Con artists use a variety of investment schemes to separate unwitting investors from their hard-earned money, including: Ponzi schemes, pump-and-dump schemes, affinity scams, off shore scams, and pyramid schemes, just to name a few. With the numerous scams out there and new ones popping up every day, it can be difficult to know a legitimate investment opportunity from a fraudulent one. Fortunately, there are six characteristics almost all investment schemes have in common. Knowing and recognizing them can help protect you and your investments.
U.S. citizens are required to pay income taxes on income received, regardless of whether or not the money is housed in a U.S. account. According to a 2009 WSJ article, the IRS recently increased its scrutiny of offshore accounts and foreign income in order to catch tax evaders. "The penalties for offshore income violations are now among the toughest in the tax system. Those who have inadvertently failed to report offshore income, even just a few hundred dollars, could be subject to a $10,000-a-year penalty going back several years," reports Laura Saunders. If a sales agent or broker claims an investment will provide you with an offshore tax haven, tread carefully.
Many con artists trick investors with claims that the investor is one of "only a few" who are aware of the current opportunity. By cultivating a sense of secrecy (often coupled with a sense of urgency: "Act now. This deal won't last long!"), fraudsters can gain an investor's trust by making them feel like a part of a privileged minority. Research such offerings very carefully.
A majority of investment schemes involve unregistered brokers or agents selling unregistered securities. Before investing in any security, you should check with both the SEC and FINRA to make sure the security and the agent are properly registered.
Legitimate investments should include proper documentation that fully discloses all relevant aspects of the investment necessary for an investor to make an informed decision about the product. If you cannot obtain a prospectus (for a stock or bond) or an offering memorandum (for a private placement product), then that is a good indicator that something may be amiss.
Investments are risky. Some are more or less risky than others, but none (other than an insurance policy) can provide a guaranteed return. Promises of a guaranteed return should be a red flag.
And the most common indicator that an opportunity is really an investment scam:
Scammers often promise high returns in order to garner investor interest and make potential investors believe the opportunity is too good to miss. Research the typical rates of return for the securities in which you want to invest. If someone is pushing a security with a proposed rate of return that is significantly higher than the industry average, the investment is likely a scam.