Avoiding International Investment Scams

Tips to Avoid Investment Scams and Fraud

Getty Images / Peter Dazeley.

International investing can be a very difficult endeavor for a number of reasons, ranging from language barriers to a lack of transparency. Unfortunately, these barriers make it easy for unscrupulous individuals to take advantages of U.S. investors looking to invest abroad. International investment scams have been on the rise as communication has become easier.

In this article, we will take a look at at various types of investment scams and how international investors can avoid becoming a victim to them.

Types of Investment Scams

There are many different types of investment scams, ranging from ponzi schemes to unlicensed securities brokers. While these schemes certainly exist within the United States, international investment scams are much easier to perpetrate and harder to prosecute, making these investment scams very attractive to organized criminal syndicates around the world.

Here are some of the most popular types of investment scams:

  • Ponzi Schemes - A version of a pyramid scheme whereby money from new investors is used to pay a return to older investors. Investor losses arise when money owed to old investors exceeds the income generated from new investors.
  • Pump and Dump - A stock price spike generated from a small group of informed people illegally buying stock before recommending it to thousands of investors, usually via e-mail. The perpetrators sell the stock at a high, while the thousands of investors lose money when the stock ultimately declines to its prior levels.
  • Advance-Fee Fraud - A confidence trick whereby the target is persuaded to advance a large sum of money in the hope of realizing a significantly larger sum in the near future. The most common version of this scheme are Nigerian Letter or 419 frauds.
  • International Boiler Rooms - High pressure, and often unlicensed, brokers based outside of the U.S. place calls trying to sell investors on phony shell companies, pump and dump schemes, or a myriad of other investment schemes.

    Tips to Avoid Investment Scams

    Investment scams aren't always easy to avoid. In fact, knowledgable university professors and bookkeepers have fallen victim to the now-popular Nigerian Letter or 419 scams. But fortunately for investors, there are many warning signs that can signal problems ahead. By keeping these tips in mind, investors can shield themselves from most scams.

    Here are some key tips to keep in mind:

    • If It's Too Good to be True, It Probably Is - Most investment scams offer promises of extraordinary high returns with very little risk. Of course, any financial expert will tell you that extraordinarily high returns only normally come with extraordinary high risks. So, if an investor hears otherwise, it's best to exercise caution before investing.
    • Stick to Reputable Exchanges - Securities listed on OTC exchanges, such as foreign stocks trading on the OTC Markets or OTCBB, face less regulatory requirements. As a result, investors should exercise caution when investing on these OTC exchanges, particularly if they are located outside of the United States.
    • Do Your Due Diligence - Most investment scams are pretty obvious when investors start to dig below the surface. Looking at financial statements for irregularities (such as rapidly growing revenues with no inventory buildup) and management personnel for any criminal histories (especially in securities fraud) is a good start.
    • Diversify and Start Small - Many investment scams require large upfront investments to be pulled off, which means that slowly building a position over time makes you a lackluster target. Investors unsure about an investment opportunity should invest a small amount and average in over a longer time frame.
    • Consult a Financial Advisor - The vast majority of investment scams can be avoided by simply consulting a financial advisor. Never purchase a stock or bond over the phone from someone you don't know. Financial advisors keep up with the latest trends and are likely aware of many popular investment scams.

    Key Takeaway

    International investing has become increasingly commonplace, but so have scams targeting investors looking to put their capital to work abroad. By knowing common scams and keeping some basic tips in mind, investors can avoid these pitfalls when diversifying their portfolios.