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Types of frauds and scams and how to avoid them

At a glance:

Investment frauds and scams do damage not just on a personal level—there have even been mass uprisings in nations because of them. The more powerful and well orchestrated the fraud, the better its ability to penetrate throughout a society.

And once the damage is done, you can't always count on getting your money back; it simply may not be there anymore, and neither may the perpetrators.

Frauds and scams have been with us for thousands of years. They are not always easy to spot, but once you know the signs (and the signs tend to be similar no matter the type of scam), you can start asking the right questions.

Let's look at several of the most common types and what you can do if you are ensnared.

Pyramid schemes

What is a pyramid scheme?

If you find yourself getting involved in a business venture that involves being recruited and then paying to join its salesforce, you may or may not be involved in a scam; it depends on whether that salesforce is being formed to sell a real product, service, or investment … or whether it is just taking your money to pay earlier recruits.

The latter is a true pyramid scheme—that is, a hierarchy business in which the only income is coming from new recruits who provide the "earnings" to those above them. These are illegal.

Oftentimes, the recruits themselves do not know that there is nothing actually being sold; that is part of how the originator designs it.

The scheme may claim that there is one, but it will be vague or evasive about what it is. It may use sophisticated-sounding language to create a sense of legitimacy; for example, a scheme involving investments might call itself a "high-yield investment program."

A true, illegal pyramid scheme will inevitably collapse. Since it is not generating wealth from a product, service, or investment, its only income can come from additional recruits, and there are not enough people in the world for that.

Not all pyramid businesses are scams, however. Multi-level marketing, for example, uses a pyramid structure to recruit a salesforce in order to sell a real product or service to people outside the program. Also, not all pyramid schemes start out illegal; some morph into illegal ones over time.

How can you spot one?

Pyramid schemes are not always easy to spot. Regulators have to analyze them to discover how their compensation system works. Here are some typical signs:

  • You are expected to continually recruit new sellers and buyers to keep the pyramid alive.

  • It focuses much more on recruiting than on the product or service.

  • You are paid for recruiting new people.

  • A membership fee is required to participate.

  • For a small amount of work, you are promised sky-high profits.

  • If products are offered, they cost more than similar ones on the market.

  • The operation makes unrealistic claims about the product or service.

  • The company does not appear to have a permanent location.

  • The company does not seem to have a customer base.

If you have been scammed

If you suspect a pyramid scheme, research the company online to see if there are any warnings about it: type the company's name into a search engine along with the word complaints. Check with the Better Business Bureau. Check with the Federal Trade Commission here.

If you need to launch a complaint, you have several resources at your disposal:

  • The FBI: www.fbi.gov, or (202) 278-2000

  • The FTC: ftc.gov/complaint or 1-877-FTC-HELP

  • Your state's attorney general: www.naag.org, or 202-326-6000

  • The U.S. Postal Inspection Service: https://postalinspectors.uspis.gov/, or 1-877-876-2455

Bernard Madoff is a famous case of scamming. (Photo: Stephen Chernin/Getty Images)
Bernard Madoff is a famous case of scamming. (Photo: Stephen Chernin/Getty Images)

Work-at-home scams

You've seen the ads that say "Make lots of money working from the comfort of home!" And you may have wondered why, if that's true, more doctors, lawyers, and starving artists aren't doing it!

The ads promise a large amount of money—more than the market rate—for a small amount of work. Often, no training is required.

The real purpose of most such schemes is for the promoter to take money from you by charging you fees, charging you for products or equipment, and/or rejecting your work after you have already paid for the products or equipment.

  • Work-at-home scams promise wages that are much higher than market rates.

  • Your contact information is sold to other scammers.

