Investments have quickly become synonymous with the fintech industry. Robinhood, Moneybox and now even traditional banking institutions are increasing the ability for consumers to invest, save and grow their money. This increase in access has given fraudsters an opportunity to seize on the vulnerability and excitement of these consumers who in many instances have access to investment products and services for the first time.

Now more than ever, financial markets are seeing the influx of new investors who have held onto their cash due to canceled vacations and curbed spending following COVID-19 restrictions.¹ According to a statistic from Bank of America, more money has gone into stock-based funds over the past five months than in the previous 12 years combined.²

Sadly, not all new and returning investors are as sophisticated as the fraudsters preying on them. These fraudsters are cunning and their schemes are elaborate enough to mislead consumers or even investigators. Recently departed Bernard Madoff misled many seasoned investors for years using his position and affinity to powerful members of society³ as well as plain lies and fake data.

Most investment fraudsters use similar tactics, such as leaving the impression that they have deep industry experience, falsely presenting themselves as licensed brokers, producing apparently credible websites (imposter websites) as well as falsified or inflated documentation to substantiate their claims. Fraudsters always keep up with the times and they will be the first ones to exploit upward trends like investing in green energies, cryptocurrencies or in one of the next tech unicorns about to become public.

According to the Investment Association (IA) in the United Kingdom (U.K.), the number of investment scams has quadrupled since the first U.K. lockdown began in March 2020. Using various tactics like cloning fund managers’ websites, products and documents, and even creating fake price comparison websites, the scammers were able to steal almost 10 million pounds ($13.3 million) from U.K. investors.⁴ For many firms, they may not even offer investment services directly, but their brand can suffer as a result.

Typologies

Investment fraud has existed for years, but with greater access and global reach, it has changed in recent years. Below are some of the emerging or changing typologies explored.

Pre-Initial Public Offering Scams

“While legitimate offerings of pre-IPO shares in a company are not uncommon, unregistered offerings may violate federal securities laws,” says the U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy.⁵ Furthermore, any news of a possible initial public offering (IPO) of a tech startup sparks investors’ thoughts of getting their hands on the next Google or Facebook, and no one wants to miss that lucrative train. Investment fraudsters are readily exploiting this group of investors who often do not do their homework, fall for flashy bulletins or websites, or simply do not have the expertise to check the background of the broker/company making these offerings.

Whether it was Google, Airbnb, Lyft, Palantir or Uber, all have had their pre-IPO shares appear in various scams.⁶ This trend only continues with the tech market having grown significantly in recent years. According to The Wall Street Journal, “combined revenue for the five biggest U.S. tech companies—Apple Inc., Microsoft Corp., Amazon.com Inc., Google-parent Alphabet Inc., and Facebook Inc.—grew by a fifth, to $1.1 trillion. Their aggregate profit rose at an even faster 24%.”⁷ Who would not want to invest with these types of profit margins?

Pre-IPO scammers use various weapons from fraudsters’ arsenal. To prevent customers from being part of the long list of fraud victims, the following are some risk indicators to monitor:

• Scammers create websites using the name of the company and some combination with IPO. For example, “Money Ltd” would have a website called “themoneyipo.com,” “moneyipo.com” or “themoney-ipo.com.” They also often combine the commercial texts and logos taken from actual companies’ websites, making the bogus websites look legitimate.
• The broker company usually has an address in a posh neighborhood in London or some other financial capital. However, Googling the address would usually show, at best, a nondescript office building but more often a residential property or a school.
• The “brokers” advertise aggressively on social media and online, often using techniques such as constant calling, stressing the urgency of the offer and scarcity of shares.
• The scammers often claim “expertise” such as “having worked” in big investment firms such as Goldman Sachs or BlackRock, and sometimes they even have carefully crafted LinkedIn profiles to back this up. Needless to say, all information is heavily distorted or simply fabricated. Curiously enough, the individuals almost never come up as brokers with active licenses. Consumers can best protect themselves by checking publicly available resources like Australia’s Financial Advice Register,⁸ the BrokerCheck⁹ registry provided by the Financial Industry Regulatory Authority (FINRA) or the U.K.’s Financial Services Register.¹⁰

It is best to keep in mind that the next time some tech unicorn’s pre-IPO shares appear on Facebook, if it sounds too good to be true, it probably is.

Initial Coin Offerings

Initial coin offerings (ICOs) are another relatively recent fraud phenomenon. While they can be legitimate, unfortunately they have been linked to fraud in several cases. Similar to how equity works, an investor is offered a coin with the promise that the coin will increase in value as the firm grows. This taps into the excitement surrounding cryptocurrency while also targeting more vulnerable investors who are unfamiliar with cryptocurrency and do not know how to vet firms operating in this industry.

