FRAUD FACTS Issue 7 December 2010 INFORMATION FOR INDIVIDUALS

Ponzi schemes A Ponzi scheme is a type of that pays returns to initial from money brought in by new investors. The scheme collapses when new investors cannot be recruited or earlier investors try to withdraw their principal investment.

Introduction returns if they pay a fee to join the scheme • High-pressure sales pitches: Because greater numbers of investors must be Investors can be attracted by promises and are then able to successfully recruit recruited to generate returns, sales of high returns with little or no risk. But other members – such as friends and family pitches can become high-pressure. that seem too good to be true – to the scheme. You may find it harder to resist if you usually are. Many types of investment fraud Both types of scheme are camouflaged as have been introduced to the scheme entice potential investors by promising a legitimate company that invests, or sells by a friend or acquaintance, but do not unrealistic returns. or manufactures products, but the funds be pressured into something you are Investment fraud is big business and can contributed by investors are rarely, if ever, unsure of. take many different forms. used for valid purposes. • Difficult-to-get-in sales pitches: One well-known form of investment fraud Confusingly, some Ponzi schemes is the Ponzi scheme, named after Charles Thinking about investing? purport to be very difficult to join. Ponzi, who conned thousands of investors Before you invest it is important that you You may be tantalised by rumours about out of millions of dollars in Boston during understand exactly what it is you are high investment returns, while the the 1920s. There have since been many buying. While there are many types of scheme operator appears un-keen to variations of the scheme, including the legitimate investments available, there are extend these ‘benefits’ to you. This was recent investment scandal also many which are fraudulent. But by a characteristic of the Madoff fraud. doing some research and looking for in the United States. • Incentives for recruitment: common warning signs you will be able One of the most successful UK-based As the Ponzi scheme requires more and to avoid being scammed. Ponzi schemes in recent years has been more investors in order to stay afloat, KF Concept, which defrauded investors of Always check that any stockbroker or many schemes offer rewards or incentives £34 million through various gambling and firm offering stocks and shares for sale to recruit new members. other activities. is authorised by the Financial Services If you encounter any of these issues – Authority (FSA) to conduct investment proceed with caution! Investigate further What is a Ponzi scheme? business in the United Kingdom. Otherwise and seek advice from an independent you will not be able to access complaints professional financial advisor. A Ponzi scheme is an investment fraud that procedures or compensation through the uses funds raised from new investors to Financial Services Compensation Scheme create returns for earlier investors. if things go wrong. Reporting fraud Investors are often lured by the prospect If you think you may have become the victim of an investment fraud, report it to of high rates of return with little or no risk The warning signs or by consistent returns at times of your local police station or to Action Fraud Be aware of the warning signs of a Ponzi economic uncertainty. by calling 0300 123 2040 or visiting the scheme: website www.actionfraud.org.uk. The scheme collapses when no new • High returns at low risk: All investments investors can be found or when earlier have some degree of risk, which should Recovering your money investors try to withdraw their principal be reflected by the expected returns. investment. Most investors lose their In most cases reporting the matter to the If the promised returns seem out of line money. police or to Action Fraud will represent the with the risk of the investment, be wary. most realistic prospect of recovering any If it sounds too good to be true, it money lost. Ponzi vs pyramid schemes probably is. A Ponzi scheme is different from a pyramid For victims who have lost a significant sum • Complex investment strategy: This can of money, it may be possible to pursue civil scheme. apply to other investment as well recovery proceedings to recover losses. A Ponzi scheme will often appear to as to Ponzi schemes. If you cannot get a To maximise the prospects of success it present a real investment opportunity for straightforward explanation of how the is important to act immediately upon the individual, whereas a investment scheme works, you should discovery of the fraud and seek professional will typically only offer individuals a right to not invest. legal advice. How to protect yourself Further information

DO: DO NOT: Helpful websites for making informed investment decisions.  Seek professional and independent  Believe everything you are told. financial advice. Action Fraud  Buy investments from unauthorised www.actionfraud.org.uk  Ask questions! Make sure you individuals or businesses. The FSA understand what type of asset you are publishes warnings about unauthorised Companies House investing in and the investment strategy firms (based in the UK and overseas) www.companieshouse.gov.uk behind it. offering financial products to UK investors on their website (see ‘warnings and Consumer Direct  Compare the market to see whether the alerts’). return you are being offered is realistic www.consumerdirect.gov.uk and consistent with those offered by  Be pressured to invest by cold-callers, Financial Services Authority (Register) other similar investments. friends, family or acquaintances. www.fsa.gov.uk/register/home.do  Review historic returns and ensure that  Invest in schemes that promise returns these are in line with the market. based on recruiting new investors. Fraud Advisory Panel www.fraudadvisorypanel.org/  Check the FSA register to see whether  Agree to make an investment in a the individual or business is authorised high-pressure meeting or presentation. National Fraud Intelligence Bureau to conduct investment business in the  Invest in a multi-level marketing plan www.nfib.police.uk United Kingdom. or investment without professional and The Law Society  Know who you are dealing with. Look independent financial advice. the company up on the Companies www.lawsociety.org.uk  Invest in a scheme that has a secretive House website to see whether it is a strategy or is too complex to understand. The Law Society of Scotland registered company and review its www.lawscot.org.uk annual report and accounts.  Send money or give your bank account details to cold-callers without having  Take your time to make an informed US Securities and Exchange Commission first checked whether the caller and investment decision. www.sec.gov investment are legitimate.  Report an investment fraud to Action  Forget that you can say no to an Fraud. The Fraud Advisory Panel gratefully investment opportunity. acknowledges the contribution of Keith  Remember, if it sounds too good to be Williamson (AlixPartners) in the preparation true, then it probably is. of this Fraud Facts.

Fraud Advisory Panel, Chartered Accountants’ Hall, PO Box 433, Moorgate Place, London, EC2P 2BJ. Distributed by Tel: 020 7920 8721, Fax: 020 7920 8545, Email: [email protected]. Registered Charity No. 1108863

Disclaimer Dissemination of the contents of this Fraud Fact Sheet is encouraged. Please give full acknowledgement of the source when reproducing extracts in other published works. Whilst every effort has been made in the construction of this Fraud Fact Sheet, compliance with it does not guarantee that you and/or your business will not be a victim of fraud or criminality aimed against you and/or your business. The Fraud Advisory Panel and the contributors to this Fraud Fact Sheet accept no responsibility for any action taken by parties as a result of any view expressed herein. Readers are strongly advised to seek and obtain the appropriate professional advice on the issues raised which affect them or their business. © Fraud Advisory Panel, 2010

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OTHDIG9861 12/10 FRAUD FACTS Issue 7 December 2010