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Beat the scammers

Investment scams are proliferating across the internet and everyone is at risk of being caught out. Here's what you need to know
Beat the scammers

It’s just over a month to the Individual Savings Account (Isa) deadline, so you search the internet to see what the best available rates are. Google flags up a regulated company at the top of its search list offering returns of 6.5 to 8 per cent. You register your interest and a charming salesperson calls you, explaining how they make returns by lending to small and medium-sized companies. Finding paltry rates elsewhere, you decide to invest and less than a year later you find out the company has had its assets frozen and is subject to a criminal investigation.

This was the experience of Andrea Hall, 54, a seasoned investor who bought London Capital & Finance (LC&F) bonds in spring 2018, both using her Isa allowance and in a general investment account. She checked the Financial Conduct Authority (FCA) register before she invested, and at no point was she made aware that while the company was authorised, the bonds she invested in were not regulated. LC&F collapsed last year owing £237m to 11,600 savers. The administrators indicate that only a small proportion of cash went into sensible interest-bearing investments.

Financial crime has been mushrooming in the UK and diligent savers are repeatedly getting caught up in sophisticated scams – you should not assume that investment fraud is limited to naive people looking for unrealistically high returns. Scams range from simple websites taking money for investments that don’t exist to sophisticated operations holding seminars and forging accounts, even sometimes with regulated entities involved. 

Charles Randell, chair of the FCA, said financial crime against individuals has reached “endemic proportions” in a speech last autumn. The Crime Survey for England and Wales for 2018-19 put the total number of financial frauds affecting individuals at 3.8m cases. 

Action Fraud, a national crime reporting service, was alerted to over £197m of losses in 2018 to investment scams. Experts say the total number lost is likely to be much larger, as many people do not report scams either because they are embarrassed or because they believe it will be a waste of time. 

Investment scams have existed for as long as people have been investing, with fashions evolving for how they are carried out. Charles Ponzi coined 'ponzi schemes' a century ago by duping tens of thousands of investors into buying supposed postage stamp coupons, paying irresistible rates of interest out of new investors' money. 

Although the FCA has banned the promotion of mini-bonds following the collapse of LC&F, this hasn't stopped scammers promoting illegal mini-bonds. Many investors are also vulnerable to pension scams following the introduction of pension freedoms in 2015, with scammers posing as advisers trying to tempt pensioners into handing over their pots. 

 

Fixed-rate investments and ‘mini-bonds’

There is no legal definition of what a ‘mini-bond’ is, but the FCA describes it as an ‘IOU’ issued by a company directly to an investor, in exchange for a fixed rate of interest over a set period of time. While there have been success stories – such as Hotel Chocolat, which issued bonds in 2010 and 2014 paying an annual rate of up to 7 per cent – they are unregulated, high-risk products. The unorthodox players, let alone fraudsters, can be very hard to detect. You should not invest unless you know exactly how the promised returns are made and that the provider is totally legitimate. 

LC&F provides a stark example of the risks associated with these investments and – unlike most mini-bond issuers – the company was regulated by the FCA. However, the bonds it issued were not, which means investors can only claim compensation (up to £85,000) if they transferred from a stocks-and-shares Isa or if they can prove they are victims of mis-selling from a regulated entity. 

The investigation by the Serious Fraud Office into LC&F is not yet complete, but a progress report published by LC&F's administrator in September 2019 says bondholders should expect to receive a quarter of their original investment. The administrator, Smith and Williamson, found that nearly £20m of bondholders’ money was transferred either directly or indirectly to four individuals at the helm of the firm. An eye-watering £20m was spent on Google advertising.

The collapse of mini-bond issuer Carlauren Group last year, which invested in care homes and hotels, provides another example of the risks in this area. Carlauren promised to pay investors a fixed 10 per cent a year. The Insolvency and Companies Court heard in November that more than 650 Carlauren Group investors put a total of £76m into projects and that £50m was currently unaccounted for. Court proceedings have been issued against Carlauren’s boss, Sean Murray.     

On 1 January this year, the FCA banned the promotion of ‘mini-bonds’ to retail customers fearing that they were not adequately aware of their risks. An exemption was made for investors proved to be sophisticated or high net worth. This has led to a rise in scammers targeting more wealthy individuals, either on the internet or by cold calling. 

To help investors spot potential fraudsters, the FCA publishes a warning list. Alarmingly, it is identifying roughly 10 to 25 firms every week, the majority of which relate to purported bond or fixed-rate investment issuers. Some are clones of authorised firms, and say they are regulated. 

An example of a firm on the FCA watchlist is investmyisa.co.uk, which offers returns up to 8 per cent. It does not give any explanation on its website about how it makes its returns and it is unregulated. Investors who take the time to carry out further research into companies offering suspiciously good returns may find links to defunct companies or ones that have their regulatory authorisation withdrawn or that sound very similar to legitimate big brand names. 

Fixed-rate investments are fraudsters’ “weapon of choice” at the moment, says Mike Barrett, director at consultancy the lang cat. Sophisticated scams may have some underlying assets, but far fewer than would be required to generate the promised returns, while others have none at all. In 2019 Action Fraud was alerted to more than 1,500 victims of a pyramid or ponzi scheme, an investment that typically generates fixed returns for early investors by acquiring new investors – and then collapses. This is a huge increase from 218 reported cases in 2017.

Fraud in the bond space is a “massive problem”, says Will Christopher, partner in the dispute resolution practice at law firm Kingsley Napley. “Low level scams targeting people’s savings are everywhere and constant.” 

 

Pensions

Pension transfers can be easy pickings for scammers as they involve large amounts of money looking for a home. Investors are vulnerable both when they reach drawdown, and beforehand if transferring from a defined-benefit to a defined-contribution scheme. 

