Spot a scam before it bites you.

If you can spot a scam and recognize the common traits and characteristics of a ripoff you and your money are less likely to be parted.

  In a typical Ponzi scheme, large returns are paid to initial investors out of the funds of later investors. Not only does this give the first investors confidence in the deal, but it motivates others to invest. Unfortunately, the later investors lose all or most of their money to the con artist. If you do spot a scam where you are promised high, guaranteed profits and given no written explanation concerning the investment vehicle, the promoter's background or the risks involved, it is probably a Ponzi scheme at work.

  Ponzi operators also tend to persuade you to "roll over" your "profits" into still another investment - so your return only ends up being on paper.

  Many unlicensed investment schemes are dressed up as loans in order to try to bypass the legal requirements (i.e. licensing) of running an investment scheme.

  Australia's tax system contains provisions to tax all income earned by residents, including income earned offshore. Having money in foreign banks is not illegal but the income from offshore bank accounts and investments, even if they are owned by a trust or company, must be declared to the ATO.

  Likewise in the US, IRS Publication 54 states " As a US citizen or resident alien, your worldwide income generally is subject to US income tax, regardless of where you are living."

  The only way to avoid taxes by moving money offshore is to do it secretly and not declare the income from it, in which case you are breaking the law by committing tax evasion.

  Needless to say, if the promoter of an investment scheme says they need to move your money offshore (e.g. to avoid taxes), your chances of getting your money back are almost nil.

  Knowing that you are committing the crime of tax evasion, you are then placed in a very difficult position. You can not expect much sympathy from the authorities in helping you recover your assets.

  There have been cases where people were enticed into offshore schemes and then blackmailed by the scheme promoters.

  Although often scams are advertised openly (dodgy wealth creation seminars for example often advertise prominently in newspapers), a high proportion of scams are promoted only through word of mouth through communities or groups, ethnic communities, church groups, retirement homes, etc. Sometimes scams employ agents to sell the scheme, which helps the scheme masterminds distance themselves from some of the marketing practices used, for example they can claim that the scheme was high risk but it was the agents who failed to disclose this properly.

  When the scheme is based on multi level marketing (MLM), such abuses can become particularly common. There is almost no control over what the "downline" people do and say to promote the scheme and hence well meaning but misinformed people can become the worst kind of scam promoters. Unfortunately, the nature of MLM is that people will tend to hurt their friends and family first of all with serious negative consequences to family and friendships.

  Scammers can be very creative and give the appearance of authenticity through genuine looking forms and documents. The names given to documents and forms can sound very convincing and high-falutent. Fictitious endorsements or involvement with legitimate organizations lend more credibility. Dropping a name does not mean it is legitimate.

  Sadly, particularly common among evangelical Christian churches are the multi level scams. Scammers are often able to convince people that they have been sent by God as a blessing for their faith. Once the scammer has "converted" one person, the endorsement by a friend lends the credibility of that friendship to the conman and his scam. They may believe that the financial help they prayed for was answered when God sent them them a man with an answer.

  Christians are of course not the only groups targeted, with scams in the Moslem community as well as among various ethnic groups.

  But church groups are particularly vulnerable because they are targeted more aggressively than Secular groups. The faithful are are more inclined to believe in miraculous claims and are more trusting. They also like to "spread the word" and share their perceived blessings.

  When scammers try to use religion or ethnicity or some similar link to flog their scam, it is known as "affinity fraud". There is of course no guarantee that a person attempting an affinity fraud actually shares the beliefs or ethnicity of the group he or she is targeting, that could be faked as well.

  Investments offered by word of mouth or through groups as mentioned above often call for secrecy because:

•   You will miss the ground-floor opportunity if too many know about it;
•   They are an exclusive investment opportunity with confidentiality agreements;
•   They are designed to make the investor feel priveleged and special, so see secrecy as a big red flag.

  Scammers often target newbies. They don't want the people who know too much already or know the earmarks of a shonky setup. A reputable seminar put on by a reputable fund manager or respected speaker in the industry will attract a variety of people including financial advisers, accountants and other professionals. Now there is no real way you can tell who the audience is composed of but it should not look too "working class". Bear in mind that many seminars have audience plants to ask the "right" questions or somehow endorse the product on offer and lend credibility to it.