Here are some classic work-at-home scams:

  • Stuffing envelopes

  • Typing

  • Processing rebates

  • Certain e-commerce businesses

  • Reshipping items (usually stolen items)

  • Spamming via email or online forums (usually called "email processing")

  • Processing medical claims or bills

  • Assembling products via a starter kit you pay for, only to be told later that the products "don't meet specifications"

  • Pyramid schemes where there is no actual product to sell

Who falls prey most often to these schemes? Usually senior citizens, stay-at-home parents, the uneducated, migrants, unemployed people, and low-income people. The effects of being scammed can extend beyond just lost time and money; your contact information is sold to other scammers.

In some worst cases, you might be unknowingly engaging in criminal activity, and you can be charged as a criminal for it.

How can you spot one?

Many legitimate work-at-home opportunities do exist, of course, and others exist in a gray area. Often, illegitimate work offers are advertised right next to legitimate ones in the same job boards, which makes it harder to distinguish them.

Here are some common signs of scams (not all of them are sure signs, however):

  • You must pay a fee before starting.

  • The pay is above the market rate (e.g., $300 for an hour a day).

  • No experience or skills are required.

  • Excessive amounts of advertising.

  • The company does not appear to have a permanent location.

  • The company persists in contacting you.

  • The company does not seem to have a customer base.

  • You must pay upfront for equipment and supplies.

How to avoid them, and how to respond if you are defrauded

The first step in avoiding a scam is to know the signs of one. If you suspect a scam or are curious about it, research the company online to see if there are any warnings about it: type in the company's name along with the word complaints. Check with the Better Business Bureau. Check with the Federal Trade Commission here.

If you need to launch a complaint, you have several resources at your disposal:

  • The FBI: www.fbi.gov, or http://www.fbi.gov/contact-us/field, (202) 278-2000 or

  • The FTC: ftc.gov/complaint or 1-877-FTC-HELP

  • Your state's attorney general: www.naag.org, or 202-326-6000

  • The U.S. Postal Inspection Service: https://postalinspectors.uspis.gov/, or 1-877-876-2455

Telemarketing scams

It's hard to avoid telephone swindlers, no matter how many times you put yourself on a "Do Not Call" list. In the age of email and texting, it remains a reliable way to reach people, and because there is a human voice on the other end, it still succeeds at defrauding people.

Phone scammers may already know a vast amount about you. They get this information from other telemarketers. It is one of the ways they get an "in" with you. But this does not mean that you are anything other than a name on a long, impersonal list to them.

Once they have called you, they will use the same smooth, friendly high-pressure tactics on you that they will use on everyone else on the list; you are not special or unique to them.

A headset hangs on a cubical wall at a telemarketing company. (Photo: William Thomas Cain/Getty Images)
A headset hangs on a cubical wall at a telemarketing company. (Photo: William Thomas Cain/Getty Images)

It's important to remember that swindlers do not have the kind of conscience and regard for others' well-being that most of the rest of us have. Legitimate phone salespeople will respect your choice to decline, so you should have no qualms about refusing any offers.

Phone swindlers are very good at making "opportunities" sound legitimate. This is one way that they work past people's defenses. They often use official-sounding language like "high-yield investment opportunity," "prime bank note guarantee," or nearly anything that can be cobbled together from a dictionary.

They also know how to appeal to your human qualities—your sympathy, your desire to be a good person, and your desire to not disappoint others.

Examples

Nearly anything can be fraudulently marketed over the phone, but here are some of the biggest ones:

  • Charity appeals, esp. in the aftermath of major natural disasters

  • Investments

  • Prizes, vacations, gifts, or government grants, or anything you have "won" and for which you must pay some kind of fee or tax

  • Work-at-home opportunities

  • Pyramid schemes

  • Timeshares

  • Offers to provide services that can normally be obtained free (like placement on "Do Not Call" lists)

  • Fake technical support people from real companies, like Microsoft, claiming that you have a computer virus and you can be rid of it by going to a certain Website and signing up for a service.

  • Fake IRS agents telling you that you owe taxes and can pay them over the phone (the IRS never contacts people this way).

  • Offers that seem tailor-made to certain ethnic or age groups.

How can you spot one?

Phone-based scams have some or most of the following signs:

  • Fast-talking salesperson who guarantees an unusually high return for little risk.

