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Trading Scams - What Are The Most Common Types & How To Protect Yourself From Them
This is the comprehensive guide to understanding the most frequent types of investment fraud. Investment fraud is a genuine and severe problem in 2022, and it occurs more frequently than you may think.
All sorts of Trading fraud refer to the act of obtaining money or other assets held by a financial organization through illicit means.
With the increase in online Trading fraud, more fraudsters are becoming involved in schemes. But how do these different types of financial fraud differ? How can you tell whether you’ve been involved in one, whether as a victim or perpetrator? This is the comprehensive guide to understanding the most frequent types of investment fraud. Investment fraud is a genuine and severe problem in 2022, and it occurs more frequently than you may think.
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Trading Scams Which You Need To Know About in 2022
Offers of small or no-risk investments, guaranteed returns, constant profits, sophisticated processes, or unregistered securities are all classic indicators of investment trading fraud. However, now many other types of trading scams have evolved too! Read on to find out what they are, how to point them out, and ways to stay careful from them.
Skimming - The Most Dangerous of All Scams
Skimming is the illicit process of reproducing information from a credit card’s magnetic strip. Whenever a debit or credit card is stolen or misplaced, the fraudster can read the information on the magnetic strip or use the card online by entering the card information.
Scammers cannot withdraw cash without the card pin, but they can use the card to make contactless payments if the feature is enabled. An RFID scanner may also scan contactless cards through luggage, which is more likely to happen in congested locations like cities and public transportation. Furthermore, certain shops and merchants have been accused of misusing consumer bank information by taking copies of the credentials when making a purchase.
Advance Fee Fraud
Advance fee scams require investors to pay a charge upfront – before obtaining any proceeds, money, shares, or warrants – in order for the transaction to proceed.
The upfront payment might be defined as a refundable charge, tax, commission, or other incidental expense. Some advance-fee schemes target investors who have previously purchased underperforming stocks and offer to sell them for a fee, while others target investors who have already lost money in investment schemes. To offer investors comfort and lend an air of validity to their schemes, fraudsters frequently ask investors to pay advance money to escrow agents or lawyers. Fraudsters may also use official-sounding websites and e-mail addresses to deceive investors. In an advance fee scam, the victim is convinced to pay money upfront in order to benefit from a deal that promises much more in return. The catch is that the fraudster gets the money and never contacts the victim again.
Investors who have lost funds in a risky investment are frequently targeted by con artists. They’ll contact the investor and offer to assist them in recouping their losses. They may claim that they can acquire or exchange investment for a large profit, but the client must first incur a “refundable” charge, fee, or taxes. Investors will lose much more money if they send more money. Advance fee scams might include the sale of goods or services, the offering of investments, lottery prizes, found money, and a variety of other ostensibly lucrative opportunities.
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Fraudsters who use advance fee schemes
Provide standard financial instruments such as bank guarantees, old government or corporate bonds, medium or long-term notes, standby letters of credit, blocked funds programs, “fresh cut” or “seasoned” paper, and proofs of funds;
- Offer to locate finance for clients who pay a “finder’s fee” up front; or
- Pretend to be legitimate U.S. brokers or firms, offering to help investors recover stock market losses by exchanging worthless shares in exchange for a “security deposit” or “insurance” or “performance bond.”
Ponzi or Pyramid Scheme
People are recruited into these schemes by advertisements and e-mails that promise everything from making a lot of money working from home to turning $10 into $20,000 in just 6 weeks. Alternatively, you could be invited to join a select group of investors who would profit handsomely from a sound investment. It’s possible that the invitation will come from someone you know.
Early investors in the scheme may see huge profits quickly from what they believe are interest checks. They are frequently so satisfied that they increase their investment or solicit additional investors from friends and family. The investment, however, does not exist. The “interest cheques” are paid using money from both existing and new investors. New people eventually quit joining the plan. There are no more funds to payout, and you’re not getting any. The promoters will then depart, taking with them all of the money.
Current investors are paid with funds raised from new investors in a Ponzi scheme. Organizers of Ponzi schemes frequently offer to invest your funds and earn high returns with little or no risk. However, the fraudsters in many Ponzi schemes do not invest the money. Instead, they utilize it to compensate previous investors, with the possibility of keeping part for themselves. Ponzi schemes ask for a constant flow of new investors’ money to survive because they have little or no actual earnings.
