Know the Red Flags that Could Signal a Fraud

As if choosing an investment wasn’t hard enough on its own, a wise investor also needs to be wary of possible frauds or scams. How can you tell if a particular investment is legitimate? Many people think they would know a scam if they saw one, but remember a scam has to be believable to be successful. Luckily, there are some red flags that can help you separate the scams from the real thing.

Red Flags of Fraud

• Guaranteed high returns – no risk!
  Sound too good to be true? It should, because it is. There is simply no such thing. The higher the returns the higher the risk. This type of sales pitch is often used to attract people who live on a fixed income or those near retirement who are worried about having enough money.
• Insider tips – get in now!
  Scam artists use this line to pressure you into making a quick decision. They want to convince you that they have secret information about a company that the general public doesn’t have. They pressure you to act now to “get in on the ground floor”. Don’t! This kind of sales pitch appeals to your fear of missing out on a valuable opportunity.
• Offshore investment – tax free!
  You can defer paying taxes, but you can’t avoid paying them. End of story. This type of deal is often pitched as a secret, but not to hide the tax benefits. By asking you to keep the deal to yourself, scam artists know you won’t face hard questions and comments from family, friends or financial advisers who might see through the scam. Often with scams like this, your money will be transferred outside the country, making it harder to recover and even harder for the authorities to investigate.
• Profit like the experts!
  These scams are pitched as opportunities known only to a select few who are said to be making a lot of money. A good example of this is the “prime bank” scam. Investors are told about the existence of a secret market that only the world’s largest banks know about and are then given an exclusive opportunity to participate in this secret market. The catch is secret prime bank markets don’t exist. You may never see your money again.
• Great investment opportunity – your friends can’t be wrong!
  This scam relies on the trust you place in your friends and the fear of not keeping up with them financially. This type of scam also comes in many forms such as “affinity fraud”. Scam artists target religious, ethnic, or close-knit groups by working their way into organizations, making friends and gaining trust only to eventually rip people off. Even more devious is when the scammer gets a longtime member of the organization to do the selling by convincing him or her that it is a legitimate investment opportunity. Don’t be a victim; check out everything about the person who brings the investment opportunity to your attention – no matter how trustworthy.

To report a scam or suspicious investment opportunity, contact the Nova Scotia Securities Commission.

For more detailed information on common types of investment frauds and scams download our “Protecting Your Money” brochure.