  • "Free" vacations, prizes, or gifts, for which all you need to do is pay for postage and handling, or taxes.

  • An air of specialness about the "opportunity." Scammers use terms like "special," "once in a lifetime opportunity," "unique," etc.

  • A request for your credit card number or bank account number, or an offer to send a courier to pick up a check written by you.

  • A demand for quick action. Scammers don't want you to think about or verify what they are promising you.

  • A quickly established feeling of rapport.

  • An assurance that the company is solid and no investigation is necessary.

  • No return information about the company. Instead, scammers will use a mail drop or a courier to pick up your money. Scammers typically avoid the U.S. mail system.

  • Stalling those who follow up on the "opportunity."

How to avoid them, and how to respond if you are ensnared

  • Consult a trusted financial advisor or attorney about any offer first. Don't be shy about declining a salesperson who cold-calls you. You are just a number to them, and they won't remember you.

  • For charity calls, find out what percentage of the earnings goes to actually helping people.

  • Don't buy from unfamiliar companies.

  • Request that written material on the offer be mailed to you.

  • Insist on investigating the company and the offer through the Better Business Bureau, the National Consumers League (www.fraud.org/), or other watchdog groups.

  • Get the salesperson's name, phone number, address, and business license number, and then verify them.

  • Don't pay in advance for any services if offered by cold-callers.

  • Don't let the salesperson send a courier to your home to pick up payment.

  • Never give out your credit card numbers, Social Security number, bank account numbers, date of birth, or card expiration dates to unknown callers.

  • Finally, there is the option to just hang up.

Elder fraud

Why do scammers target the elderly? Many elderly grew up in a time when it was considered impolite to hang up the phone or turn down someone in need; as well, many of them have sizable nest eggs that criminals want to pillage.

According to a recent survey by the Investor Protection Trust, more than seven million Americans over 65—that's about one in five—have been the victim of financial fraud of some kind.

Fraudsters often come across as genuine and likable (mostly at first), despite the fact that they are hardened and unfeeling criminals who don't care what pain they inflict on people.

Though the elderly are stereotyped as lonely and financially incompetent, that is not always so. Even knowledgeable elders get swindled, because criminals are often masters of persuasion. And often, they simply wear people down through relentless targeting.

Perpetrators aren't always strangers, either. A sizable percentage are actually friends, family members, or neighbors, and they prey on seniors who have memory problems, a reluctance to seek justice, or declining mental capacity.

Types of elder fraud

Scammers have a wealth of possibilities at their disposal:

  • Mortgage fraud and reverse mortgage fraud

  • Health and anti-aging products, and prescription drugs

  • Health insurance or Medicare fraud

  • Telephone fraud—charity scams, fake accidents, sums of money to share, etc.

  • Free lunch seminars

  • Funeral and cemetery fraud

  • Annuity or investment fraud

  • Charity scams, especially in the aftermath of major natural disasters

  • Email/phishing

  • Lotteries

  • False medical bills

  • Offering fake medical tests at locations around town

  • New "best friends" who are giving "financial advice" (but are actually taking money)

How can you spot it?

Elder fraud has many of the same signs as any other fraud, including heightened sales pressure, an appeal to urgency, a demand for immediate payment, an assurance that you don't need to check out the opportunity with anyone, and an assurance that you don't need to get any information about the company before doing business with them.

But it is also tailored to the elderly, so expect to encounter products or services more popular among the elderly.

How to avoid it, and how to respond if you are defrauded

  • Resist any pressure to act quickly or make decisions right now. A legitimate salesperson will respect your decision to think it over.

  • Research any "opportunity" online by discussing with knowledgeable friends or by consulting an investment advisor or attorney.

  • Don't wire money based on a request made over the phone … especially overseas. You will likely never hear from the requester ever again, and you won't get your money back.

  • Don't sign blank insurance claim forms.

