Common Frauds and Scams
Would you recognize a scam if you saw one? Click below to find out more about some common investment scams.
Affinity fraud targets groups, such as social clubs and ethnic or religious communities. The scam artist plays on our instinct to trust those who are like us. In some cases, the scam artist may be an established member of the group. In other cases, they may build relationships with influential members of the group in order to gain acceptance.
This type of scam begins with an unsolicited phone call to buy shares in a private company that is about to be listed on a major stock exchange. They will say that once the company goes public, the value of its shares will skyrocket. The company is usually in a sector that's in the news. Right now, many of these scams focus on alternative medicine or the latest environmentally friendly product.
Here's the catch: the company doesn't exist. By the time you realize you've been had, the scam artist will have closed up shop and moved on to another scam. You'll likely never see your money again.
This scam is usually pulled off by a team of scam artists who set up a makeshift office, called a "boiler room." To convince you the company is real, they might send you to the company's website to check things out. They might also set up a toll-free number and a business address to make the company seem legitimate. However, everything on the site could be fake. The toll-free number goes right back to the scam artist, and the address is likely just a post office box or temporary office.
Double dip or repeat scam
If you’ve been scammed once, you are likely to be targeted again. If a scam artist receives money from you, they will often hold onto your information for future use, or sell their list of names and contact information to other scam artists for profit. This is known as a "double dip" or repeat scam.
Here’s how it often works. After some time has passed, you’re contacted by the first scam artist or a new one. They tell you that some or all of your original investment has been lost. The scam artist will say that they can help recover your lost money for a “fee”. However, if you pay the fee, you’ll lose that money, too.
Exempt Securities Scams
Exempt securities, on their own, are not scams. They’re sold by companies that are allowed to sell the securities without filing a prospectus. Exempt securities are usually sold to wealthy investors who can afford professional advice and the higher risks of these investments.
The scam usually starts with an unsolicited pitch to invest in a promising business that is about to go public. You may be told that the investment is only available to very wealthy people, but an exception will be made for you—all you have to do is sign some paperwork. This paperwork usually involves lying about how much money you make.
Exempt securities are risky, and you could lose all of your investment. If you have to lie about how much money you have before you invest, you are likely taking on risk you can’t afford.
These scams often find their victims through ads placed in newspapers, or on radio, TV or websites. The ads look legitimate and offer you an exciting opportunity to invest your money on the foreign exchange (forex) market, buy software or sign up for trading courses.
What usually happens is that your money is not invested in anything, but simply stolen by the scam artist. If your money is invested in the forex market, you may not have been told that the investment is very risky. Again, you’re likely to lose some or all of your money.
Software programs and trading courses look at past performance to identify trends in currency trading. These trends are the basis for predicting if the currency's value will increase or decrease. As helpful as the software or course might be, profits can't be guaranteed.
Foreign exchange trading is dominated by large international banks with highly trained staff, access to the best technology and million dollar trading accounts. It is extremely difficult to consistently beat these professionals.
For more information, consult:
- CSA Investor Watch / Backgrounder: Foreign Currency Exchange (FOREX/FX) Trading
- Forex Resources
Investment seminar scam
Be wary of investment seminars offering you an opportunity to “move your money,” “maximize tax flow” or “pay less tax”. The seminar is likely promoting an investment with some kind of tax break or shelter.
Unfortunately, tax breaks that sound too good to be true often are. In some cases, investors are audited years later only to find that they could be assessed for additional taxes, interest, or penalties by the Canada Revenue Agency (CRA). Visit www.cra-arc.gc.ca for more information.
If you’re approached about a tax shelter, get a second opinion from an independent and qualified tax expert such as a chartered accountant or tax lawyer.
Offshore investment scam
This scam promises huge profits if you send your money “off shore” to another country, usually as a way to avoid or lower your taxes. Once your money is sent off shore and is in someone else’s control, it may be virtually impossible to track down your money and get it back. If the promised tax savings are fictitious, you could also end up owing the government money in back taxes, interest and penalties.
In addition, when you move your money to another country, you are no longer protected by Canadian law. For example, if you use an offshore broker, you are not protected by the Canadian Investor Protection Fund if they go bankrupt. You will also not have any recourse in Canadian court.