These schemes usually collapse when it becomes difficult to recruit new investors or when a big percentage of existing investors payout. Ponzi schemes are named after Charles Ponzi, a con artist who defrauded investors with a postage stamp speculating scheme in the 1920s.
"Red flags" for a Ponzi Scheme
Many Ponzi schemes have elements in common. Look out for the following warning signs:
High returns with minimal risk
Every investment has some risk, and higher-yielding assets are frequently riskier. Any “guaranteed” investment opportunity should be viewed with caution.
Extremely inconsistent results
Investments fluctuate in value over time. Be wary of an investment that consistently produces positive returns regardless of market conditions.
Ponzi schemes usually include investments that aren’t registered with the Securities and Exchange Commission (SEC) or state regulators. Investors will benefit from registration since it gives them access to information about the company’s management, products, services, and finances.
Investment professionals and firms must be licensed or registered under federal and state securities regulations. The majority of Ponzi schemes are run by unlicensed people or unregistered businesses.
Complex and secretive strategies
If you don’t comprehend or can’t receive complete information on investment, avoid it.
Errors in account statements could indicate that funds are not being invested as promised.
Having trouble receiving money
If you don’t get paid or have trouble cashing out, be wary. Promoters of Ponzi schemes sometimes try to deter players from cashing out by promising even bigger rewards if they continue in the game.
Pyramid Scheme Characteristics
Participants in the conventional “pyramid” scam strive to gain money simply by recruiting new members, with the promoter typically promising a high return in a short amount of time.
The main focus is on attracting new players
All pyramid schemes eventually fail, and the majority of investors lose money. Pyramid schemes are often advertised on social media, the internet, corporate websites, group presentations, conference calls, YouTube videos, and other platforms.
Promoters of pyramid schemes may go to considerable measures to make the scam appear to be a legitimate multi-level marketing (MLM) program. However, the con artists make money from fresh recruits to pay off early-stage investors (usually recruits as well). The schemes grow too big at some time, and the promoter is unable to obtain enough funds from new investors to pay old sponsors, resulting in individuals losing their money.
A focus on recruitment.
A pyramid scam is one that relies primarily on recruiting people to join the program for a charge. If you get paid more for recruiting others than for selling products, be wary.
No actual goods or services are offered for sale
If the business is selling services or products that are difficult to value, such as mass-licensed electronic books or online advertising on little-used websites, proceed with caution. To make it harder to show the organization is a fraudulent pyramid scheme, some scammers pick fancy-sounding “items.”
Guarantees high profits in a short period of time
Be wary of claims of quick riches; it could mean that commissions are paid from new recruit funds rather than the revenue produced from product sales.
Passive income or easy money
There is no such thing as a complimentary meal. You may be a part of an illegal pyramid scheme if you are offered money in exchange for doing little labor, such as making payments, recruiting people, or placing online adverts on obscure websites.
No evidence of retail sales revenue
Request papers, such as financial accounts reviewed by a certified public accountant (CPA), demonstrating that the company earns money from people outside the program. In general, respectable MLM organizations make money by selling things rather than recruiting new members.
The commission structure is complicated
If commissions are dependent on things or services that you or your recruits sell to people outside the program, you should be cautious. Get wary if you don’t grasp how you’ll be compensated.
Card Not Received?
When a bank sends a customer a new or replacement card, it is intercepted somewhere along the road.
It is especially common in shared residences when the post is not securely secure upon delivery (such as when you share a mailbox). If the card issued is new, the PIN code should be sent separately, but this will not prevent a scammer from using the card for contactless or internet payments. Card not received fraud is more difficult to detect because the victim may not realize the card is gone at first.
In-person (Stealing Card and PIN)
In-person fraud, which is commonly performed by looking over a person’s shoulder with an ATM or by utilizing distraction tactics, is a risky type of financial fraud because it can sometimes imply that the scammer has access to their target’s bank card and PIN.
In order to obtain more identifying information about the victim, the fraudster may engage them in conversation. The card, like skimming, can be used in a variety of ways, but with the inclusion of the PIN and any other data, the possibilities expand to include face-to-face retail purchases.
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Phone Bank Fraud
This sort of financial fraud, like online Trading fraud, tries to persuade the victim to give over personal information or transfer money to another account.
