Over the past 40 years, only one new entry has been added to the Federal Bureau of Investigation (FBI) roster of "Top 10" investment scams – the very broad category of "Internet fraud." The other financial rip-offs listed are merely new versions of tried and true swindles that have been around for decades or more – from Ponzi schemes and pyramid systems to phony stock offerings and commodity cons.
The big difference is that the one new category – Internet fraud – has greatly increased the frequency, speed and effectiveness of the other types of financial fraud, as well as exponentially increasing the scammers' take.
In 2009, there were 6,062 robberies of physical bank offices and branches, netting the perpetrators a total of $45.9 million in loot, more than $8 million of which was recovered by law enforcement officials. By contrast, there were more than 14,000 reported (and countless unreported) online attacks on banks and bank customers, with the estimated loss exceeding $110 million, almost none of which was recovered.
In addition, where physical bank theft is local, online robbery is global. MSNBC recently reported that a ring of cyber thieves based in Eastern Europe had used a so-called Trojan horse computer program to steal more than $1 million from the accounts of more than 3,000 British bank customers in just four weeks – and, even though the banks had identified the problem, they weren't able to immediately stop the thefts.
That mirrored an even broader rip-off of banks and their customers in November 2009. According to the FBI, a highly sophisticated group of thieves using cloned or stolen debit cards, with PINs gained primarily via Internet phishing scams, hit more than 2,100 ATM machines in 290 cities across North America, Asia and Europe, walking off with more than $9 million in cash in under 12 hours. That figure would have been much larger had many of the ATMs not been drained of all their bills.
Banks aren't the only targets, either. Overall, the FBI counted 335,655 complaints of online thieves targeting U.S. consumers, financial institutions, brokerage firms, retailers and other companies that maintain customer accounts in 2009, up 22.3% from 275,285 in 2008. The total 2009 take in those incidents was estimated at $559.7 million, up from just $264.6 million in 2008.
And those numbers will almost certainly increase dramatically in the decade ahead, thanks to the growing use of cell phones, laptops and home computers to access personal bank, brokerage and other types of online accounts.
The National White Collar Crime Center (NW3C) says direct online thievery is just a drop in the bucket compared to all white-collar crime, most of which involves some form of investment or financial skullduggery. Examples include bankruptcy fraud, bribery, credit card fraud, counterfeiting both of currency and securities, embezzlement, identity theft, insurance fraud, kickback schemes, money laundering, price fixing and others.
The total cost of worldwide white-collar crime rose from just $5 billion in 1970 to $20 billion in 1980, $100 billion in 1990 and $220 billion in 2000, according to NW3C surveys and research of global law enforcement and regulatory reports. The total could reach $400 billion in 2010.
But while the technology may have changed, financial scammers continue to rely mostly on the old standards.
The Ponzi scheme, named for Charles Ponzi who first used it in the early 1900s to fleece investors out of $10 million, continues to head every list of top financial frauds, probably because of its simplicity. The perpetrator merely promises huge returns and then delivers them, using money from new investors to pay off older ones, who praise the investment and draw in more and more new investors – until the operator has built up a big enough cash pool to abscond with all the money. See Bernie Madoff!
The big difference now is that the Internet can bring in money to the Ponzi operator in days rather than the months it used to take. The same is true of pyramid scams, where early investors profit by bringing in new suckers and raking off a share of the new money – until the whole thing collapses.
The Internet is even better suited to more complicated frauds. Using e-mail and/or highly professional-looking Internet Web sites, white-collar thieves can send out hundreds of thousands of sophisticated marketing appeals or official-looking documents in a matter of hours, reaping hundreds or even thousands of responses.
Problem is, the charities are bogus, the investments are phony, and the operators are long gone.
Seniors are particularly susceptible to many of these scams, being sold false charitable gift annuities, viatical settlements, reverse mortgages, or having their pension funds drained.
In 2005, for example, Pennsylvania authorities shut down a well-promoted "IRS-approved, IRA-authorized" investor plan that pulled more than $2 million out of senior pension programs in the state.
Of course, anyone can fall victim to an investment scammer. Following are nine other types of frauds or dubious investment offers you might encounter:
- Affinity fraud – These scams target groups with common interests, such as alumni associations or religious or ethnic clubs, letting the members sell one another on bad or fake investments.
- Annuity misrepresentation – These aren't scams so much as failure to disclose hefty sales commissions, huge surrender fees and other things that eat up the buyer's money.
- Promissory notes – These are short-term, supposedly high-return debt instruments issued by obscure or non-existent companies and sold by unlicensed individuals posing as brokers, insurance agents, etc.
- "Prime-bank" schemes – These offer small investors high returns by giving them supposed access to the world's elite banks and entry into the exclusive world of the ultra-rich.
