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Smart money - Beware of scams
By Jeffrey Lucy
Edition 1171, July 26, 2007 |
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Financial scams often remind me of carefully positioned, camouflaged mines.
If you were advancing through a minefield, you would tread carefully and take every precaution.
An equally cautious approach should apply to your finances. Here are some examples of scams to help you tread a safer path:
Boiling point
Run by professional criminals, boiler rooms aggressively sell shares over the phone to investors at inflated prices. In some cases, the shares have never existed, or scammers might buy large parcels of shares in tiny companies so they can manipulate the price. As soon as their selling campaign begins, they start driving up the price to entice investors. At the peak price, the scammers offload their stock and close down their business. The stock price inevitably collapses.
Ponzi schemes
In these scams, investors are promised secure high returns. Ponzi schemes were named after Charles Ponzi who ran such a scheme in the US in the 1920s. Essentially, returns to existing Ponzi scheme investors are paid entirely out of the funds raised from new investors entering the scheme. These schemes only need to con a few people in their early stages to be successful.
The swindler pays dividends from the pot of money for a couple of months, until investors are more comfortable with their investments, often deciding to invest more. We’ve seen that people often begin to urge their friends and relatives to invest as well. Soon there is a steady flow of funds into the scheme.
It may be, however, that there is no underlying investment at all. An example was the Wattle Group scheme that caught around 2700 investors across Australia and raised more than $196 million. The leading promoter was jailed for 10 years.
Nigerian letters
If you have received an email promising that “riches and wealth are within your reach” on behalf of a “fallen dictator” or “the trustee of a wealthy estate”, then you have been targeted by a Nigerian letter or advance fee fraud scam.
Anyone who replies will be asked to pay a fee in advance to secure a slice of the fortune. If you make the mistake of paying once, you will be asked to pay more until your patience, or your money, dries up.
Unexpected lottery winnings are another variation on the same scam. Often you will also be asked to provide personal information that can be used to compromise your financial identity and security.
These scammers often tell their victims not to talk to the authorities, saying the government only wants to grab the money.
What to do
There are some simple ways to spot scams and avoid losing your hard-earned money:
- scams often look realistic and have attractive documents, a business-like website, and names that sound like reputable companies;
- scams always offer a higher return than genuine investments. Some offer 20 per cent, around three times the cash or bank rate;
- there is often some feature to make you feel like you have an edge over other people. Scams often promote “secret” offers, “inside information” or “new techniques”; and
- scams are usually presented as “time-critical”. They’re really just after your money before you have a chance to check properly.
You can check a business or a financial adviser by searching ASIC’s online registers to see if they are licensed, as required by law.
| WISE COUNCIL |
This column is an initiative of the ADF Financial Services Consumer Council. The ADF Financial Services Consumer Council’s web site is at www.adfconsumer.gov.au
If you have a topic suggestion for the Smart Money column, send an e-mail to ADFcolumn@asic.gov.au. |
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