Typical ICO scammers use international payments and the fascination around crypto to target individuals

In a recent U.S. Justice Department case, an individual was indicted for collecting funds for a soon-to-launch crypto exchange who instead ran off with the funds. They used traditional fraud methods such as inflated claims of return and false identities.¹¹ Typical ICO scammers use international payments and the fascination around crypto to target individuals. Some go as far as building credibility, such as releasing a fake news story purporting the entity was being purchased by a Russian firm.¹² Even if victims attempted to validate the claims independently, they would see what appeared to be a legitimate source claiming the firm was authentic.

But how can one protect themselves and their institution from serving scammers?

The following red flags can be found in almost all recent crypto Ponzi schemes:

• The website: If possible, look at the creation date and expiration date of the website; this can reveal that the website will expire just within a few months.
• Advertising: The scheme is heavily advertised on social media and on blogs that seem to have few followers or have very few blog posts. Often the website and those blogs have similar design features and scripts, clearly indicating that these are made by the same people. Also, be wary of the “investment opportunities” using tactics of affinity fraud, which targets people within the same groups (e.g., church groups, clubs, retirement homes, extended families and political affiliate groups).
• Review the team behind developing the coin: Google their pictures and their names and really go through their LinkedIn profiles to see if the experiences they claim actually add up, and if they have the following and endorsements they claim. Sometimes people use entirely false identities, like Kristijan Krstic, who pocketed $7 million in investor funds from B2G and Start Options. He was known to his investors under the alias “Felix Logan.”¹³
• Documentation: Do not trust companies that have not even posted a white paper of the project. Even the ones that have a white paper and good online presence may still end up selling false promises like the three Canadians behind the PlexCoin ICO scam, who ended up raising $8 million from unknowing investors.¹⁴
• Look out for any adverse media: There is a good chance that the founders are connected to earlier failed investment schemes or similar ICOs that did not go anywhere.
• Connected brands: These schemes often claim connection to trusted crypto exchanges or known players in financial services. Often at least part of their revenues actually come from various crypto exchanges.
• Payment pattern: Their payment pattern almost always shows high velocity and money being forwarded to individual accounts across borders. Sometimes some money trickles back to investors, but always less than what they paid to invest. A good Ponzi scheme can continue, only for as long as investors have the illusion that they can get their investment out at any time.
• Employee payments: Proceeds of crime may appear as payments to different “employees” and may be veiled as salaries, commissions or “website maintenance” costs.

With the bitcoin price just recently having reached an all-time high (it crossed $63,346 per one bitcoin on April 16, 2021), there are always some who are looking for cheaper alternatives to enter the market when the “price is right.” That is, if the recent radical price fluctuation of popular cryptocurrencies doesn’t scare people off.

Accessibility

The innovation with investments has meant more people are vulnerable to falling victims to fraud, scams or simply not understanding legitimate products being offered. With anxiety rising during lockdown, less human contact with younger and more critical loved ones, as well as free funds left over from missed travels and spending, elderly and other vulnerable persons are increasingly falling victim to various scams. From fake supermarket vouchers to fraudulent TV licensing emails, scammers are striking at a time when the public may be slightly more susceptible to a hoax. At the end of April 2020, the U.K.’s Action Fraud, the police’s fraud team, reported more than 2 million pounds ($2.79 million) had been lost by the public to certain scams circulating over the last period of a few weeks.¹⁵

Vulnerability also means not having investment knowledge, which depending on the nature of the investment, could be extremely risky and result in loss or may even be a scam in and of itself. The impact of complex investments being offered to vulnerable and/or inexperienced investors has highlighted that increased efforts need to be undertaken by firms to educate consumers. In 2020, a 20-year-old investor using Robinhood, a commission-free trading app, committed suicide after believing his complex options trade resulted in a loss of over $700,000. In fact, this negative balance was only temporary while other investments settled into the account.¹⁶ It begs the question: Why was a young adult offered access to investment activity in the hundreds of thousands in the first place?

In this case, there was no scam involved but it highlights that inexperienced investors can be targeted through claims of significant returns. They believe that if they invest early in certain innovative industries, like crypto or a tech unicorn, they will make a large profit but instead they lose significant sums of money.

What Can Law Enforcement Do to Fight Investment Fraud?

It is key that law enforcement continues to educate the public on emerging risks. Increased public awareness will make it harder for bad actors to perpetrate their crimes. Another tool at law enforcement’s disposal is knowing how to act when approached by the victim of investment fraud. Time is very much of the essence as fraudsters will do all in their power to move victims’ funds between accounts and very likely to another jurisdiction. FINRA has published extensive guidance about what to do if someone finds themselves to be the victim of fraud.¹⁷ What this guidance misses is that financial institutions (FIs) are often the best placed in preventing the victims’ funds from leaving their systems. Law enforcement should also be mindful of this and if approached by a victim ensure they guide them to contact their FI as an immediate first step. This notification could be the trigger for the investigation by the FI and may protect the victim and future victims from losing their money. Only after this step does it make sense for law enforcement to collect the information to pursue an investigation. The best outcome for the public is one in which the victim recovers their money and the fraudster can be prosecuted.