If you have been defrauded, or if you suspect you have, file a complaint. You have several options:

  • The Internet Crime Complaint Center

  • The Federal Trade Commission

  • The Financial Fraud Enforcement Task Force

The law is well attuned to elder fraud and investigates on behalf of the elderly. Doctors are often aware as well, especially when one's mental state is suspect.

Advance-fee and money transfer schemes

In an advance-fee scheme, someone contacts you—usually by email, but sometimes by phone or mail—and convinces you to pay them a fee in return for something of a greater value, such as an investment, lottery winnings, "found money," or various products.

You will sign a contract. Often, the schemer will offer a financing arrangement, and the "fee" acts as a finder's fee. You will learn a little later that you are not eligible for the financing.

Although this is a scam, you may not have legal recourse unless you can prove that the schemer never had any intention to provide the financing.

A money transfer scheme is similar, except that the scammer promises to transfer money to you via your bank account, let you keep a small "commission," and then asks you to transfer money to some other party. The incentive for you is the commission.

Usually, the scammer proceeds to empty out your bank account, but in some cases might let you keep some or all of the money. Money like this might come from organized crime or other scams, and the scammer might eventually extort it from you.

In the event that a transfer does go exactly as the scammer promised, you are likely being used to cover someone's tracks, and the law may find its way right to your bank account.

How can you spot these schemes?

Money transfer scams have some or most of the following signs:

  • They usually arrive by email.

  • The offer requires your account details.

  • There is a promise of employment attached to the offer.

  • The offer includes a commission.

Here are some ways to protect yourself from these frauds:

  • Learn more about any business that offers this arrangement to you. Visit the location, check with the Better Business Bureau, or research it online.

  • If you can, have the contract reviewed by an attorney.

  • If the business does not have a street address, or if the finder is never available when you call, be wary.

  • Be cautious with non-disclosure agreements that are added to the contracts. These are designed to prevent you from discussing the deal with other people.

  • Do not agree to transfer money on behalf of someone else.

Nigerian letter fraud

You may have seen letters or emails coming from a self-proclaimed "government official" from Nigeria that promise an opportunity to share in part of a multimillion-dollar transfer of money out of Nigeria, and that the official needs your "help"— your help being your bank account number.

The idea is that by letting the official withdraw a certain amount from your account, certain needed fees and taxes can be paid up front, thus making the transfer possible. In reality, your bank account is being robbed, because no such transfer exists. This is a type of advance-fee scheme.

The "official" might go to great lengths to detail the various fees and taxes needing to be paid, thus making it look legitimate. Detail is one of the weapons that schemers use to lure victims, even educated ones. The more detail they present, the more legitimate the opportunity appears.

Many schemers even portray their multimillion-dollar transfers as illegal, meaning that if you do get scammed, the Nigerian government will not be sympathetic to you, and should you travel to Nigeria to pick up your "share" of the money (as some have), you can wind up in jail.

What to do if you are contacted by one of these people?

  • If you receive such a letter, send it to the Secret Service or your local FBI office.

  • Don't give your bank account to anyone who represents one of these "opportunities."

  • Never believe any such offer in the first place, or reply to the email or letter.

Investment scams and frauds

Although it is easy to read a story about the latest investment scam and shake our heads at the ridiculousness of it all, there is a reason these scams persist: they work.

The scammer uses detailed, sophisticated, official-sounding language that is over the heads of most victims.

The scammer projects an air of authority, which soothes the fears of the victims. The scammer adds an air of urgency. And many otherwise educated people fall for them. If you don't know of any such people, perhaps they were too embarrassed to admit they fell for them.

Investment scams come in many forms. Here are some of the bigger ones:

Ponzi schemes

Similar to a pyramid scheme is a Ponzi scheme, named for Charles Ponzi, who defrauded investors out of millions in the early 1900s. In a Ponzi scheme, the schemer gathers money from a large group of people to allegedly invest it, but instead of investing it, keeps most of it, and pays small "dividends" to the earliest joiners out of the funds of later joiners.

