Six Fraud Warning Signs

Unrealistic Returns – Unrealistic rates of return are a big red flag. Investments that offer a higher-than-market rate of return and little to no risk are almost always fraudulent. The CSA’s 2012 Investor Index found that many Canadians have unrealistic expectations of market returns. When asked what they think the annual rate of return on the average investment portfolio is,only 12% of Canadians gave a realistic estimate.

Guaranteed High Returns – With most investments, there are no guarantees. Guaranteed high returns are a red flag that the investment is likely a scam.

Pressure to Borrow – Pressure to borrow money to invest is an investment fraud warning sign. Fraudsters often recommend that you borrow to invest. FAIR Canada believes it is highly inappropriate (and overly risky) for most individuals to borrow to invest (otherwise known as ‘leverage’), particularly where it involves borrowing against your home. If you lose your investment, borrowed money still needs to be repaid. If your house was used as collateral, it could be sold to cover your investment losses. Even in legitimate investments, leverage can lead to financial ruin for consumers.

High-Pressure Sales – Recognize high-pressure sales tactics (“limited time, act now” or “don’t miss this opportunity”). Such tactics are investment fraud flags. Legitimate investment opportunities should provide you with adequate time to review any information and make an informed decision. Do not make spur-of-the-moment decisions with your life savings. Take your time and if unsure, don’t invest. Visit BeFraudAware.ca for more persuasion techniques you should be aware of.

“Inside Information” – Another flag involves exclusivity (particularly where the information is “confidential” or “inside information”). Registered investments are required to file public information, so there would be no reason to require investors to keep any details about such investments secret.

Ponzi Schemes – The Ponzi scheme is one of the most common forms of investment fraud. A Ponzi scheme lures investors in with the promise of high returns. The fraudster pays early investors “returns” from funds contributed by new investors, and steals the rest. The schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out. If you have been dealing with someone who is not registered and have received “interest” payments or account statements this is no guarantee that the investment is legitimate.

Learn more about other common scams.