Capital-market fraud – red flags
All financial investments inherently involve risk, but putting your funds in unregulated investments entails multiple, more serious risks. If these materialize, you might lose your entire investment.
We frequently hear of cases in which people lose their life’s savings because they made a financial investment that appeared to be especially promising and offered a high return. In some of these cases, the opportunity to make a profit never really existed, because the investment was a risky one at best or a scam disguised as an investment at worst. In both cases, the losses and mental anguish could have been prevented.
The heavy financial toll and loss of savings collected at great effort is also accompanied by multiple personal and health-related repercussions, including stress, tension, insomnia, depression and even the dissolution of marriages and families.
Digital sophistication coupled with a low-interest environment bring a flood of tempting offers to investors’ doorsteps: offers from unregulated entities of large, quick profits. The public encounters these offers on the Internet, their mobile devices and various aggressive commercials and advertisements. Unfortunately, many people succumb to the temptation and ignore the eternal fact that there is no such thing as a free lunch.
Unregulated activities can be fertile ground for fraud and Ponzi (pyramid) schemes, which ultimately lead to the loss of one’s investments. Deceptions of this type and others often incorporate technological tools, innovative products and sophisticated financial terminology, which are designed to attract as many investors as possible, based on the belief that unsophisticated investors tend to be less innovative due to their lack of familiarity or understanding of the proposals being made to them.
How can you avoid becoming the victim of a financial scam?
There are several simple steps and precautions that we can take to avoid such situations:
1. Do not be seduced by promises of fantastic returns on any investment. Remember: If it sounds too good to be true, it probably is. You will never get something for nothing; high returns, allegedly, in the past are no guarantee of similar returns in the future. In fact, such past returns may be a tangible indication of the riskiness of the investments and the real chance that you will lose your money.
2. Avoid making an investment decision under time pressure, and avoid investments that create a sense of urgency by using phrases such as “only today!” and “once-in-a-lifetime opportunity!”
3. Make your decisions in a calm, collected manner. Don’t rush.
4. Seek the advice of a licensed financial adviser. Never make an investment based solely on your intuition, “gut feeling,” friends’ advice or advertisements.
5. Make sure your money is invested in a regulated entity or with a professional who is licensed by the Israel Securities Authority. You can verify this out quickly at www.isa.gov.il.
6. Beware of relying on items that appear in the media. Reports in the media typically lack the information you need to make a sound decision to invest in a specific company. In other cases, the information is actually promotional material.
7. Be careful about sending your personal information, such as your ID number, bank-account number, credit-card number, passwords and codes, by email to individuals or websites that you don’t know and whose credentials can’t be verified.
8. Keep track of your investments. To sum up, every financial investment you make entails some risk, but if you invest with unregulated entities, you are subject to many and more serious risks that could lead to the loss of your entire savings. Put simply, it’s always better to be safe than sorry.
The writer heads the Israel Securities Authority’s Financial Education Unit.