9 Essential Ways to Prevent Investment Scam

Decent businessman. Scammers may look like this.
  • Learn how to recognize and prevent investment scam.
  • Avoid losing all your money. It is more important than some percent more returns.
  • What sounds too good is a lie.
  • Authorities are trying to protect you, internet forums and lists also can help.
  • Firms, which can’t be identified, aren’t worth following and give money to.

More Investment Scams Lately, and More to Come

By several sources, pyramid and Ponzi schemes, other investing scams, financial frauds are very widespread. For example, in the USA, the Securities and Exchange Commission uncovered 60 Ponzi schemes only in 2019.

That means an ‘ominous 30% surge from 2018 and also included the highest total amount of investor funds at issue in nearly ten years’ – wrote Ponzitracker.

This year it can get worse because of coronavirus scams. The US authority FTC alerted consumers in February and March about coronavirus hoaxes and frauds (here and here). Scammers woke up very early and offered “prevention, treatment, or cure” already in initial stages of the pandemic in their ads, e-mails. Others wanted “donations in cash, by gift card, or by wiring money”. Or, propagated new “investment opportunities”:

The U.S. Securities and Exchange Commission (SEC) is warning people about online promotions, including on social media, claiming that the products or services of publicly-traded companies can prevent, detect, or cure coronavirus and that the stock of these companies will dramatically increase in value as a result. (SEC)

What If Things Get Uglier?

Later things got uglier, and shortages have emerged for some important health items. Fake sellers claimed they had products like cleaning, household, health, and medical supplies. “You place an order, but you never get your shipment” – wrote FTC. They reminded anyone can set up a shop online under almost any name. Including scammers, of course.

One important reason investment scams were widespread in the last years can be the low or zero interest rates environment (ZIRP) in many countries. People were struggling to defend their savings from inflation. But the coronavirus pandemic leaves masses without jobs. If many people struggle to survive, if more poverty is spreading, crime can get also worse. Scammers and other delinquents are planning to take your money away.

In this post, I inform you about important common characteristics of investing type scams and how to prevent this type of fraud. (About technical advice on how to avoid other types of fraud, like fake shops, hacking or phishing read the safety tips of NordVPN, an online security service provider.) Fraudsters are still with us because they always find people who believe them. Don’t be a victim!

How Do You Recognize Investment Scammers, Then?

1. Fraudsters Promise Too Much

Prince(ss), do you believe in fairy tales? What sounds too good is always a lie. You must learn to distinguish real interests and investment returns from unreal promises. You don’t have to be an economist or investment guru, only make some basic research (Google or DuckDuckGo searches). Or ask other people who know more about it.

For example, let’s suppose, in the economy of your country, the average savings interest rate is two percent annualized (p. a.). Banks are giving you credits with 4-6-8 percent interest per year. If you investigate further, you can realize that other, riskier investments have returns of 8-16 percent a year. Like some dividend yields of company shares, high-yield corporate bonds. (The example is theoretical, but real, at least at the beginning of 2020.)

Don't fall in the trap of investment scammers like a mouse.
Don’t fall in the trap of investment scammers like a mouse.

Then, somebody offers you five or ten percent – a month! Not a year. (And the person is claiming the investment is “totally secure”, of course.) This is the multiple of the rate of “normal” investments, 80-200 percent on yearly basis. Is it payable, indeed? Can any legal business reach such a profit? Or even more than this, because they must earn more than they pay you. Think about it.

The Power of the Market

The market does its work also in the investment industry. If a business offers higher returns than others with the same risk level, many investors will buy it. The demand pushes those high returns lower very soon. Risk and return are tied. The basic rule is: the higher the risk, the more return investors can expect. Reversed, the higher the expected return, the higher the risk. In the case of scams, the risk of the investment is endless and the probability of payback, zero. (See also: Looking for a Good Investment Return? Use the Magic Triangle!)

But entrepreneurs aren’t fools, either. If they have a business that earns 10 percent a month, they won’t pay you 7 percent of that. They may take a bank loan with 0.5-1.0 percent monthly interests and make their big money. (The fewer people know about it, the better, by the way.) So, please, check out the real investment returns in your national economy.