The fraudster would usually try to persuade the victim that they need to relocate money to avoid losing it and to protect their possessions. They may even invent fictitious offenses and demand that the target pay fines for them.
CEO fraud, sometimes called BEC, also referred to As business E-mail Compromise or whale phishing, is a sort of financial fraud in which a fraudster impersonates a senior manager or CEO to persuade an employee to make a payment.
Sending an email to a company’s accounting department that looks to be from a senior member of staff is the most typical way of CEO fraud. The e-mail requests an immediate payment to a partner or supplier. The Scoular Company is a recent example. They lost almost $17 million to CEO fraud when fraudsters posing as the company’s CEO sent emails to an employee telling them to transfer funds to what seemed to be the company’s accounting firm. This was, however, a bogus request, and the monies were sent to a con artist.
This bank fraud example targets firms by impersonating a supplier and requesting that invoices be paid into new bank accounts. If the fraudster has hacked the supplier’s information, the request will appear to be genuine, making it appear completely benign.
Online Trading Fraud
Phishing, virus attacks, catfish scams, and clone websites are all examples of online Trading fraud. It’s hardly surprising that this is a frequent sort of bank fraud, given how much Trading is done online.
Fraudsters are getting better at crafting convincing emails and websites, making it more difficult for victims to defend themselves. A fraudster acting as a bank employee can tell the target that their account has been compromised and that they need to transfer money to another account in an online bank fraud example. Scammers may also ask their victims to ‘confirm’ their PIN, account password, or other credentials through email, posing as legitimate bank employees.
Authorized Push Payment scams are any scams in which the target must voluntarily elect to withdraw funds from their account. It’s a typical strategy in some forms of financial fraud, but it can also be done via the phone or in person.
Typically, the scammer will notify the victim of a change in their account (typically a data breach putting their money at risk) and urge them to confirm their password, PIN, or other sensitive information to prove who they are. APP scams are a kind of financial fraud that might be harder to recover from. Even if they were under duress, banks will rarely automatically reimburse any money lost if they believe the target gave it out deliberately or was irresponsible with their information.
Counterfeit Card Fraud
This is a more typical sort of financial fraud in nations where chip and PIN systems for bank cards have not yet been widely implemented. The fraudster will take the data from the magnetic strip, just like in skimming, but in counterfeit card fraud, they will transplant it onto another magnetic card and use it again.
Card Identity Theft
This sort of bank fraud can involve impersonating the owner of a legal bank account or opening an account in someone else’s name using stolen or fabricated documentation.
This sort of financial crime is similar to card identity theft in that it includes taking out a loan under someone else’s name using stolen or forged documents. This could be to take advantage of someone else’s superior credit or to avoid repaying the loan.
Accounting fraud can lead to loan fraud, but it isn’t restricted to businesses providing false information on loan applications. Loan fraud occurs when people provide fraudulent information in order to get a loan. Another sort of loan fraud is when a burglar steals someone’s identity and applies for a loan in their name. This also includes situations where someone has a line of credit, and a scam artist uses that line to steal money.
Phishing is when a scammer makes an attempt to steal a victim’s Trading information via email, SMS, phone calls, or other means. This sort of fraud frequently occurs in conjunction with other types of fraud. Phishing emails, for example, are frequently used by fraudsters to get bank account information from their victims in order to commit ACH or wire transfer fraud.
If you own an investment bank, you almost certainly have traders on staff, and you must ensure that you are protected against rogue traders.
These are traders that engage in illicit trades and manipulate the system to make it appear as if their trading operations are making the bank more money than they are.
When criminals deposit fraudulently obtained funds into a bank, this is known as money laundering. They usually try to make money appear to have come from a reputable source.
For example, if someone is selling narcotics, they may try to disguise the money as coming from a business and put it in that company’s account. You have a legal obligation to report suspected money laundering, and failing to do so could place your financial institution in jeopardy.
Demand Draft Fraud
Internal demand draught fraud occurs similarly to rogue trading. One of the bankers simply creates a demand draft payable to a different branch or even a different bank. Then, to avoid detection, they use what they know about the system to cash the demand draft and keep the money.
Bill Discounting Fraud
Although this form of bank fraud is uncommon, you should be aware of the danger. The fraudster usually opens a business account at the bank while committing bill discounting fraud.
