Retail investments have soared in recent years, and so is online investment frauds. Around 90,000 Americans lost $1.58 billion to investment scams in 2021, while in England and Wales, such fraud jumped by 42 percent. Here, as a part of the Macropay Scam Alert series, we will discuss the types of investment fraud and how to avoid such scams.
Technology and the internet have pushed the process of investment online. People now invest on online platforms without requiring agents or any representatives of financial institutions.
Fraudsters run campaigns on the internet, through advertisements and even direct approaches, trying to trap potential victims by offering high returns. These schemes are often not regulated, and scammers siphon off victims’ deposits.
Types of Online Investment Scams
There are dozens of ways fraudsters are pulling off online scams. Some are rash, while many carefully implemented, looking like a legit scheme.
The most rampant investment frauds are:
Investment and Social Media Fraud
The mass use of the internet and social media has made these frauds rampant across the globe. Fraudsters post about luxurious lifestyles to trap inexperienced investors in fraudulent investment scams. Scammers hook people showing similar interest on social media and even dating platforms. Many sophisticated fraudsters gain the trust of the potential victims before carefully pitching the fraudulent schemes.
These scams soared over the last five years, targeting over 95,000 people in the US who reported a loss of around $770 million in 2021.
Ponzi and Pyramid Scheme
Ponzi and Pyramid schemes are different, but scammers usually use them together to build a fraudulent business model.
Ponzi schemes (known after the notorious con artist Charles Ponzi) offer lucrative returns and pays the old investors from the deposits of the new ones. They often encourage existing investors to bring in more and more investors for handsome rewards making a pyramid structure of investors. These schemes were a hit for a long time and now are spreading online too.
Mathematically speaking, pyramid schemes can never sustain after a few cycles of investors. So such investment schemes are frauds as promotors often start to make Ponzi-styled payments.
Bernard Madoff ran the largest Ponzi scheme in history, a $65 billion scam busted in 2008. The US authorities raided 60 such schemes in 2019, those believed to have gathered $3.5 billion in investments.
Pump-and-Dump Schemes
Under a pump-and-sump scheme, scammers first invest in a poorly performing stock or other investment instruments, inflate their value-creating hype, and dump their holdings.
Scammers often run massive campaigns online and on other channels to make poor investments popular. For years, penny stocks were the most pumped assets, but cryptocurrencies has become the favourite in recent years.
Binary Options Fraud
Binary options were originally offered as a very simple legitimate investment instruments; traders only have to predict up or down movement of investment instrument in a short time frame. But fraudsters soon took over the industry targeting retail investors, leading to a ban on such instruments in most countries.
Fraudulent platforms, sometimes under offshore entities, often target inexperienced traders and siphon their investments by manipulating trading data. Before the UK banned such instruments in 2018, Britons lost £87,410 to binary options fraud everyday.
Cryptocurrency Investment Schemes
Cryptocurrency investment scams are only a few years old but spread like wildfire. Fraudsters often promote tokens of fake blockchain projects, hype initial coin offerings, and even run Ponzi and pyramid schemes of cryptocurrency investments.
These investment scams took off in 2017 when the value of Bitcoin and other altcoins rallied, and the ICO market peaked. Multi-billion dollar crypto investment scams like OneCoin and BitConnect impacted the lives of people around the globe, even in some remote Pacific islands.
Cryptocurrency scams are still rampant, siphoning off $14 billion in 2021 and another $1 billion after that.
How to Spot an Online Investment Fraud?
Online investment frauds are often very sophisticated and look like legitimate schemes. However, many signs can alarm investors to double-check the claims.
- High risk and no return: Investment is risky; even the stocks of established companies swing. If an investment scheme promises a high return, even double-digit annually, and without any risks, something is definitely wrong.
- Offshore operations: If the company offering the investment scheme operates with an offshore license, investors should check their options again. Developed countries usually ban investment through any offshore entity.
- Incentives for bringing friends and relatives: Several online platforms offer incentives against referrals, but it’s a red flag for an investment scheme.
- Lack of information: If documentation of an investment scheme looks good, but there is no information about their regulatory registration or the executives, chances are, they are scams.
What Should a Victim of Online Investment Fraud Do?
It’s sad if someone falls for online investment scams. But there remains a chance to recover the funds, atleast some of it, if not the entire investment. If someone becomes a victim of online investment fraud, they should:
- Create a detailed file with all investment information.
- Know the rights that can differ from country to country.
- Report the fraud to the financial regulator.
- Report the fraud to law enforcement.
- Consider alternate recovery options.
- Follow up with regulators and law enforcements.
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