- Brokerage scams – These can range from outright fraud, such as selling phony securities, to "pump-and-dump" promotions of penny stocks, unauthorized trading of customer accounts (known as "churning"), excess or hidden fees and other irregularities.
- Unlicensed agents – Nearly every financial endeavor is regulated and sales people are required to be licensed at either the state or federal level – but most scammers aren't. Even non-regulated operations usually have professional or business associations you should be able to check with if you have doubts.
- Pressure tactics – Cold callers operating out of boiler rooms similar to those portrayed in the 1980s film "Wall Street" promote commodity futures, precious metals, penny stocks, coins, and travel and vacation properties. While some cold calling operations are legitimate, many aren't. The bad ones typically offer either "a special one-time deal" or an opportunity you have to "grab now or you'll miss out." Diamond investments are popular among pressure sales teams since they're one of the few commodities not traded on any organized exchange, meaning you have no real way to compare prices to actual market values.
- False sales premises – These are often used in response to major shifts in public mood, such as the present distrust of Washington. A popular pitch currently being used promotes the purchase of antique gold coins because "the government has secret plans to confiscate all gold and prohibit individual ownership," as it did to a limited degree in 1933.
- Fake real estate sales or leases – These scams reflect the recent mortgage crisis and collapse of the real estate market in many areas of the country. Because of foreclosures, weak sales and abandonment, many homes sit empty in places like Phoenix, Las Vegas and California's Central Valley. Scammers fake ownership papers to the empty properties, advertise them for sale or lease at below-market prices and then walk away with the deposits or down payments when they hook bargain-hungry buyers or tenants.
A comprehensive list of potential financial and investment scams would have many more entries, but the ones above should suffice to raise your suspicions any time you encounter an offer that sounds "too good to be true." Don't put your money on the line for anything you don't completely understand – that goes for potential risks, as well as rewards. And always verify that the offering company actually exists and the person presenting the offer is properly licensed, not just a glib talker with a slick presentation.
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Where to Turn for Help
If you have reservations about a potential investment opportunity, or if you've been victimized by a financial scam, you might turn to one or more of the following agencies.
Better Business Bureau – With offices nationally, in every state and most large and mid-sized cities, the BBB can alert you to problems with local businesses, work-at-home programs, distributorships, sales routes you can buy and other one-on-one type rip-offs. They usually have lists of current online offers that are suspect or drawing lots of complaints. You can access the national BBB Web site at http://www.bbb.org/us/ and navigate to your home state or city chapter from there.
U.S. Securities and Exchange Commission (SEC) – Information is available on all securities-related fraud issues and investment scams, and you can file your own personal complaints or suspicions online at http://www.sec.gov/complaint.shtml. You can write them at: Securities and Exchange Commission, Office of Investor Education & Assistance, 450 Fifth Street, N.W., Washington, D.C. 20549-0213, or fax a complaint to 202-942-9634. You also can verify financials and regulatory standing on all publicly traded U.S. companies by accessing the SEC's EDGAR Database at: http://www.sec.gov/edgar.shtml.
Your SEC complaint can be anonymous or you can provide only limited personal data. However, the more information you give them, the more likely they'll be able to help you. Either way, include specific details about how, why and when you were bilked with any contact info you have on the fraudulent person or company involved.
U.S. Commodity Futures Trading Commission (CFTC) – If the scam involves commodity futures or options rather than stocks or bonds, the CFTC can help at: http://www.cftc.gov/
Internal Revenue Service – Since most scammers don't pay taxes, the IRS tries to keep track of them as well – not only to put them out of business but to prevent having to let you deduct your fraud losses. Check out posted IRS fraud information at: http://www.irs.gov/privacy/article/0,,id=179820,00.html?portlet=5
U.S. Federal Bureau of Investigation (FBI) – For any kind of Internet fraud, bank-related scams or other interstate criminal activity, check with the FBI or report complaints at: http://www.fbi.gov/. (Just for fun, you can also review the "10 Most Wanted" list on the FBI home page to see if you recognize anyone.)
Financial Industry Regulatory Authority (FINRA) – A professional association of investment regulators and agencies, FINRA has a Web page where you can check out your broker's credentials and review past complaints: FINRA – FINRA BrokerCheck.
If you've already been victimized, you might also get some combined help from all of these government agencies and others thanks to a new joint task force designed specifically to investigate and prosecute financial fraud cases. The new team, announced in late May, will be based in Virginia.
The U.S. Attorney's Office in Richmond told USA Today the task force will try to coordinate local, state and federal anti-fraud efforts, the goal being to channel cases to the Federal Court for the Eastern District of Virginia, which has what is known as a "rocket docket." That means cases can go from indictment to trial in just 90 to 150 days, whereas it usually takes more than a year in other jurisdictions.
Meet our country's financial terrorists. While there's nothing we can do to stop them, there is, in fact, a way to protect yourself from their next attack.