  Gurus like to make up testimonials and often use false or incomplete names. If Kevin Y. of Brisbane or J. Smith of London are quoted as happy customers who made millions then it is impossible to check up on this.

  Genuine testimonials need to properly identify the person giving them. Ideally originals should be available for viewing and the persons giving them verified.

  Often actors are paid to give testimonials, and Media Watch often runs stories on the popular Channel 7 and 9 6:30 current affairs shows identifying the happy customers as staff of the marketing company. One such story about a miracle pain relief cream. Media Watch found that every single person who gave a glowing testimonial was an employee of the company, mostly from the telemarketing and advertising departments.

  While it is hard to prove faked testimonals, it is important to note that it is impossible to prove they are true either. When anonymous people show up out of nowhere a short time another anonymous person asks an "innocent" question about a product, and the testimonial givers are claiming to make returns like 16% a month, the benefit of the doubt should not be automatically granted to the testimonial givers.

  If the investment is good, it will stand on its own merits. The promoter will be able to defend it with technical arguments and data.

  Critics are dispatched with the personal attack that the critic has a bad attitude or is jealous and will never succeed with such a mindset and should now resign themselves to a lifetime of being a loser.

  Multi-level marketing organisations even have a standard term for critics, "dream stealers". Certainly there are people, generally friends or family who can be "dream stealers" when they fear what we may be about to do and urge caution. Take their concern as an expression of their caring for you but if you hear that sort of accusation being levelled at a critic, be wary that you could be watching a quack in action.

  Bait and switch is a common scam on the guru circuit. You sign up for a course that you were led to believe will teach you the true secrets of investing or wealth accumulation only to find that it is a rather expensive appetiser for the next course.

  You are led to believe that the follow up course has whatever it is that you need, since you didn't get it in the first course or package of information.

  Now of course all education is a bit like that, you don't learn the good stuff right in the first lecture.

  What is different about universities and dodgy gurus is that universities don't give you the impression that Economics 101 will make you an expert, there is a clear progression of units with a defined curriculum where more and more complex information is built up over several years, and that post-graduate studies can follow that to enable to you become even more specialised and expert in your chosen field.

  A dodgy bait and switch scam is where promotional material is sent out advertising skills that the scammers know are not taught in the basic course, but they'll imply quite strongly that the course you are buying for $1,000 is all you need to become a millionaire. Once in the racket people fall prey to the "sunk cost fallacy" where a person feels they need to spend more money so the money they already spent is not wasted. Spending another $4,000 to pay for the second course is frequently done because people didn't want to think the $1,000 they spent on the first course would go to waste.

  Pointing to the occasional entrepreneur who started with a grade nine education and now has teams of MBAs at his beck and call, such gurus point out that it is possible to get wealthy without an education.

  That you never learned about the stock market in school does not mean that education is not worth having.

  The educational system is designed to produce graduates with the required skills to be employable and earn a living not become entrepreneurs and astute investors.

  Bashing education helps provide a simplistic scapegoat that uneducated seminar attendees can relate to. It is a simple sales technique, the more things you can get an audience to agree with, the more they'll accept the rest of the things you say, the technique of having customers say yes a lot.

  Get the customer saying yes enough and they'll be more likely to say yes when you try to close the sale, it is practiced by salesmen the world over. Just keep an eye out for this and note how often salesmen ask questions that everyone is going to agree with.

  Some investment gurus spend as much effort trying to discredit standard investment strategies as they spend promoting their own.

  Property seminars dwell on the risks of the stock market and talk ceaselessly about the crash of 87 and the tech wreck. They might focus on the folly of buy and hold investment in a diversified portfolio or adopt a simplistic world view and decide that only a single asset class, like residential property, or only commercial property is the way to go.

  Managed funds are disparaged as being only for losers whereas it is possible to make quite a lot of money in managed funds.

  Share trading seminars say similar things about property investing or disparage forms of share trading that differ from theirs.

  One of the big features of shonky advice is that people insist you can use their system even though you have no money and bad credit. This is simple salesmanship in overcoming the "but I don't have cash to invest" objection.

