If you read the news, then you probably know that financial fraud is a sad reality of life. While most of us work hard to earn the money we need, there will always be people who would prefer to take from others.
Addition Financial members are our priority and that’s why we believe it’s our duty to tell you about the various types of financial fraud and what you can do to avoid them. We’ve researched some common fraud techniques and schemes to help you out. Here are eight types of financial fraud and some tips to make sure that you don’t become a victim and get taken in by them.
#1: Identity Theft
The financial fraud that has received the most attention is identity theft, which occurs when someone uses your personal information to steal from you or from creditors. The information stolen usually includes the following:
- Social Security number
- Your name/mother’s maiden name
- Address
- Telephone number
It may also include other identifying information commonly used for passwords and verification questions. Examples include the names and birthdates of children, pet names and so on.
The best way to avoid identity fraud is never to hand out your personal information and to be cautious about where you store it. No legitimate lender will email you to ask for personal information or expect you to click a link to provide it. It’s also a good idea to monitor your credit report and report suspicious or fraudulent activity immediately.
#2: Charity Scams
A charity scam is a type of fraud that plays on people’s emotions to steal money. It can take many forms. Some of the most common include email solicitations and phone calls, but they can also happen on social media or through the mail.
The most common charity fraud happens when a person or group poses as a legitimate charity to solicit donations. They’re likely to have a name that sounds real and they may even have a website with a .org extension, which is supposed to be used only by charities and non-profit organizations.
You should be wary of any charity that pressures you to give money immediately. A common tactic is to send an email thank you for a donation when you never made one in the first place. Although it might seem strange, a thank you can make the charity seem trustworthy.
Before you give to any charity, take these steps:
- Verify the charity’s rating with CharityWatch or CharityNavigator to get a feeling for how they operate and whether they’re trustworthy.
- Google the name of the charity with the word “scam” or “fraud” to see what people are saying about them online.
- Check to see how much of your donation will go to the charity’s cause. A good rule of thumb is that at least 65% should be used for charity.
Doing a little research before you donate to a charity will minimize your risk.
#3: Ponzi Schemes and Pyramid Schemes
A Ponzi scheme is a type of financial fraud that entices investors with promises of significant returns. Most commonly, there is no investment. The person running the scheme pays back early investors with the money they collect from late investors.
The most famous Ponzi scheme in modern history was operated by Bernie Madoff, who stole $65 billion from investors. While that amount of money is not something most people can relate to, there are plenty of examples of smaller Ponzi schemes. In 2017, a man named Joseph Meli was convicted of duping investors into buying a non-existent block of tickets to the hit Broadway musical Hamilton.
The telltale sign of a Ponzi scheme is the promise of a guaranteed return. In the Hamilton example, Meli and his cohorts said they would resell tickets at a 10% markup, thus guaranteeing a 10% return. All investments entail risk and there are no guarantees.
Pyramid schemes are a lot like Ponzi schemes. The key difference is that pyramid schemes ask investors to recruit other investors. They may also ask them to invest in inventory.
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#4: Affinity Fraud
Affinity fraud uses group affiliations to obtain the trust of investors and convince them to hand over their money. Groups may be ethnic or religious. In some cases, the group may be a fraternal organization, a trade association or a community group.
The key sign that you’re being targeted by affinity fraud is that the person trying to talk you into the investment is a member of your group and uses your affiliation through the group as a way to earn your trust. Even if someone goes to your church or serves on the HOA with you, you should still research the investment to ensure its legitimacy.
The most important thing to remember about affinity fraud is that membership in the same group doesn’t make someone trustworthy, nor does it make them an investment expert.
#5: Property Flipping Scheme
We’ve all heard of property flipping. There are entire television shows dedicated to it and it’s portrayed as a nearly sure-fire way to make money. In a property flipping scheme, both the seller and the flipper conspire to get an elevated price for the house being sold.
Here’s how it works. The seller contracts with the flipper to buy the property at a price below its market value. The flipper turns around and presents the buyer with a fraudulent appraisal and title insurance commitment at an inflated price. If the buyer falls for it, they’ll own a home that’s not worth what they paid for it.
In most cases, buying a house takes time and uses a trusted mortgage lender. A person-to-person transaction should always be scrutinized. There’s a reason lenders require an independent appraisal before they grant a mortgage. Your best bet is to go the traditional route when buying a home and don’t take anybody’s word for its value except an appraiser who’s approved by your lender.
#6: Advance Fee Schemes
Advance fee schemes occur when a scammer asks an investor for money up front with the promise that they’ll deliver something at a later date. The “something” could be a product, a service, an investment opportunity, a loan or even lottery winnings.
People who perpetrate advance fee schemes may hide behind complicated contracts that use convoluted language. It’s always a good idea to have an attorney review contracts before you sign them to make sure you’re not being targeted by a scammer.
A lot of the same advice that we’ve offered applies to advance fee schemes. You should always make sure you know who you’re dealing with and do what you can to verify their credentials and experience before giving them your money.
#7: Wire Fraud
You’ve probably heard of the old “Nigerian prince” scheme where someone would contact targets claiming to be an exiled prince who needed help getting the money that had been stolen from them. That scam has evolved over the years and falls under the category of wire fraud.
If you get an email asking you to wire money, it’s probably a wire fraud scheme. Once you wire money out of your bank account, it’s virtually impossible to retrieve it. You should be wary of anybody claiming to be important or telling you a sob story to get you to give them money.
Another type of wire fraud occurs when someone contacts your bank or financial institution and asks to wire money to an outside account. Most credit unions and banks have failsafe measures in place to minimize the risk to their account holders. However, this type of fraud still happens.
Here again, the main advice is to be skeptical and verify everything. Logic can go a long way toward pointing out problems with a request. For example, if that Nigerian prince can’t access his money, how is he going to be able to send it to you? How are you going to help as an ordinary person?
#8: Debt Collection Fraud
Being in debt can be stressful and stress can make us vulnerable to fraudsters. Debt collection fraud occurs when someone claiming to be from a debt collection company calls and demands money for a fake debt.
There are some easy ways to identify debt collection fraud. The first is that fraudsters will often call before 8 a.m. or after 9 p.m. which is forbidden by the Fair Debt Collection Practices Act. They may also be vague or evasive when you ask for the details of the debt or pressure you to pay with a gift card or some other non-traditional payment method.
To protect yourself, insist on getting the name of the creditor and calling them directly. You can also ask for a callback number from the debt collector. They will almost always give up when confronted in this manner.
Financial fraud may be common but you can avoid it. The eight types of financial fraud we’ve listed here are easy to avoid if you know to be skeptical and ask the right questions.
Your best bet is to seek out expert advice and open a retirement account with a trustworthy lender. Click here to learn about Addition Financial’s retirement accounts.
Posted on Jun 15, 2021
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