Oil and gas scam
The fluctuations in the price of oil and gas in recent years have spawned a rash of scams to get people to invest in fake oil and gas companies.
Scam artists approach investors through e-mails and phone calls with false reports of an "up-and-coming" opportunity to become involved in an oil and gas limited partnership. They will tell investors that a large oil or gas company has invested in this venture to make it sound legitimate.
They may have a legitimate-looking website and glossy brochures and research. Promotional material may also include falsified reports about actual drill sites and production estimates.
Be wary of terms like "expert geologist reports", and claims of "tremendous discoveries in the ground at adjacent wells/drill sites." These oil and gas company "headquarters" and "drilling sites" often do not exist. Once you hand over your money to one of these scam artists, you probably won’t get it back.
Ponzi or pyramid schemes
A common type of affinity fraud is the Ponzi or pyramid scheme. Typically, investors are recruited through ads and emails promising you can “make big money working from home” or “turn $10 into $20,000 in just six weeks.”
Investors are asked to provide money up front. Early investors may receive high returns fairly quickly from “interest cheques”. They’re often so pleased that they invest more money, or recruit friends and family as new investors.
Here’s the catch: The investment doesn’t exist. The “interest cheques” are paid from investors’ own money and the contributions of new investors. The scheme eventually collapses when the number of new investors drops. Ultimately, the promoters vanish, taking your money with them.
Pump and dump
In a typical "pump and dump", you receive an e-mail promoting an incredible deal on a stock described as a once-in-a-lifetime investment. What you don’t know is that the person or company touting the stock owns a large amount of it. As more and more investors buy shares, the value skyrockets. Once the price hits a peak, the scam artist sells their shares and the value of the stock plummets. You’re left holding worthless shares.
Retirement account scam
If someone tries to tell you there is a way to take the money out of your locked-in retirement account (LIRA) without paying tax, don’t believe it. In most cases, you have to reach age 55 or older before you take money out. And there are often limits to how much money you can take out each year. Also, you likely will have to pay tax on the money you withdraw. If someone tells you different, it may be a scam.
You may have seen these scams in newspaper ads.
Here’s how they often work:
A promoter advertises a special "RRSP loan." They say it lets you get around the tax laws and tap into your locked-in funds. To get the loan, you have to sell the investments you now hold in your LIRA. Then you use the money in the plan to buy shares of a start-up company the promoter is selling.In return, the promoter promises to loan you back 60-70% of the money you invested. He or she will keep the rest as a fee. You are told you will get ready cash, pay no tax on it, and still hold a valuable investment in your LIRA.
Here’s the catch: the investment you buy may be worthless. And you may never see the loan. You could lose your retirement savings. In addition, you may also have violated federal income tax law and will now have to pay taxes to the Canada Revenu Agency (CRA) on money you never received.
Spam is unsolicited e-mail promoting a product or service, including investments. Many of these e-mails promote “microcap” stocks that are traded on over-the-counter markets, which have fewer regulations than the major stock exchanges. While all investments have some risk, microcap stocks are considered high risk. Many of these companies are new, have limited assets and have little public information about them.
Be wary of unsolicited investment advice. The person sending the e-mail doesn’t know you or your financial situation. If you read the fine print, you may find that they are paid to promote the investment. They may also benefit from an increase in the stock’s value.
If you receive spam, don’t reply. Delete the e-mail and block further messages from that sender. Your e-mail server may allow you to report spam as “junk mail,” which can reduce the amount of spam you receive in the future.
West African/Nigerian letter scam
In a typical letter scam, you receive an e-mail, fax or letter from someone posing as a high-ranking government official from a developing country. It’s usually marked "urgent" or "in strictest confidence." The sender will tell you that because of a financial error, they have millions of dollars languishing in a bank account that they can’t touch, but with your help, they can access these funds. They will tell you that they are not able to open a foreign bank account and therefore can't access their funds. They may say they have a sick relative or dying child and need the money right away. They will ask you to help them get access to the funds.
In return, you are promised a portion of the funds, usually 20 per cent. All you have to do is deposit a sum of money in the bank account as a “processing fee” and fax your bank account information. Once they have your fee and banking information, the scam artists will drain your bank account.