What is Investor Fraud?

Investor or investment fraud, refers to a range of deceptive practices where fraudsters induce individuals into making purchases based on false or misleading information. This can range from legitimate companies that provide false information about their level of profits to complete fake companies or opportunities.

How does investor fraud work?

Fraudsters will often contact people out of the blue, persuading them to invest in schemes or products that may be worthless or, rather, non-existent. Falsified audits and company statements can be used to this effect, enabling the delivery of incredibly convincing sales pitches that make these investments appear realistic or more profitable than they actually are. Particularly sophisticated schemes even involve providing investors with early returns on their investments as a form of false reassurance.

Cases of investor fraud are highly prevalent in the UK. From September 2019 to 2020, Action Fraud received approximately 17,000 reports of investment fraud amounting to £657.4 million in financial losses. The pandemic increased the prevalence of investor fraud with criminals preying on those suffering from financial hardship as a result of the economic landscape and job losses.

Common types of investment fraud 

Investment fraud can come in various different forms, which can make it harder to spot. Here we discuss the most common types of investor fraud

Pyramid Schemes

Pyramid schemes are one of the most common types of investment fraud. Individuals are often first contacted by family, friends or an acquaintance. This person may ask an individual to invest a relatively large sum of money upfront for a ‘starter pack’, typically entailing physical products.

Investors may then be promised commission on products sold or a bigger return if they recruit others to join the business. However, it is the fees from new recruits that actually fund these pyramid schemes as opposed to the sale of the products. As such, recruits will often leave these schemes having lost their initial investment.

Affinity fraud

Pyramid schemes also frequently involve ‘affinity fraud’, which makes them highly influential as scams. Affinity fraud regards the practice of fraudsters targeting members of a specific group based on characteristics such as race, age and religion. They use this common feature to attract people to the scheme and can even pretend to be part of this group to win over potential recruits by gaining their trust.

Pump and dump schemes

These schemes entail the fraudster building up potential investors and then offering a deal on low-priced stock - the majority of which the fraudsters owns. As there is an increase in sahres in the stock being bought by the investors, the value of the shares increases (‘pumps the stock’). The fraudster then sells their own shares (‘dumps the stock’), crashing the value of the shares in the stock. Investors are left with worthless shares, while the fraudster is left cash-rich.

Offshore investment schemes

This kind of investment vehicle is especially risky since there is much less protection if your money has gone overseas. It encourages the sending of money offshore, often with the promise of spectacular profits and tax avoidance. However, the companies set up to receive these monies are false, or simply serve the purpose of funnelling these funds to the fraudsters. Investor’s money is probably being siphoned into a feeder account, clearing funds out of the account. These fraudsters then move the money around to avoid detection.

Land banking schemes

These are unregulated property schemes, where developers that buy large plots of land apportion and offer smaller parts of it to investors. The crux of these scams regard the failure of developers to actually receive council approval for development of the land, therefore rendering these investments worthless where such is not granted.

Boiler room scams (share sale frauds)

Here fraudsters cold-call victims to offer worthless, fake or over-priced shares. These scams derive their name from the highly pressurised (‘boiler room’) sales tactics implemented by the fraudsters, who will promise excellent returns or share false ‘insider knowledge’.

Carbon credit schemes can fall under the remit of these boiler room schemes. ‘Carbon credits’ regard certificates that represent the right to emit one tonne of carbon dioxide. These ‘credits’, though having the capacity to be traded legitimately, often fall subject to abuse, which sees them being traded in a highly pressurised format, with investors often losing out.

Cloned firms and individuals

These instances of investment fraud involve the setting up, by the fraudsters themselves, fake businesses that completely mirror otherwise legitimate businesses (authorised under the FMSA). These fraudsters then use these ‘legitimate’ credentials to promote worthless or overpriced shares.

Recovery schemes

These schemes are themselves marketed as methods of remedying investment fraud . This enables fraudsters to illegitimately siphon even more funds from vulnerable parties.

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