During financial hardships, people tend to be in desperate need of money, which leads them into falling for almost anything promising high returns. Online opportunists, better known as internet swindlers or online fraudsters, exploit this situation and have made millions of dollars from desperate people around the world wishing to take a shortcut to getting rich or achieving high returns. Online fraudsters make their money by developing fraudulent companies or investment products, which they claim have high returns with no risk.
The Capital Markets’ endorsement of online trading has led to increased access to the market, as well as reduction in fees. However, that has bought with it an opportunity for online fraudsters. In addition, the use of online trading has presented the Capital Markets industry with great opportunities for increased efficiency, information flow and trading volume.
Due to online trading, companies have embraced going electronic in terms of marketing, trading and communication with their shareholders and hence people’s understanding of a particular company or product is highly influenced by information they receive from a particular company – some parts of which may be legitimate whilst others fraudulent.
In this article we want to share information on:
1. How online fraudsters exploit the internet as a medium of communication;
2. Common types of internet investment scams; and
3. How to avoid online investment scams.
HOW ONLINE FRAUDSTERS
EXPLOIT THE INTERNET AS A
MEDIUM OF COMMUNICATION
a) World Wide Web (www)
The World Wide Web is the mechanism widely used to disseminate information on the internet. Most websites are free to access while some websites are restricted through the use of technologies that require a password as identification for access. Just like a legitimate business, online fraudsters create their websites to disseminate their false or fraudulent information to web users.
Most of these websites appear authentic, as some online fraudsters have gone to the extent of developing websites that are very similar to those of legitimate service providers.
Generally, flashy pop-up advertisements show up on the screen and are designed to attract your attention and re-direct you to a fraudulent website.
b) Electronic Bulletin Boards
An electronic bulletin board works similarly to conventional public notice boards that you see at your municipal building or university library. The only difference is that an electronic bulletin board allows members of the public to connect and become members of such a board, and provides their members with the opportunity to engage in discussions of mutual interest through chat rooms. It also provides members access to news, either of a general or business nature.
Electronic bulletin boards are becoming an increasingly popular forum for investors to share information and many online fraudsters have developed board messages to offer “unbelievable” investment opportunities or “get-rich-quick” schemes to subscribers/browsers of such boards. Online fraudsters that target investors make use of the boards to post false inside information on a certain share of a company. Many online fraudsters prefer this medium as it enables them to easily hide their identities with the use of aliases, making them difficult to trace.
c) Electronic mail (“E-mail”)
E-mail is an electronic message that can be either directed to a particular person or to a vast number of addresses. Most people nowadays use it as a medium of communication whether at work or in their personal lives. Online fraudsters have exploited e-mail facilities by sending out various spam e-mails promoting their fraudulent investment opportunities. They collect e-mail addresses from chat rooms, websites and customer list newsgroups by using viruses that harvest the users’ address books. With your e-mail address, fraudsters will then devise fraudulent investment opportunities in which various investment scams are carried out with the aim of getting hold of your hard-earned money.
Although there are several tactics that fraudsters may employ when attempting to commit online investment fraud, most typical fraudsters generate and distribute online newsletters. These newsletters, which are commonly found on websites, electronic bulletin boards or passed on via e-mail to the target audience, often carry no subscription fee and some offer investors valuable information on securities and companies. Most of the newsletters are legitimate, as it is legal for a legitimate company to pay a writer to write an article or newsletter about their company and products. However, at some point in time, the cyberspace may be flooded with a mix of legitimate and falsely developed newsletters. It is often hard for the average individual to determine the legitimacy of the information provided in the newsletter.
Unfortunately some online investors do end up selling or buying a particular share based upon information of the share or company featured in the newsletter.
COMMON TYPES OF INTERNET
a) “Pump and dump” scams or internet share
This type of online scam is particularly common in situations where an online fraudster holds a legitimate worthless share in a particular company. They often make use of small, thinly traded companies, as it is easier to manipulate a share when there is little or no information available about that company. They effectively promote this scheme in chat rooms and spam e-mail, where the targeted persons are recommended to buy a share in a particular company while it is cheaper with promising growth and higher returns by pretending to reveal false inside information on a legitimate company which they have shares in, but are in fact worthless. As investors react to this information and recommendations, the price of the share featured either in the chat rooms, via spam e-mails or electronic bulletin boards will increase. The online fraudster then sells or “dumps” the worthless stock at a high price which generally will never return the investment.
b) Ponzi schemes
The Ponzi scheme is named after Charles Ponzi, who became notorious for the technique in the early 1920s, but has also been used in recent times by Bernard Madoff. It is an affinity scam that is developed to exploit the trust and friendship that exists in groups of people who have something in common. Mostly, online fraudsters promote their product or company by pretending to be members of such a group. Some online fraudsters often use the respected members in the groups to promote and convince fellow members about a particular Ponzi scheme. The bond and affinity of the group make it very hard for the unsuspecting individual to doubt
the investment. Ponzi schemes offers returns which
legitimate investment will not guarantee.