Conclusion

Increased access to investment services means fraudsters can target a wider array of individuals than ever before. It is not just the traditionally vulnerable, but also young or inexperienced individuals looking to make returns through fintech-like investment activity or by investing in a pre-IPO for a brand they like. This excitement and inexperience may mean an individual’s guard is down when a seemingly sophisticated fraudster approaches with a real website, along with apparently real documentation and even several third parties backing up claims of the firm’s success.

Both pre-IPO and ICO scams are here to stay. Unfortunately, individuals’ digital life only furthers the access to get-rich-quick schemes. The plethora of seemingly adequate “advisers” or “reviewers” often promote schemes where they conveniently “forget” to disclose their affiliates. Both young and old investors may lose their savings, and in the worst case their lives, when they realize they were only pawns for elaborate fraudsters. 

Kristi Raffai, fincrime product compliance manager, Estonia, Kristi.Raffai@wise.com

Danielle Herndon, fincrime product compliance lead, FL, USA, Danielle.Herndon@wise.com

1. Maggie Fitzgerald, “A large chunk of the retail investing crowd started during the pandemic, Schwab survey shows,” CNBC, April 8, 2021, https://www.cnbc.com/2021/04/08/a-large-chunk-of-the-retail-investing-crowd-got-their-start-during-the-pandemic-schwab-survey-shows.html
2. Jeff Cox, “Investors have put more money into stocks in the last 5 months than the previous 12 years combined,” CNBC, April 9, 2021, https://www.cnbc.com/2021/04/09/investors-have-put-more-money-into-stocks-in-the-last-5-months-than-the-previous-12-years-combined.html
3. Diana B. Henriques, “Bernard Madoff, Architect of Largest Ponzi Scheme in History, Is Dead at 82,” The New York Times, April 14, 2021, https://www.nytimes.com/2021/04/14/business/bernie-madoff-dead.html
4. “Coronavirus: Investment scams quadruple since virus lockdown,” BBC, November 30, 2020, https://www.bbc.com/news/business-55126228
5. “Investor Alert: Pre-IPO Investment Scams (Updated),” Investor.gov, April 24, 2012, https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-alerts/investor-48
6. Thomas Brewster, “Fraudsters Made $2 million In 4 Months Selling Fake Airbnb, Uber And Lyft Shares, DOJ Claims,” Forbes, November 15, 2019, https://www.forbes.com/sites/thomasbrewster/2019/11/15/fraudsters-made-2-million-in-4-months-flogging-fake-airbnb-uber-and-lyft-shares-doj-claims/?sh=77396ec952cb
7. “How Big Tech Got Even Bigger,” The Wall Street Journal, February 6, 2021, https://www.wsj.com/articles/how-big-tech-got-even-bigger-11612587632
8. “Financial advisers register,” Moneysmart.gov.au, https://moneysmart.gov.au/financial-advice/financial-advisers-register
9. “BrokerCheck by FINRA,” BrokerCheck, https://brokercheck.finra.org/
10. “Welcome to the Financial Services Register,” Financial Services Register, https://register.fca.org.uk/s/
11. “Co-Founder Of Cryptocurrency Company Pleads Guilty For Role In ICO Fraud Scheme,” The United States Attorney’s Office Southern District of New York, June 16, 2020, https://www.justice.gov/usao-sdny/pr/co-founder-cryptocurrency-company-pleads-guilty-role-ico-fraud-scheme
12. “Founder of International Cryptocurrency Companies Indicted in Multi-Million Dollar Securities Fraud Scheme,” The United States Attorney’s Office Eastern District of New York, February 23, 2021, https://www.justice.gov/usao-edny/pr/founder-international-cryptocurrency-companies-indicted-multi-million-dollar-securities
13. “Serbian Founder of Digital-Asset Companies Indicted in International Cryptocurrency Scheme,” The United States Department of Justice, February 23, 2021, https://www.justice.gov/opa/pr/serbian-founder-digital-asset-companies-indicted-international-cryptocurrency-scheme
14. “SEC v. PlexCorps, Dominic LaCroix, and Sabrina Paradis-Royer,” U.S. Securities and Exchange Commission, https://www.sec.gov/divisions/enforce/claims/plexcorps.htm
15. Sian Traynor, “These are 7 of the biggest scams targeting vulnerable people during lockdown,” Edinburgh Live, May 16, 2020, https://www.edinburghlive.co.uk/news/7-biggest-scams-targeting-vulnerable-18261767
16. Sergei Klebnikov and Antoine Gara, “20-Year-Old Robinhood Customer Dies By Suicide After Seeing A $730,000 Negative Balance,” Forbes, June 17, 2020, https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-year-old-robinhood-customer-dies-by-suicide-after-seeing-a-730000-negative-balance/?sh=1fbdd1781638
17. “A Recovery Checklist for Victims of Investment Fraud,” Financial Industry Regulatory Authority, https://www.finra.org/investors/insights/investment-fraud-awareness