exist because either the investors or their advisers are not thorough enough in their due diligence process and therefore do not ask the right questions.

Sometimes this is because all parties rely on the reputation of one or more of the promoters. The con artist relies on investors desire to be with the in crowd. They create a further lack of due diligence by individuals assuming that if it is good enough for “so and so” then it’s good enough for me!  

These type of investors are just easy targets for scurrilous scam artists. In many cases, pride often prevents them from telling others if they find out later that they have been stung! Spotting a financial scam before it spots you is often the best form of prevention.

Financial Scam artist conclusion

Finally, if you are considering an unregulated investment vehicle, the best approach before you might invest is to engage a capable professional in order to carry out due diligence. This individual should be someone who has the experience, knowledge and skills necessary to analyse any such investment scenario. A fee paid for such work in advance of any potential investment might save a lot of money later on if the investment turns sour!