The “business owner” next persuades the bank to begin collecting bills from the company’s customers. Because the alleged clients are complicit in the scheme, they always pay the invoices. The financial institution is lulled into a false sense of confidence about this customer after a while. The customer eventually requests that the bank credit the bills in advance. When the bank does this, the fraudster takes all of the money and flees, never to be seen again.
Everything from reprogramming the machine to adding a skimmer to capture card information is considered ATM fraud.
It can also entail making fraudulent deposits by putting empty envelopes – the easiest method to avoid this is to use an envelope-free ATM.
Cheque fraud can be divided into three categories.
- Fake checks — completely created checks used to withdraw funds from a valid account.
- Cheques that have been altered – checks that have been properly written but have had their details modified without the account owner’s permission (such as changing the beneficiary or the amount).
- Falsified cheques — genuine bank cheques that have had their signature forged after being taken from their owner.
Non-Delivery of Goods
This fraud involves the sale of goods that never come – not because of a postal or courier service, but because the money’s recipient has no intention of shipping the commodity.
Non-delivery of items has become a very significant issue in an age of internet shopping and small businesses.
Creating an insurance policy with stolen or forged documents, or offering an insurance policy under false pretenses, are examples of this. See our page on Trading and insurance fraud for additional details.
According to a Lloyds Bank survey released in 2019, millennials are the most likely to be deceived by various forms of financial fraud, while those over 55 lose the most money per scam. According to the research, scammers impersonating bank employees, police officers, or HMRC professionals lose an average of £2630 to fraud.
Pump and Dump Scam
Scammers use lists of potential investors to pitch a fantastic offer on a low-priced stock in these schemes.
You have no way of making sure whether the person or corporation contracting you also owns a significant amount of this stock and the stock may not represent a legitimate company. The stock’s value grows dramatically as more investors purchase shares. When the price reaches a high point, the scammer sells their shares, and the stock’s value plummets. You’re left with stocks that are worthless.
There are two aspects to “pump and dump” schemes. Promoters aim to enhance a stock’s price by making incorrect or misleading statements about the firm. After the stock price has been inflated, fraudsters move on to the second stage, in which they try to profit by selling their own stock holdings and dumping shares into the market.
These schemes are widespread on the internet, where messages enticing readers to acquire a stock rapidly are common. Frequently, the promoters will claim to have “inside” information on a beneficial development for the stock. When these con artists sell their stock and cease advertising it, the price usually drops, and investors lose money.
The foreign exchange (FX) market is widely regarded as the world’s largest and most liquid financial market. Investors trade currencies in order to profit from fluctuations in exchange rates.
However, dealing in foreign currencies can be quite dangerous. Forex advertisements often claim easy access to the foreign exchange market via courses or software. However, huge, well-resourced international banks with highly qualified people, access to cutting-edge technology, and large trading accounts dominate foreign exchange trading. It’s incredibly difficult to continuously outperform these experts. You might not realize how dangerous FX trading is.
Furthermore, some forex trading methods may be unlawful or deceptive. Unregulated enterprises may be marketing their services outside of the rules because forex trading services are frequently run online from another country. Your money might not be invested as promised, and you might be required to move money to an off-shore account before you start trading, where it will be unreachable. You’re likely to lose some or all of your funds in any of these scenarios.
If you’ve been scammed through online trading and need assistance, then we have the expertise to help you get your money back!
Off-Shore Investment Scam
If you send your funds “off-shore” to another country, you can make a lot of money. The most common purpose is to avoid or reduce taxes. Tax avoidance tactics should be avoided at all costs; you could end up owing the government money in back taxes, interest, and penalties.
Other risks of off-shore investing exist as well. If something goes wrong with your money in another nation, you may not be allowed to pursue your case in a civil court in Canada. It can be tough to get your money back.
Look for These Red Flags
Some actions by a foreign real estate seller, agent, or developer should raise your suspicions:
- Any demand to transmit money outside of the United States as a condition of negotiating or beginning to deal
- The developer or agency is not authorized to conduct business in the country in question.
- There is no prospectus or paperwork submitted with the proper local agency or regulation for developers.
- Unreasonably high returns or tax savings promises
- Any hints that the offer is based on confidential information
- A lack of documentation, such as blueprints, inspection reports, building permits, or financial statements
Legal Off-shore Investments and Due Diligence
There are legitimate off-shore investments, but even these require careful scrutiny.