The risks escalated in 2015 following the ‘pension freedom’ rules, which sparked a boom in transfers as anyone over the age of 55 was given unfettered access to their pensions pots, with up to 25 per cent of withdrawals tax-free. The new rules gave some people in defined-benefit schemes an incentive to transfer into defined-contribution schemes to secure increased flexibility and inheritance tax benefits, although at the cost of a guaranteed income for life. 

Ways that scammers target pension investors include:

  • Coaxing individuals over the pension age to hand over some or all of their pot.
  • Persuadig pension holders to transfer their pot out of a defined-benefit scheme.

Some victims not only lose pension assets but they are also hit with a large tax bill from HMRC through having released pension funds early. 

The types of products scammers promote include investments in luxury products, property, agriculture and environmental solutions. For example, a network of five unregulated advisory firms was shut down in 2018 having cheated more than 100 investors out of almost £9m of pension savings by convincing victims to transfer into small self-administered schemes (Ssas). Investors were falsely persuaded their money went towards cultivating commercial-scale global truffle plantations. One investor was told they could expect a 200 per cent return over a 10-year period.  

Margaret Snowden, chair of the Pension Scams Industry Group and non-executive director of the pensions regulator estimates that £170m was lost to scams where people transferred from direct benefit schemes in 2018. Action Fraud figures show the average loss for someone caught in a pension spoof is £82,000.

“We have clients losing their entire pension pots [to scammers]. It’s heartbreaking. They have been fortunate enough to get into a final-salary scheme and some sharp-suited salesman has lured them out of it for an enormous fee,” says Pradeep Oliver, expert in financial services negligence and the mis-selling of financial products at law firm Cripps Pemberton Greenish.

Analysis from the pensions regulator last year said nearly two-thirds of people would trust someone offering pensions advice out of the blue – one of the main warning signs of a scam. Pension cold-calling became illegal in January 2019, so if you receive a call out of the blue you should put the phone down. 

 

Tax

People are increasingly getting caught out by conmen posing as HMRC demanding a tax payment, or asking for their bank details in return for a tax rebate. HMRC received nearly 900,000 reports last year from the public about suspicious HMRC contact – phone calls, texts or emails. More than 100,000 of these were phone scams, while more than 620,000 reports were about bogus tax rebates.

Common techniques involve phoning taxpayers offering a fake tax refund, or posing as HMRC by texting or emailing a link which will take customers to a false page, where their bank details and money will be stolen. Scammers might also threaten victims with arrest or imprisonment if a bogus tax bill is not paid immediately.

Genuine organisations such as HMRC and banks will never contact you asking for your bank details. You should never give out personal details, reply to text messages, download attachments or click on links in texts or emails you are not expecting to receive. 

HMRC asks that you report any suspicious calls, texts or emails to phishing@hmrc.gov.uk. If you have lost money contact Action Fraud. Read HMRC’s guidance on reporting scams at: www.gov.uk/topic/dealing-with-hmrc/phishing-scams

 

Shares

Share scams have scaled back in recent years as more and more investors manage their portfolios on platforms. Ten years ago, share scams were rife, with fraudsters pretending to be stockbrokers and trying to sell victims shares that were worthless or non-existent.   

One particular scam involves the fraudster contacting investors from old shareholder lists, perhaps claiming they are a hedge fund putting in a takeover offer and asking victims to transfer the share certificates in exchange for money, without fulfilling their side of the deal.

Investment trusts have been targeted too. The Personal Assets Trust says it has had calls from 10 to 15 people who had been approached by scammers, offering to buy their shares at an inflated price if they posted them their share certificates. A lawyer who spoke anonymously says while this area of investment fraud is on a smaller scale to others, he has seen a significant rise in cases over the past 18 months. This type of fraud is often targeted at elderly investors who can be more susceptible to being scammed by persuasive phone calls. 

Penny share investors need to be watchful for 'pump-and-dump' scams. This involves insiders promoting a stock, manipulating its price higher through short-term hype, and then selling out themselves at the top, leaving those who bought on the ascent with losses as the stock crashes. If you get emailed about a penny stock, or reached out to in any way, it’s probably a pump-and-dump scheme. 

 

Forex, CFDs, crypto and more...

Investors are frequently targeted by unauthorised brokerage platforms offering the chance to trade in foreign exchange, contracts for difference (derivatives), binary options, cryptoassets and other wacky investment products. 

Typically investors get some returns from these trading websites, making them think that their trading has been a success and enticing them to invest more. Once they do invest more, their account is suspended and investors are unable to make further contact with the firm. 

Mr Oliver says his company is regularly contacted about forex trading scams, but in most instances there is nothing they can do, as the companies are not regulated and tracking assets can be very expensive and involve multiple jurisdictions. He advises that if you use a trading platform, make sure you use a credit card as insurance might be able to help you recover the money.   

The FCA says over £27m was lost to scams involving cryptocurrencies and foreign exchange investments in 2018-19 – with the number of cases tripling from the previous year. 

A staggering example of a crypto scam is OneCoin, headquartered in Bulgaria, which is estimated to have pulled in about £4bn from investors all over the world between 2014 and 2017 – including millions of pounds from UK investors. OneCoin was hyped as the next bitcoin by its glamorous Oxford-educated founder Ruja Ignatova. However, the exchange never opened and the coin turned out to be a fraud, with no cryptocurrency underpinning it. Ms Ignatova has not been seen since 2017.  

For more information on investment and pension scams, visit the FCA website: https://www.fca.org.uk/scamsmart/types-investment-and-pension-scams