DUBAI: Investment fraud and scams are becoming a daily issue around the world. Gullible people are being targeted and deceived persistently. It is vital that knowledge in financial and investment services is expanded for any individual to make a well-informed decision, and most important, know how to spot a financial charlatan.
Below are few examples of how financial charlatans can take advantage of your capital:
Ponzi Schemes
Any form of investment involves risk and can never guarantee profits. The safest form of investment in the world is the US 10-Year Treasury Bill and the current annual pay-out is 2.3 per cent. So be wary when you are introduced to a system that claims fixed returns of up to 100 per cent in six months or something similar.
In such schemes the money is collected and distributed back to the investor using other investor’s money. Initially, the agreed profits are paid to investors to encourage them to allocate more capital into the system. The ‘fund manager’ uses the cash inflow to pay off other investors so they can re-invest more capital as well. This illegal investment pool grows bigger and the cycle keeps repeating until either the fund manager disappears with the capital, or when the local authorities get involved.
Social media gurus
The so-called investment gurus usually associate themselves with lavish lifestyles and successful careers to gain fan following on social media. The harsh truth is that many of these gurus have fake and rented luxurious lives and the whole marketing package is designed to lure beginner investors to purchase the product they are selling. Many of these swindlers are involved in pump and dump schemes – an illegal practice where the guru buys low-volume stocks before announcing it to their followers as a hot tip. The stock price jumps following the recommendation and the swindler uses the liquidity to sell their stocks at a high price, leaving the investors with worthless stocks.
Financial Trading Courses
Stocks and forex trading courses are now widely available. Amongst the thousands of trainers and experts teaching such courses, it is extremely difficult to say which ones are legitimate and beneficial.
The truth is that most of these trainers are charlatans and have never made a living trading the financial markets directly. They usually set up seminar meetings and small gatherings and try to convince you their bogus strategies are effective.
Their baseless claims will be backed by fake reviews designed to make you purchase their courses, or to get you to sign up to a broker for IBA commissions. (IBA: Introductory Brokerage Agreement; when a financial adviser recommends a specific broker, he/she will receive a commission once you sign up using their referral.)
It is important that you request the trainer’s trading experience, professional background, and proven track record.
You have every right to critically question the abilities and skills of the financial tutor prior to purchasing a course. If the individual has no professional trading or fund management history, then it is very likely the trading course is worthless.
However, it is understandable that a certain level of trust must be made on such financial and investment service providers. Therefore, the relevant background checks must be performed. Every licensed broker, professional trader, or fund manager will be listed on their local regulatory body.
Some regulator websites even publish full details of licence status, employment history and litigation charges.
Regulatory bodies:
Below are some regulatory bodies you can use to perform background screening of an entity or individual to obtain reasonable assurance:
UAE: DFSA, DIFC, SCA, Central Bank
US: SEC, FINRA, BrokerCheck
UK: FCA, CISI
Europe: MiFID
Hong Kong:SFC
Other countries have their own regulatory bodies
Planning to invest? Here are a few things you need to consider:
If an investment opportunity sounds too good to be true, a more thorough research needs to be done on the individual claiming such returns. Checking the regulatory body’s website and searching for an individual/entity will give you a confirmation whether they have relevant experience and capabilities. No individual is legally allowed to manage public investor’s money without holding an appropriate licence. Just having a trade licence for a business does not qualify them to lawfully offer investment services.
If you are unable to trace the individual’s database, contact them and request their regulatory licences and professional history. If not provided, then walk away. That individual or entity is currently not licensed and may have never been regulated to practice financial activities.