These "dividends" give it an air of legitimacy. The scheme collapses when not enough new investors can be found to keep up the payment of dividends.

Not all Ponzi schemes start out that way. As with Bernard Madoff (the biggest Ponzi scheme of all time), what was once a legitimate investment opportunity with high returns eventually became a Ponzi because those high returns could not be sustained. This makes it hard to identify these operations as illegal. What can you do to guard yourself?

  • Investigate any investment that makes claims of high returns for low risk or "you can't lose." Research it online.

  • Ask a broker or financial advisor before investing.

Prime bank note fraud and letter of credit fraud

"Prime" bank notes and letters of credit are fake investments in "bank guarantees" (a type of letter of credit) used by large, established banks. Scammers try to convince you that by sending your money to them, you can participate in these notes and receive unusually high returns quickly. In reality, they just steal your money.

Banks do use similar instruments (to ensure payment for goods in trade), but they are not sold or traded on markets. Scammers target not only individuals, but also organizations and associations. They even advertise in mainstream media. Here are some tips for protecting yourself:

  • Always be skeptical of any investment claiming a high yield and/or low risk.

  • Beware if the promoters are claiming that the investment is secret or confidential or limited to only a few people. Secrecy and exclusivity are common tipoffs to scams.

  • Beware if the opportunity is vague about how it works or who is involved. Beware if the promoters rebuff your attempts to understand the investment.

  • Verify the investment opportunity by researching it as well as you can. Consult a broker or an investment advisor or an attorney if you can.

Unscrupulous or unlicensed agents and brokers

Just because people are agents or brokers does not mean they always act ethically. Sometimes they can be enticed by scammers into promoting fraudulent investments. Sometimes they don't even know how these investments work.

People who sell investments must be licensed by their state securities regulator, but not all salespeople actually are. Contact your state securities regulator to find out whether a salesperson—and the investment itself—is actually registered.

If you already have a broker, read your statements carefully for any unauthorized trades, unexplained fees, or anything suspicious.

"Pump and Dump" fraud

This is market manipulation that creates artificial demand for an investment, usually a stock. This artificial demand causes the market price to go up (the "pump").

At some point, the perpetrators sell off the investment (the "dump") and realize a profit. Pump-and-dump schemes are usually promoted in Internet chat rooms, social media, and email lists.

To avoid these scams, find out where the investment is trading, verify any claims, and research the investment itself. If you have an online broker account, you may have access to research on investments.

Summary of avoiding fraud and scams

Fraud is a never-ending, always-changing crime. Just when you think the law is ahead of it, it takes on a new form. And being an educated, commonsense kind of person doesn't always exempt you from its reaches, because many scammers know how to find your weak points and exploit them.

The best way to stay ahead of scams is to know how to identify them. The Securities and Exchange Commission, the FBI, and the Federal Trade Commission are doing their parts to keep us safe from scams and frauds.

But they can only do so much. This tutorial was a broad but basic introduction to frauds; there are many more out there. Look to the ideas below for more education and protection.

Practical ideas you can start with today

  • Keep handy the following contact information:

    • U.S. Secret Service: http://www.secretservice.gov/

    • The FBI: www.fbi.gov or http://www.fbi.gov/contact-us/field, or (202) 278-2000

    • The FTC: ftc.gov/complaint or 1-877-FTC-HELP

    • Your state's attorney general: www.naag.org, or 202-326-6000

    • The U.S. Postal Inspection Service: https://postalinspectors.uspis.gov/, or 1-877-876-2455

    • State securities regulators: http://www.nasaa.org/about-us/contact-us/contact-your-regulator/

    • National Fraud Information Center: http://www.fraud.org/

    • The Internet Crime Complaint Center: http://www.ic3.gov/complaint/default.aspx

    • Investor Alerts and Bulletins: http://www.sec.gov/investor/alerts.shtml

    • Get additional information on investment fraud from the Investor Protection Trust, at http://www.investorprotection.org/protect-yourself/

    This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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