Internet connectivity brings with it many financial conveniences. But with this convenience comes risk and the unwary web user can turn into a prime target for scammers looking to get their hands on quick funds while never having to leave the desk where they conduct their dubious work.
The latest statistics from Action Fraud published on 10 August 2018 show that in June and July victims reported losing £2,059,501.29 to cryptocurrency scams. Between 1 June 2018 and 31 July 2018 203 instances of fraud involving cryptocurrency were reported to Action Fraud.
We’ve all seen spam emails making bold claims promoting “get rich quick” schemes and have wondered wryly who in their right mind could fall for such an obvious scam. But the dangerous scams are the ones you don’t see coming.
In a report published in 2017 the Financial Conduct Authority (FCA) estimated that one in 500 of us send money to fraudsters. This averages out at 250 individuals each day in the United Kingdom.
One of the most common methods used by investment fraudsters is to pressure potential investors into making a quick decision on a time-limited investment offer. But scams are constantly evolving, so how do you stay one step ahead?
Emerging types of investment scam
As one type of investment scam becomes widely known, it fades from vogue for fraudsters, but there are always new, complex-sounding investment products with which to dazzle and entice. These now include cryptocurrencies, binary options, and contracts for difference (CFDs). While these can be genuine, albeit risky forms of investment, they can sometimes also be a scam.
One scam increasingly reported by the financial regulatory authorities involves share scammers pretending to be from entities that are neither authorised nor regulated by the FCA. These scammers typically cold-call investors to promote shares, property or other investment opportunities that are non-tradable, worthless, overpriced or even non-existent.
A clone firm is a fraudulent company set up to look like a well-recognised financial services firm apparently authorised by the FCA. Often the clone firm will use the name, “firm registration number” (FRN) and address of businesses and individuals authorised by financial regulators so as to suggest they are genuine.
The clone firm’s website will have a telephone number that does not belong to the genuine firm and instead puts you through to someone working for another operation altogether. It’s not just your money that is valuable to fraudsters – it’s your information too. If you fill out a contact form on a clone firm website, for example, the fraudsters instantly have a log of your name, email address, telephone number and maybe more. This can be used to contact you in the future and can even be added to databases and sold on.
According to the FCA, clone companies have increased over the last couple of months. The FCA keeps a record of clone firms and publishes alerts when it has identified one - within the last month alone the FCA has issued over 50 warnings about clone firms!
Over the last year or so there has been a media and market frenzy on the unprecedented heights reached by Bitcoin price – and the dozens of other digital currencies that have proliferated in the cryptocurrency market. As more and more people invest their money in cryptocurrencies, the surge in popularity has also given rise to increased fraud in this area. In response and in a UK first for police training, the City of London Police’s Economic Crime Academy has recently launched a new course on cryptocurrencies.
Aside from the inherent risks involved in any volatile asset, investors should be aware that direct investment in cryptocurrencies is unregulated in the UK - meaning you won’t have the protections afforded by the Financial Services Compensation Scheme or Financial Ombudsman Service.
Within the last few weeks the FCA has issued two warnings about cryptocurrency clone firms - Good Crypto and Fair Oaks Crypto.
According to the announcement, Good Crypto was deceiving investors by using information from Arup Corporate Finance, which is already registered with the UK financial regulator. Through its website (which is no longer accessible), Good Crypto displayed an address similar to that of Arup. The “clone firm” offered a wallet that claimed to support various digital currencies like Bitcoin Cash, along with ETH, BTC, XRP, LTC, NEM, NEO, and DASH. Good Crypto also claimed to offer highly stable and secure services. Arup Corporate Finance denied links to Good Crypto and warned its investors not to engage in any activities with the fraudulent company.
The second announcement comes barely a week after the FCA sounded the alarm on Fair Oaks Crypto, which was using registered information belonging to Fair Oaks Capital Limited to deceive investors. According to reports, Fair Oaks Crypto claimed to offer a platform for clients to trade with Forex CFDs on cryptocurrencies, as well as precious metals and energy. FCA regulated Fair Oaks Capital said the crypto clone company was not part of its group.
Because the FCA does not regulate cryptocurrencies, authorities have not had an easy time identifying clone companies. Many of the investors in the UK have yet to recover money swindled by the criminals.
Binary options and contracts for difference
Binary options and CFDs are two other types of investment commonly used as vehicles for fraud. Binary options allow customers to bet on the expected price of a share, commodity, currency or index. Similar to binary options, CFDs let users bet on how much the price of an asset will rise or fall.
Sold as an investment on your behalf, or as opportunities to buy and sell investments on a platform to generate returns, these scams will sometimes entice the user with attractive, higher-than-average initial returns, only to deny access if they try to withdraw their money. The fraudsters often promote themselves online and via social media channels, and use images of luxury items like expensive watches and cars to tempt people to invest in their scams.
Binary option scams alone have been identified as one of the biggest ongoing frauds in the UK, with losses reported to Action Fraud totalling £32 million in 2017.
Within the last 12 months the FCA has issued three warnings relating to companies offering binary options, including Uno Media Solutions trading as Binary Uno, Binary Escrow and Binary Tilt / Chemmi Holdings.
Additionally in March 2018 the FCA supported The European Securities and Markets Authority’s (ESMA) measures to prohibit the provision of binary options and to restrict the provision of CFDs in order to protect retail investors.
ESMA’s product intervention measures will be applied to CFDs, including rolling spot forex and financial spread bets, and binary options to retail clients. Specifically, ESMA has agreed the following:
- prohibition on the marketing, distribution or sale of binary options to retail clients; and
- restrictions on the marketing, distribution or sale to retail clients of CFDs, including rolling spot forex and financial spread bets.
The restrictions applied to CFDs are as follows:
- leverage limits on the opening of a position between 30:1 and 2:1, depending on the price volatility of the underlying asset;
- a 50% margin close out rule applied on a per account basis;
- negative balance protection, limiting retail clients’ liability to the funds in their CFD trading account;
- a prohibition on firms offering monetary and non-monetary benefits (excluding research and information tools) to retail investors; and
- a standardised risk warning, including firm-specific figures on the percentage of client accounts that have lost money trading CFDs.
The product intervention measures will be applied under Article 40 of the Markets in Financial Instruments Regulation and will have an initial duration of up to three months, after which the measures may be renewed.
The FCA expects to consult on whether to apply these measures on a permanent basis to firms offering CFDs and binary options to retail clients.
Share and bond scams
Share and bond scams are closest to what you might expect when you think of an investment scam. You might be contacted out of the blue, perhaps from a high-pressure call centre or ‘boiler room’. You’ll be offered the chance to buy shares or bonds in such a way that practically guarantees a huge return.
However, these will likely be tremendously overpriced, if they exist at all. You may also be asked to pay money upfront as a form of security. Share and bond scams are often carried out by clone firms. The largest loss to a share scam recorded by police recently was £6 million.