  Leverage is a wondrous thing in the hands of the skilled investor, although some teach never to invest in shares on borrowed funds, Warren Buffet often does, which is partly why he was able to make so many billions.

  No investor can use leverage without substantially increasing risk however, as Buffett well knows. A guru that advises you on how to become rich on a low income is either lying, being unrealistic, or advocating something illegal or supremely risky. They claim that it isn't money that is a barrier to becoming wealthy, it is fear and ignorance. But the cash to invest initially must be acquired somehow. This either means going for broke with speculations or getting a higher paying job. Thrift, of course, is very important as well.

  Typically cameras and tapes are not allowed by dodgy organisations, and you often have to sign confidentiality agreements. This is all supposedly to stop piracy of their system. The reason they don't want cameras and tapes is that such things make them look bad in court, and take away the whole "his word against mine" defence.

Spot a scam: Repeatedly saying it is legal

  You can be fairly sure you spot a scam whenever you hear a promoter repeatedly say that the deal is honest and ASIC approved(if in Australia of course), or approved by some regulating body, get suspicious. "This is not a get rich quick scheme" is as big a lie as "This is not spam, if you received this email in error click on the link below to be unsubscribed from our list".

  There are many individuals and organisations that claim that they are not motivated by profit in selling their material. If that was truly the case then why do they charge for it? So they only get "people who are serious". What a con that statement is. If they really were serious about wanting to help people they'd make the information free so people who were serious had more money to get going. Anyway it is proven repeatedly that even when the "serious" people spend money on a seminar only about 5-10% use the information they paid for. Also, if they really didn't need the money would they give the fee being charged to a charity of your choice? Not likely. Or why not volunteer to teach needy people their secrets to wealth building, and provide them the capital to get started.

  When Warren Buffet dies, he will leave his money to the Buffett Foundation. He doesn't want to leave everything right now because he believes he can do more good by increasing the funds. The Buffett Foundation will be the largest charitable gift ever made. Buffett's skills are such that they are better applied to managing money than to flying around the country charging people $10,000 a head to teach them about stocks.

  Organizations that promote themselves as a sort of club are trying to appeal to people with this whole "nice guy" routine with their name. The "club" is generally just another investment marketing company of some sort. Calling themselves a "Club" falsely implies that they are a not-for-profit organisation. In reality though its sole reason for being is to make the drivers of it incredibly wealthy.

Spot a scam: Anonymity on the Internet

  Anonymous individuals on the Internet are accountable to no one. Aus.invest, other newsgroups and many web sites are full of people who refuse to identify themselves. Without knowing who they are and what their credentials are it is impossible to make an informed judgement of whether they are providing good advice or not.

  Do not accept the opinion of any person whose name you do not know and can't be contacted.

Spot a scam: Buy now, because the price will be higher tomorrow

  Another typical sales ploy is to threaten a price increase. Tonight you can buy the product for $2,995 but if you don't sign up right now you'll regret it because the price after the seminar is $5,000.

  This is simply a hard sell trick.

  Another trick; "we're so confident in our system that we'll make an offer, you can pay us $5,000 now for our $20,000 software, you can pay us the rest out of your trading profits!" The trick with the pay some now and the balance later deal is of course that they want to take you for your $5,000, they don't expect to get the $15,000, though some may threaten to sue you for it later.

You are here:
Spotting a scam - How to spot a scam. Common traits of offshore scams.

Offshore Scams and Rip-offs - an introduction to the biggest offshore investing danger.

How to Spot a Scam Business - The features of businesses and organizations which are out to take your money while under the guise of a legitimate business operation.

Spotting a Con-artist - How to recognize the typical characteristics of the conman after your money.

Common scams - a description of the main types of scam commonly perpetrated offshore and onshore.

Avoiding scams - How to go about avoiding being caught up in a scam onshore and offshore.

Reporting scams - Where to report scams and bodies that can be of assistance.

Information scams - a warning about a type of scam that targets small amounts from offshore information seekers.

ASIC also have a consumer protection page with a number of articles to help you spot a scam: http://fido.asic.gov.au