Below is a simple example of a Ponzi scheme:
Mary is offered an investment by John for a guaranteed 50% for a period of 31 days (1 month). The high returns entices Mary to invest N$100 with John for the aforementioned interest and time
period. A few days after Mary’s investment, Sandra and Joel also each place N$200 with John with the hope of the same return after 31 days. At the end of the promised 31 days, Mary receives her investment back, valued at N$150 from John and with the promise delivered, Mary is likely to invest more money with John and share the great news with family and friends. In doing so, she attracts more investors to the scheme while in reality the money
paid out to her is from investment of new entrants
(Sandra and Joel in this case) not out of profit or returns on investments. Sandra and Joel will likely receive their promised returns if other people subsequently join in the scheme.
Since the Ponzi scheme is dependent upon the number of new entrants, they generally collapse at some point due to the lack of new entrants and lack of money as a result of capital being paid out as returns whilst no actual returns were being earned during the period by the scheme.
c) Pyramid scheme
Although pyramid schemes works almost like Ponzi schemes, pyramid schemes require a fee to join the scheme and the return depends on your ability to recruit or get others to join the scheme compared to a passive investment in a Ponzi scheme as explained above. Despite the slight difference, both Ponzi and pyramid schemes require new people to join in for the earlier investors to get returns of their so-called investment.
HOW TO AVOID ONLINE
a) Do your homework
No matter how trustworthy the person seems to be who brought the investment opportunity to your attention and whatever the person has shown to you as a way of confirming the legitimacy of the investment opportunity, never make an investment decision solely on such information. Don’t be scared to question the person presenting the investment opportunity, even if that person belongs to your church group or social network. Always ask them to thoroughly explain the investment opportunity to you in terms of risk, returns involved and a brief history about the company and its immediate competitors.
b) No risk-free investments with high returns
If you have a feeling that the investment being presented sounds too good to be true, then it probably is. Whenever you are faced with an investment decision to make, always remember that the higher the potential return from an investment, the higher your risk of losing money.
You can own some shares, but you should have a clear understanding of what owning a share entails and what will happen to the money you have invested in the company. By buying a share, you are acquiring a share of ownership of a company. This acquired ownership of a company allows you a claim on the assets and earnings of such a company. The return referred to when investing in shares is the possibility of the value/price of the share acquired at a particular point in time increasing over time and the profits of the company (dividends) being shared among shareholders of the company if it
has managed to make a profit. Since the company
will use the money generated from shares sold to generate sales and ultimately profit, there is the possibility that the money employed in the company will not bring the desired return. All in all, there is a greater need for you, as an investor, to understand the return and risk involved in any type of investment. Should you come across a promise of quick and high returns with little or no risk on the investment, you are possibly being faced with one or other type of investment scam.
c) Take time to make an investment decision
Although you may want to get rich quickly or improve your financial situation and not want a good opportunity to pass you by, please do take your time to do your research when making investment decisions. Before you decide to invest with any person, make sure you have a clear understanding of the presented investment opportunity and that you have ascertained the legitimacy of the investment company and the person presenting the investment opportunity. Never invest your money in an investment instrument or company you don’t understand. Even popular and successful investors such as Warren Buffet do research and invest only in companies they understand.
Do not fall in the trap of saying, “There’s no time for that… It’s a new offer!”
d) Determine the legitimacy of the person presenting the company and the company itself
In most countries, investment companies, their salespeople, and investment products are required to be registered and regulated by a recognised regulatory institution. These institutions are responsible for the aforementioned registration and regulation of investment and you should therefore ask the person or company presenting the investment product to indicate the following to you in writing:
• The legal name of the entity;
• Where the company is registered;
• If such company is registered, the name of the institution (regulator) it is registered with and countries of such institution; and
• Whether the sales person is licensed to sell investment products of such a company and if the investment presented is registered with the regulator.
If such sales person is not licensed, be extra cautious and probe further or just let it go.
When provided with the name of the regulator and the country of the regulator, confirm if there is a
regulator with such a name in that country before you go ahead to confirm the investment company, sales person and presented product registration with it. If you are not sure how to go about confirming the above, either approach the Namibia Financial Institutions Supervisory Authority (NAMFISA) or the Bank of Namibia for assistance.
Only after you are certain that you are dealing with legitimate persons and company should you decide to invest your money.
e) Determine cancellation or withdrawal options
If the investment company states that it has a cancellation or withdrawal option in place, do insist on the investment company providing it to you in writing. Upon receiving such an option, compare it to options offered by other local or similar institutions. In addition, ascertain and understand the terms and conditions of withdrawal or cancellation options, as some may have severe financial implications.
f) Just ignore
Never reply to spam. Even if you want to instruct them to remove you from their e-mail list, to them this is a sign that they have found an active e-mail user. The way to deal with spam e-mail is to ignore, delete or block it.
g) Use registered brokerage firms
If you have limited or no knowledge on investments, it is advisable to consider working through a registered brokerage firm as opposed to online brokerage. Although the cost of a registered brokerage firm may appear to be higher than online brokerage firms, at least registered brokerages have
the resources to conduct research on upcoming investment opportunities and have related experience in the industry, which allows you take advantage by tapping into their knowledge.
h) Protect your personal information
It is advisable to install software such as anti-virus or anti-spyware programs that stop fraudsters from hacking your computer to gain access to your personal information.
You should also avoid accessing your online account at public computer centres, as these computers are used by hundreds of people, including online fraudsters. If you leave any trace of your personal information, the next person to use the computer will gain access to your personal information.
Refrain from providing confidential personal information on the internet.
“Information is an investor’s best tool:”
All in all, trust your gut feel and if it’s too good to be true, then it probably is.