The laws governing real estate ownership, taxes, zoning, and other regulations differ greatly from country to country. Before making any investment in another country, thoroughly research the local legislation.
In most cases, you’ll need to open a bank account in the country where you’re purchasing real estate. This allows you to pay your bills and earn money from the property.
Promissory Notes Scams
Promissory notes are a type of loan used by businesses to raise funds. A corporation borrows money from investors.
Investors are offered a predetermined amount of recurrent income in exchange. Typically, the promised rate of return is relatively high. Furthermore, the level of risk promised is quite minimal. For many investors, promissory notes are a viable option. Promissory notes marketed to private investors, on the other hand, are frequently scams.
What can you do to protect yourself from promissory note fraud?
Promissory notes are usually considered securities.
They must either be linked with the SEC or exempt from registration with a state securities authority. By reviewing the SEC’s EDGAR database or phoning your state securities regulator, most legal promissory notes can be easily verified.
The vendor must have a valid securities license
Use our free search tool on IAPD or Investor.gov to see if your investment professional is registered. Alternatively, contact your state’s securities regulator.
Compare the promissory note's rate of return to current market rates for similar investments
Fixed-rate investments, long-term Treasury bonds, and FDIC-insured certificates of deposit are all examples of similar investments. Proceed with caution if the merchant offers a greater rate.
Be wary of claims like "risk-free," "insured," or "guaranteed returns."
Con artists frequently utilize these promises as bait to entice their victims. Always remember that if anything appears to be too good to be true, it most likely is.
Research Shows That By Taking Actionable Steps Before Hand You Can Avoid Scams 94% of The Time
Make inquiries. Fraudsters bank on you not doing your homework before investing. Defend yourself by digging yourself. It’s not enough to request further information or references; con artists have no motivation to correct you. Take a moment to conduct your own study.
Before you invest, do your homework. You should never base your investment decisions solely on unsolicited emails, message board postings, or company news releases. Before investing, learn about a company’s business and products or services.
Understand the salesperson. Even if you already know the individual socially, spend some time researching the person advertising the investment before you invest. Always check to see if the securities salesmen who contact you are licensed to offer securities in your state and if they or their companies have had any problems with authorities or other investors. The SEC and FINRA both have internet databases where you may look into the disciplinary history of brokers and advisors for free. Additional data may be available from your state’s securities authority.
Unsolicited offers should be avoided. If you get an unsolicited pitch to invest in a firm or see it praised online, but you can’t locate current financial information about it from independent sources, be extremely cautious. It’s possible that it’s a “pump and dump” scheme. If someone suggests international or “off-shore” investments, be skeptical. It’s more difficult to figure out what went wrong and track down money moved abroad if something goes wrong.
Online safety is important. For fraudsters, online and social marketing platforms provide a plethora of opportunities. Protect Your Social Media Accounts has advice on how to stay safe online. Understand what to look for. Learn about the many sorts of scams and the warning signals of investment fraud.
Stay Safe From Trading Scams Now!
Criminals are continually evolving new techniques to get past their victims’ defenses in Trading fraud.
Authorities recently reported an increase in bogus automated calls and text messages ostensibly from Amazon, asking customers to click on a link to get a refund. During lockdowns, the massive increase in-home delivery of goods has opened up a new line of attack for fraudsters. Fraudsters will, as usual, “follow the money” and move to channels with a growing number of prospective victims.
Whatever the mechanisms for carrying out the deception take on, they will all rely on the same basic features of human nature to succeed. Fraudsters will thrive by preying on their victims’ fear, anxiety, and willingness to trust signals that appear to emanate from official sources, as they always have.
Trading fraud is on the rise, and the question of who is responsible for the losses that occur is becoming increasingly pressing. In general, banks are obligated to compensate victims of fraud in case the fraudster initiates the illegal payment. Banks have usually been able to avoid culpability in circumstances where the victim does so – authorized push payment frauds.
Although a wide range of Trading frauds are frequently attempted, there is only one guaranteed approach to detect and prevent them: matching the fraudulent transaction to the account holder’s or system user’s past pattern of activity. This is why, while developing solutions, it’s vital to focus on the typical behavior of account holders rather than the various sorts of fraud so that abnormalities may be recognized and flagged.
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