Advancements in technology have given today's perpetrators of investor fraud new opportunities and unprecedented cover to snare unwitting victims.
Internet fraud now has much to do with how fraudsters steal personal information, says Craig Hannaford, a Burlington, Ont.-based partner with investigative firm Inquisit Solutions Ltd.
"In the past, fraud was all about, how do we get the money? These days, it's a two-step approach," adds Mr. Hannaford, a former RCMP officer who led a unit established to detect, investigate and deter capital markets fraud.
The first step involves obtaining critical personal data, such as banking information. The second step is then to use that knowledge to strike and defraud people of money, he says.
"We've seen many, many cases where corporations have had their systems hacked, so their customer databases are stolen. Those databases can have a lot of personal information, maybe even [about] credit cards or other financial information," Mr. Hannaford says.
For example, Equifax Inc., a leading global credit monitoring company, recently announced that criminals had exploited a U.S. website application vulnerability to gain access to certain files, potentially impacting about 143 million Americans. The information included names, social security numbers, credit card numbers, birth dates, addresses and driver's licence numbers.
Some residents of Canada and Britain may also be affected, but Equifax says that only Canadians who have lived, worked or applied for credit south of the border could be at risk. The company has not said how many Canadians were affected.
"You name it. Data is everywhere. And unfortunately, sometimes organizations and individuals don't take the proper steps to protect the data, or they don't appreciate how valuable that data is to fraudsters. Personal information is the new currency for fraudsters," says Mr. Hannaford.
The Equifiax breach highlights the importance of reviewing bank and credit card statements for any evidence of fraudulent charges or accounts.
Investors need to be particularly diligent about protecting their identities, warns Graeme Hamilton, a senior associate and national co-leader of the investigations and white-collar offence practice at the law firm Borden Ladner Gervais LLP in Toronto.
"You need to be extremely careful in this day and age about providing personal information about yourself, [or] about your accounts to an individual that you don't know – whether it's over the phone or over e-mail – because with that personal information, it becomes very easy for someone to commit identity theft," he says.
The Internet has magnified the opportunities for fraud. "It's easier to solicit victims, because now you've not only got the telephone, you've got e-mail," says Mr. Hamilton. With worldwide reach, fake companies can easily set up websites to promote a scam. After the damage is done, it can be extremely difficult to trace the whereabouts of criminals, let alone bring them to justice.
"I think there's sort of a gullibility on the part of some investors out there thinking that anything they read on the Internet concerning investment opportunities must be true, and therefore worthy of their hard-earned investment dollars," says Graeme Egan, a financial planner and portfolio manager with CastleBay Wealth Management Inc., a fee-only wealth management company based in Vancouver.
Before clicking to make a quick buck, then, be wary of the following scam scenarios.
Fictitious statements that look like those issued by financial institutions can be generated and broadcast over the Internet. Even though they appear authentic, they effectively serve as cover for the misappropriation of funds.
For example, get-rich-quick promotions that tout a financial product or stock that is said to be low risk, but will provide a high return in a short period of time, should be viewed with extreme skepticism. So should high-pressure sales tactics calling for an immediate payment to avoid a lost opportunity.
"You particularly want to be skeptical of claims that a particular individual or firm can beat the market by a considerable margin over the same period of time as a conventional financial instrument would return. That just doesn't happen," Mr. Hamilton says.
Remain alert to financial sales pitches that don't sound right, whether they are delivered online or through more old-fashioned sources.
Fraudsters have been known to target a group of affiliated individuals. They may reach out to a leader of a religious group, for example, and use that person to try and sway other group members by word of mouth.
In a Ponzi scheme, a perpetrator may claim that their product will deliver vastly superior returns compared with average returns offered by conventional financial instruments. The perpetrators then start to collect funds from unsuspecting victims. Often, some of the early investors will get their money back, along with what appears to be an enormous return on top of that, but the latter is really the invested money of other victims.
"I think one reason the deception works is tied in partly with interest rates and yields being historically low so that people get glossy-eyed into thinking, if I can get [let's say] a 15-per-cent guaranteed rate of return, why wouldn't I do this?" Mr. Egan says.
Although Ponzi schemes are relatively rare, "anybody that does get impacted tends to be impacted very seriously," says Wanda Morris, vice-president of advocacy for CARP, an organization which advocates on behalf of Canadians aged 50 and older.
In a pyramid scheme, members are recruited into a network, often to sell what is touted as an outstanding product with the promise that this will ultimately generate healthy financial returns. To join, the new member has to pay their recruiter, who takes a cut of those fees, and then funnels a share up to their own recruiter and so on, with the person(s) residing at the top of the pyramid poised to get richer as the group grows larger.
Seniors are often disproportionately affected by financial fraud, says Ms. Morris, who is based in Surrey, B.C.
"What happens as we age, particularly as we get beyond 75-plus, our competence starts to decline. We lose some of our memory and executive functioning," she explains.
But in a counterintuitive way, confidence increases as people age, so there is less awareness of how certain faculties are being diminished. This makes seniors incredibly vulnerable, because they lose their ability to realize when they are being lied to, Ms. Morris adds. "So you get this potentially toxic feeding ground for scams and fraud artists."
If an older investor is unable to direct financial affairs, family members or guardians should ask whether the portfolio is still meeting the senior's financial needs and goals.
"As a loved one, it's incumbent on you to be asking questions … so that you can potentially help to detect both overt types of fraud and less well publicized, but also unscrupulous things, like putting funds in unsuitable investments," advises Mr. Hamilton.
"At that stage of life, it can be simply devastating if funds are invested in unsuitable investments. The prospects of recovery can be dim."