What Schemes and Scams Should Investors Look Out For?

1. Common Types of Scams & Fraud
While it seems like thieves and con artists are coming up with new schemes every day,
committing acts of fraud are as old as time. Equity Trust Company knows there will
always be people who resort to dishonest means for financial gains. As the owner of a
self-directed IRA, all of the investments in your account(s) will come from your own
discovery and direction. We know there is always risk when it comes to investing, but
education is one of the best ways to manage the risks.
When it comes to fraud, bad things can and do happen to even the most careful, cautious,
or conservative person. However, Equity Trust Company believes in clients’ seeking out
education on the most common fraud schemes and scams is a great step towards
protecting their investments and financial future.
What Schemes and Scams Should Investors Look Out For?
Ponzi Schemes
This well-known fraud scheme was named after Charles Ponzi, who became
famous for using the technique. In essence, investors earn returns based on the
money from new investors. The earlier investors are getting regular returns and
everything seems fine, except the scheme relies on a constant stream of new
investors before it inevitably collapses. The organizer relies on attracting new
investors to make promised payments; but funds are usually used for personal
gain instead of engaging in any investment opportunities.
Pyramid Schemes
Another well-known type of fraud is the pyramid scheme. It sounds very similar
to a Ponzi scheme, as a Ponzi scheme can be a type of pyramid scheme. However,
pyramid schemes are not always illegal, while Ponzi schemes are certainly always
outside of the law.
A pyramid scheme works by convincing people to invest into a distributorship or
franchise. The promoter may say the product is the next big thing and tells the
prospective investor they are getting in on the ground floor of something amazing.
In reality, the focus is less on the product the franchise sells and more on how to
recruit other investors. Ultimately, no product has been sold, no investment has
been made, and no service has been provided. It becomes mathematically
impossible for everyone buying in to ever see a profit.
Advance Fee Schemes
An advance fee scheme can be presented as various opportunities, all requesting
an upfront fee. The victim pays money with the expectation of receiving
something of greater value, but ends up with nothing or practically nothing in

2. return. There’s really no limit to how varied these scams can be, potential
investments include: the sale of products or services, contracts, loans, or found
money (gifts). The victim is asked to pay a contract fee, a finder’s fee, or provide
money for some other reason in advance, sometimes also signing a contract
stating they will pay the advanced fee in exchange for accepting the investment,
loan, or other item of value. This contract may be legally binding unless the
victim is able to prove the “finder” or “promoter” never intended to provide the
item of value.
Affinity Fraud
Affinity fraud occurs when an individual exploits the connection and trust within
a group to promote a fake investment opportunity. This type of scheme may
involve elements of a pyramid or Ponzi scheme while specifically targeting
members of an identifiable group. Religious groups, ethnic groups within a
community, individuals connected through military or professional affiliations,
and groups united by a specific cause or demographic are just a few examples of
the types of groups these con artists will prey upon to commit this type of fraud.
They may directly approach the group or focus on convincing the leader of the
group to buy into the fake investment, taking advantage of that person’s respect
and position to access the members. One of the biggest challenges this type of
fraud brings, is the targeted group may prefer to ‘work out the matter on their
own’ instead of reaching out to law enforcement or regulators for help.
The Securities and Exchange Commission (SEC) issued an Investor Alert and an
Investor Bulletin on the dangers of affinity fraud.
Letter of Credit Fraud
A letter of credit is not something that can be purchased as an investment. The
fraud perpetrators are taking something used to ensure there will be payment for
goods shipped and trying to manipulate it for fraudulent purposes. Letters of
credit are issued by banks and most commonly used for international trade. The
letter of credit states the receiving entity has the funds to pay for the shipment and
the shipping entity provides proof the goods are en route.
This becomes fraud when the entity shipping the goods provides documentation
stating the goods have shipped in order to collect payment, but has no intention of
sending items or sends items of far less quality.
Prime Bank Note Fraud
Like other shady investment schemes, fraud perpetrators offer a deal that
promises remarkably high yields in a very short time frame. This scam uses "bank
guarantees" to be purchased at a discount and guarantee a high return. They will
state these guarantees are coming from “prime banks” of the world and that’s why
the return is so high with almost no risk. In reality, the fraudster is trying to get

3. the victim to send his or her money to a foreign bank where it will then be
laundered or make its way to an account belonging to the con artist.
This type of fraud is also called a bank guarantee, which is a legitimate financial
instrument for international trade, similar to a "letter of credit" used by U.S.
banks.
For more information regarding fraud topics please visit, http://www.fbi.gov/scam-
safety/fraud.