2. Identify Your Business Partner

Investing is a business relationship where trust is particularly important. One of your most precious treasures, your money, is entrusted to another person or organization. Someone who is promising some returns or interests. Such investments should only be made in case of strong guarantees or a strictly controlled organization. You should give money to someone you trust entirely. But why would you trust a stranger, or an unknown, unregulated organization, a company?

States have a lot of failures. Some governments aren’t working at all. But where states are competent, they are trying to protect small investors and savers. Because, otherwise, no one would invest and the banking system and the economy would lack resources. So, fraudsters are prosecuted in every well-functioning country. And that’s why they try to hide. Who’s asking you for money and hiding is very suspicious.

Licenses Aren’t Futile Bureaucracy

Criminals rarely have appropriate operating licenses. Or their permissions are incomplete or false. They often don’t even have a decent office. Scammers are often hiding in offshore paradises, in some tropical island or banana republic on another continent. In countries where no real financial authorities exist. They may show you some license-like documents. Like company registration or acknowledgment of receipt of a bureau or a membership of a chamber of commerce. But these authentic-looking documents are false or simply useless, irrelevant.

Fraudsters don't use gloves. They use our minds and the internet. Use your mind to prevent scam.
Fraudsters don’t use gloves. They use our minds and the internet. Use your mind to prevent scam.

In every country there should be a financial supervisory organization, also called watchdog. (Offshore paradises often have no one.) That is sometimes the national bank, sometimes an independent state office or a ministry. They must give permissions to all legal financial organizations like banks, insurance companies, brokerage firms, investment funds or pension (retirement) funds, investing agencies. You may ask this organization per phone call, e-mail if they know the company which is offering you an investment. If they, in reality, gave them an operating license.

3. Investment Scammers Put You Under Time Pressure

A very common method of criminals is putting people in a hurry, under time pressure. They try to convince you you will lose money if you do not move fast. They claim you’re missing out on a wonderful profit, a once in a lifetime opportunity. (This common feeling they try to cause is known as FOMO in the investment world – Fear Of Missing Out.) The haste gives fraudsters a big advantage. You don’t have enough time to consider the offer, think carefully, and seek the advice of others. You should be always very suspicious if you feel time pressure by an investment offer.

The method works for both small and big things. For many years, I decided to never give money to beggars on the street. But once I was asked in the middle of a pedestrian crossing, where I was in a hurry to cross. This made me so embarrassed that I gave the person automatically a gift.

4. The Name Often Reveals the Deceiver

Many scammers are using company names which arouse respect or trust. Usually, they copy or imitate the names of existing and established companies. Let’s see some examples from the database of the European supervisor organization IOSCO. (The name of a similar legal business in parentheses):

  • Blackstone (Blackrock)
  • Bloombex (Bloomberg)
  • Bloomfield (Bloomberg)
  • Goldman Shaks (Goldman Sachs)
  • Goldman Capital (Goldman Sachs)
  • Morgan Trust (Morgan Stanley)
  • Morgan Investment (Morgan Stanley)

Etc., etc. There are 1273 names in the database of IOSCO and most of them seem to be tricky. Some criminals are simply stealing and using the names of big companies. So you can find clones of Blackrock, BNP Paribas, Morgan Stanley, JP Morgan and much more on the list of the prosecutors. They have, of course, nothing to do with the original, renowned companies. In the world, there are so many criminal investment firms or persons. That means they have always some clients. And if they have clients, it means that many people are too uneducated, careless or ignorant. Again and again, some people fall prey to fraudsters. So, it cannot be repeated enough how to recognize them.

5. Investment Scammers May Appear on Black Lists

Many investment fraudsters are brilliant. They can circumvent the authorities and continue their activities for years. But their names are added to a database or blacklist sooner, to lists meant to prevent fraud. Central banks, national financial watchdogs, international organizations, independent internet forums may have their lists. Both on a national and international level.

Search for the name of the company offering the investment in such databases. These are usually found on the websites of national banks and financial supervisors in each country. Or by organizations like IOSCO which I also mentioned above.

We can often contact the authority by e-mail or telephone to request confirmation, fraud warning, or advice. We can also ask questions in Internet forums because offenders usually try to network many people at once. Others may already have bad experiences, information.

