Protecting Yourself From Investment Fraud


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It is perhaps surprising how many people still get caught out by investment fraud. Regulation has tightened considerably over the last decade or two, but unfortunately this is not en

It is perhaps surprising how many people still get caught out by investment fraud. Regulation has tightened considerably over the last decade or two, but unfortunately this is not enough to stop some investors losing money to unauthorised sales people.

The latest fraud to be reported on is a particularly personal one since it appears to involve people who mixed socially with their victims, though the full facts of the case have yet to come out.

Five Britons have been charged in the UK for an alleged ?Ponzi? scheme. This is a scheme which gives investors very attractive returns, however the money is not being invested and the returns are being provided by giving investors their own money back. Once the fraudster has built up sufficient funds they typically run away with the money leaving investors with nothing).

Such a scheme defrauded 70 British residents of a Mallorca municipality out of ?12 million. The two alleged ringleaders owned luxury villas in the area and had a very active social life there, including being members of cricket and Rotary clubs. Most of the Mallorca residents who invested in the scheme were retired, with many of them handing over their life savings. The amounts lost ranged between ?11,000 and ?223,000.

According to the UK?s Serious Fraud Office (SFO) the scheme began in 2001 and investors were promised large profits on the stockmarket from a company called Gilher Inc. They offered interest of up to 18% a year, plus a 2% bonus if they remained invested for a year.

The scheme extended beyond Mallorca, in all 150 investors (many of them in the UK, France and US) lost money.

The investigation began in November 2009 following complaints by some investors to the SFO. The ringleaders have also been charged with money laundering in Panama and the Seychelles. They deny the charges and plead not guilty. The trial is due to start in June 2012.

This is not an isolated incident unfortunately. Last November three men were jailed in the UK for their involvement in a boiler-room investment fraud based in Spain and targeting investors in the UK. The previous month seven men were found guilty of another Spanish-based boiler-room fraud. In March 2011 a man was found guilty in a US court for running the UK?s largest boiler room scam so far. Along with his accomplices they were believed to have made ?100 million out of the scheme, with one victim losing ?800,000.

According to the UK Financial Services Authority (FSA), millions of Britons fall victim to such scams. Around ?500m is lost each year to investment scams where people are contacted to invest in shares, property or rare goods, with a promise of a high return.

As the FSA says, generally, the bigger the proposed return is, the greater the risk.

Share scams cost investors around ?200m a year. These are often ?boiler room? scams, where fraudsters cold-call people offering shares or other investments which turn out to be worthless, over-priced or non-existent. Investors are promised high returns but usually end up losing their money. Some victims have lost all their savings or their family home. The largest individual loss recorded by the police is ?6m.

The FSA warns that the tactics often sound like the ?real deal, so it?s easy to be drawn in by their professional and high pressure sales tactics?.

The majority of victims are men aged over 50, and most of them say they are experienced investors – so everyone needs to be on their guard.

How can you protect yourself from fraud?

First of all, when it comes to investments and pensions you should only deal with firms and advisers who are fully authorised and regulated by a reputable national regulatory body like the UK Financial Services Authority. UK firms operating in the EU can be authorised and regulated by the UK FSA through an EU passporting system. Ask the adviser or person trying to sell you an investment who they are regulated by and then check this independently with that authority. You can often do this online; for example, you can access the FSA register at where you can search for firms and individuals to confirm they are listed and also see what passports they have.

Likewise, only ever transfer money to an authorised institution or trust company. Never write a cheque or transfer funds to an unauthorised individual or company to invest it on your behalf.

Never give personal details or bank information over the phone (unless you already have a good relationship with the adviser).

Where possible, meet with the adviser before making the investment, rather than just doing business over the phone or by email. Confirm that they have an established office.

Dealing with an adviser who is part of a large established firm rather than being a one-man band will also give you peace of mind.

Compare the return being promised with comparable investments. If it is much higher than there is probably a catch. If nothing else it may be a much riskier investment than you realise.

Don?t be tempted by get rich quick schemes. At the very least limit the amount you invest and make sure you understand the investment and how returns are generated.

Most importantly, as the FSA website warns (and the bold and use of capitals are theirs):


To be on the safe side you should stick to investing through proven investments placed through a trustworthy and established firm. In general you should make sure your investment portfolio is well diversified as that reduces risk.

Blevins Franks Financial Management Limited is authorised and regulated by the UK Financial Services Authority for the conduct of investment and pension business.

By Bill Blevins, Managing Director, Blevins Franks

16th February 2012

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.