Warning signs: How to spot an investment scam

Thousands of people lose millions to investment scams each year. The Internet has become one of the most popular tools used to commit fraud and criminals are becoming more sophisticated with their hacking techniques. Thankfully, there are some warning signs, which you can use to avoid falling victim to scammers.

What is an investment scam?

Investment scams aim to get unsuspecting people to hand over money. They can seem perfectly legitimate, appearing knowledgeable with websites, testimonials and marketing material. The most famous kind of investment scam is the Ponzi Scheme, where money is collected from new investors to pay previous investors.

Eventually, the money owed is more than the money being collected and the scheme collapses, leaving all the investors out of pocket. Today, due to the internet and digital communications, investment scams can be much more complex. 

Warning signs

To check if an investment opportunity is a scam, look at the following warning signs:

1. You get unsolicited approaches or offers by phone call, text message, email, or a person physically knocking on your door;
2. The person who contacted you did not provide clear answers to your questions;
3. You get persistent phone calls from the operator to induce you to invest (so-called Cold Calling);
4. You are forced to make a quick decision;
5. The firm or operator doesn’t allow you to call them back, or you are given with only a mobile phone number for contacting them;
6. The information provided is not confirmed on the firm’s website;
7. You’re being offered a high return on your investment, but you are told it’s low risk;
8. You’re promised easily achievable returns and incentives to entice you to invest;
9. They may share fake reviews and claim other clients have invested or want in on the deal;
10. They can build friendship with you to lull you into a false sense of security;
11. The company’s domain is based in offshore countries/tax havens.

The Australian Securities and Investments Commission also has a scam checklist here.

What to do before investing

Before investing, you should ask the person who contacted you for more information. For example, you can ask more details on the company, if it is authorized or regulated, and who the authority or regulator is, what is the firm reference number and where it is based. Financial product providers in Australia must be licensed by the Australian Securities and Investments Commission (ASIC).

You can also do some basic checks yourself.

First, check ASIC's website to see if they have authorised the company. 

Second, verify the firm’s website/domain under the name with which they operate, in order to avoid so called “clone sites” (illegal companies which use website/domain whose name is similar to that of an authorised firm).

Third, check the financial service register of the country where the company declares to have its legal headquarters and the related information (name, headquarters, etc.). Consider checking the regulators against this list of fake operators published by Moneysmart. If not possible, enter the firm name into Google and check the main results published in forums, blogs and other, on the web. 

Fourth, check the local financial supervisory authority’s Warning archive, that contains reports on financial activities carried out fraudulent initiatives. ASIC maintains a list of companies it recommends not dealing with.

If you don’t receive clear and complete information, do not rush to invest at any price, because the proposal might be a scam. Remember that the abusive practice of investment services is a crime. If you are suspicious, report the firm or scam to the local supervisory authority. If you’ve given your bank account details to a firm you think may be operating a scam, tell your bank immediately. Be wary of people who promise you to get back your money.