If you don’t know which organization is supervising investments in your region, check this list of Wikipedia: List of financial regulatory authorities by country.

6. Cheaters Fool You with a Lot of Chatter

Agents often present learned texts and formulas for selling financial products. Explanations that the average person does not understand. They build their activities on the fact that many of us don’t have the right knowledge, experience. Most people who don’t have the right qualifications can believe that the agent is an expert, well versed in their business. Let’s take the advice of Warren Buffett, the billionaire stock-market guru: Never buy something you don’t understand!

Many times a good acquaintance or friend of ours brings in a “business opportunity” who we think is sure not to fool us. Unfortunately, that is no guarantee, he/she may have been also deceived, or maybe wrong. Or the person is blinded by the high commission promised for recruiting new clients. Friendship is more important than a dubious business, anyway. (Many times the legal agents of the official financial system can also enchant you with their admirable chatter.)

Looking at the appearance is not enough to prevent investment scam. Fraudsters may look like businessmen.
Looking at the appearance is not enough to prevent investment scam. Fraudsters may look like businessmen.

7. Avoid the Bottom of the Cheating Pyramid

Let’s suppose your neighbor paid money to a company that made a very attractive offer. It is possible that he received a wonderful account stating that he had already earned a lot of money. They may even have already paid him a fat yield or returned his money back. Even this is no guarantee that the company is honest.

Because often, the ventures work according to the rules of the pyramid scheme. That means the money of the new depositors is used to pay the previous entrants. So, everything seems to be O. K., and more and more people are coming up with courage, more and more people are trusting them. They see that the investment is paying in plenty. In fact, it all only goes that way as long as there are enough new players. If they run out, the organizers, the scammers will step down with a large sum of money. Whilst a large mass of investors, i.e. the bottom of the pyramid, will lose all their investments.

Ponzi or Pyramid?

Ponzi schemes are fraudulent investments where the “wealth manager” or “portfolio manager” is promising a high return. In reality, “they merely transfer funds from one client to another”, and “when those investors want their money back, they are paid out with the incoming funds contributed by later investors”. (Investopedia) Classic pyramid schemes are also similar. But here the same investors are encouraged to recruit new members for payments or services. That is seldom legal, although it has some similarities with the so-called MLM (Multi-level marketing) business model. Also called pyramid selling.

Many pyramid schemes attempt to present themselves as legitimate MLM businesses. Some sources say that all MLMs are essentially pyramid schemes, even if they are legal. (Wikipedia)

8. Tell Others to Prevent Investment Scam

Feedback from customers about fraudsters trying to cheat them is very important. So further incidents can be prevented. Let’s help others. If you experience any scam, report it to the appropriate authorities in your state. In most countries, it is easy. You can now report by email or in a form on the organization’s website. You may come across such fraudulent offers on blogs, Facebook, Instagram, Twitter or other social media sites. Here, it is worth saving or printing the documents, taking a photo of the website (“PrintScreen” button). It is best to send this to the authorities, along with the website’s address.

Fraud alert
Fraud alert

9. Useful Lists of Investment Scam Methods

New and unknown scammer groups can also try to steal your money. You can prevent new frauds if you know their methods. Some recipes exist for decades and were in use before the internet revolution began. If you read more about past cases, you will learn their way of thinking, their methods. You will also be able to discover new cheats. (You can use search engines like Google or DuckDuckGo to find many lists and collections about “scam methods”, for example.)

Be sure to check out the unforgettable scene from the 2013 cinema “The Wolf of Wall Street” about selling penny stocks. (Youtube) But it’s even better to observe the whole movie. It is a must for all investors and savers. A masterpiece about lying, cheating, and investment fraudsters. (IMDB)

Final Advice

Learn how to avoid or preve investment scams, evade losing all your money. Preserving your money is more important than some percentage points more investment returns. Don’t take unnecessary risks. Don’t be too greedy. Also, help your family and friends learn how to protect against investment fraud. End of preaching.

More Important Readings for You About Your Money

(Photos: Pixabay.com.)


I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research or consult your advisors before making any investment or financial or legal decisions.

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