Beware Of Common Frauds And Scams

A closer look at three typical fraudulent schemes, and how to avoid them
President, Proximo, LLC
December 06, 2011

Scam artists and fraudsters understand human nature very well. They manipulate our fear and our greed to take our money.

As someone who has been the victim of a scam, I know firsthand how these people can read our weaknesses and adapt their pitch to get what they want. In hindsight, and with more information, it’s easy to see why a particular opportunity that turned out to be a fake had the telltale signs. But in the heat of the moment it’s not so easy.

Fortunately most scam artists use the same playbook again and again to deceive their targets. While the details or pitch may change, most frauds fall into one of only a few categories. Let’s take a closer look at these typical fraudulent schemes.

Offshore investments with high yields, no risk

Many investors associate “offshore” with secret investments available only to the ultra-rich. These are people who make millions and sip banana daiquiris on the beach, right?

Actually, offshore investments typically refer to strategies that may help defer or minimize taxes on investment gains made legitimately. U.S. citizens, however, are responsible for income taxes regardless of where the money is made and are not eligible for many of the tax savings offered by offshore strategies.

This tax-management strategy is not in itself an investment. A certificate of deposit issued by a bank in an offshore jurisdiction is fundamentally the same as one offered by your bank down the street. For this reason, it’s impossible for a legitimate CD issued by an offshore bank to offer a 50 percent return. FDIC protections don't extend to entities outside of the U.S. No equivalent organization protects your "investments" in offshore havens.

When someone offers you the ability to earn high yields on risk-free instruments issued by "offshore banks" it is likely a fraud.

Pyramid schemes

A pyramid scheme typically offers a legitimate business opportunity as part of its pitch. Interested parties are given the opportunity to sell a product or service at a markup and are paid a commission based on their sales.

But these schemes offer an alternative way to make money: Participants get rewards for recruiting new associates into the pyramid. The potential to make money by recruiting new members is several orders of magnitude greater than the potential for pushing products. The items you're selling become almost irrelevant as participants focus on recruiting everyone they can into the pyramid.

The organizers typically make huge profits by offering "educational" materials and seminars to help participants recruit more people.

Some pyramids generate hundreds of millions of dollars in revenues. Typically, less than 5 percent of the participants benefit financially to any significant degree. Most people lose their initial investment and their time.

Ponzi schemes

Scam artists love Ponzi schemes because of their simple design, easy execution and nearly instant returns. A Ponzi scheme purports to offer a high return over a short period of time—typically weeks or months—for little to no risk.

Ponzi organizers typically make good on their promises to initial investors as a marketing tactic, which helps the scheme grow. But they don’t intend to run a legitimate business—they use money from new investors to make payments to old investors. This continues until no new money enters the scheme, at which point it collapses. Typically, very few people are able to recoup their money.

Use extreme caution when you evaluate investments that offer high returns in short time frames. Be especially careful of those where the source of profits is not transparent.

As a business owner, you've worked very hard to achieve financial success. Don't let someone who is too lazy or greedy to do the same take your money.