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Warning Signs of Common Financial Scams and How to Avoid Becoming Their Next Victim

| July 25, 2017
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A Nigerian prince wants to give you $13,000,000!

You receive an email: it’s from a Nigerian prince who happened to inherit a large sum of money in excess of $100M. He cannot personally transfer the funds outside of his country for tax purposes, so he is contacting you in hopes of giving you over $13M. All you need to do is supply your banking information for him to wire the funds into your account.

If this sounds too good to be true, there’s a reason why. This is one version of the infamous African prince email scams responsible for over $12.7B in financial losses alone in 2013. (GeekTime, July 2014) Hopefully, you’re savvy enough to see the fairly obvious illegitimacy of these emails. Unfortunately, there are other common financial scams that are more discreet in their presentation.

Examples of Common Financial Scams

We would like to share some examples of common financial scams and their warning signs for you to consider when faced with a potential scam.

IRS Phone Calls

Imagine receiving a phone call from the IRS claiming you owe several hundred dollars in unpaid taxes. Your stomach may drop at the idea of being in trouble with Uncle Sam. In fact, the caller shares, there’s even a warrant for your arrest unless you pay your tax bill this minute. There’s good news: all you need to do is provide your credit card or banking information to confirm a one-time payment to the IRS.

As you may guess, the caller is a scam artist and they will likely transfer as much money as possible from your credit card or banking account if given the opportunity. Remember: the IRS will never call you.

Iraqi Dinar

Scammers are claiming the Iraqi government is set to revalue the dinar, Iraq’s currency unit, at a much higher rate than current market values. Investors are led to believe ‘spectacular’ returns in the range of ten to 15,000 percent will occur within 90 days of investment, as claimed by one recently convicted scam artist. (Forbes, August 2016) Remember: Investing in overseas currencies carries inherent risk, especially in currencies native to war-torn countries.

Ponzi Schemes

Ponzi schemes have arguably stolen more money from investors than any other financial scam. A Ponzi scheme is a form of a pyramid scheme where initial investors are asked to wait a period of time for returns. When they start to receive returns, they’re encouraged to tell their family members, co-workers, friends, and anyone else in their social circles. As more investors join, their investments are used to pay dividends to initial investors.

Ponzi schemes collapse when withdrawal requests from investors are greater than returns invested with later investors. Their collapse is inevitable and can be devastating for entire communities. The U.S. Securities and Exchange Commission (SEC) has a list of Ponzi scheme warning signs available for your review. Remember: Be wary of the promise of massive returns and very low risk.

Pump and Dump

Pump and Dump scams involve a small group of ‘informed’ investors purchasing large sums of a specific stock before the stock is recommended to a much larger group of investors. The result is a soaring stock price, which the initial investors quickly sell off at an extraordinary profit.

The stock then takes a significant downturn, often at the hands of a smear campaign (called a “short and distort”), where the stock value plummets. The scam’s victims are encouraged to “short sell” their stocks in an effort to recoup their losses. Scammers purchase the stocks at a lower rate than the victim’s purchase price and complete the second part of their scam. Remember: Be skeptical of ‘get rich quick’ stock advice on internet message boards.

How to Avoid Falling Victim to Financial Scams

Thankfully there are several ways you may be able to identify a financial scam before it’s too late. Many of these safety measures involve caution, research, and following the advice of a trusted financial professional.

Start with Google

If you received a suspicious email making any claim to investment riches and “can’t-miss market opportunities,” it’s probably a scam. One way to find out is to start with a simple Google search.

Ask yourself good questions.

If this opportunity is such a great no-brainer opportunity, then why are they telling you about it? Why not keep this information to themselves to profit from all the proceeds? If this person is in a rush to access your finances, why are they in a rush? These types of questions can help you logically determine whether an opportunity is a scam.

Remember: if it seems too good to be true, it probably is.

This classic adage is truer than ever when it comes to financial scams. As one example, risk-free, huge-return financial opportunities should be avoided at all costs. You may also want to review FINRA’s six steps for spotting an investment scam.

Talk with your financial advisor for third-party verification.

A trusted financial professional, such as one of our certified financial advisors with MSMF Wealth Management, can provide critical third-party insight on potential financial scams. We work to provide trusted analysis based on investing reviews and help you spot financial scam practices to protect your investments.

The first step is to connect with our team at MSMF Wealth Management to start a conversation. Send us a message to start a conversation today.

Nick Mengel is a Certified Financial Planner™ practitioner and provides financial planning and investment analysis for MSMF’s partners and clients, as well as for his own personal clients. He has a Masters in Finance from Washington University – St. Louis and more than 10 years of industry experience. In his spare time, Nick enjoys outdoor activities, sporting events, and motorcycle riding.

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