Avoiding investment scams

Australia's banking and investment industry is one of the most regulated and sophisticated in the world. So how do investment fraudsters still manage to ensnare savvy Australians?

  • 5 June 2018

    In today’s high-tech environment, scammers have a plethora of technical tricks to deceive you out of your hard-earned money. From authentic-looking invoices and emails to fake telephone marketers and computer technicians, there’s no limit to their crooked creativity.

    Most of us are alert to anything that looks a little odd, however when it comes to investment scams, even the most financially astute of us are susceptible.

    Of course, not all investment spruikers are dodgy, but unfortunately the scammers camouflage their ill intent behind convincing salespeople and credentials, and attractive, glossy brochures.

    So, how do you spot an investment scam? The key is to do your homework—here are a few tips to kick off your due diligence.

    Person typing on a keyboard as they surf the internet

    1. Do a background check

    First off, check whether the company has an Australian Financial Services Licence (AFSL). The Australian Securities and Investments Commission (ASIC) issues AFSLs to enable companies or individuals to legally deliver a financial services business in Australia. Accordingly, it advises against doing business with companies that do not have an AFSL.

    See ASIC Connect professional registers to determine whether the person or company holds an AFSL.

    ASIC also provides a list of companies that you should avoid dealing with. These are companies that have come to ASIC’s attention for various nefarious reasons. Check the list of unlicensed companies before proceeding.

    2. Check the prospectus

    Legitimate investments must have a prospectus, which is a disclosure statement that outlines, among other things, the terms and conditions of the investment, the company’s ABN and an issue date. The prospectus becomes invalid 13 months after the issue date, after which it must not be presented to prospective investors. As a rule of thumb, never invest in a scheme through an expired prospectus.

    3. Beware of unsolicited offers

    If you receive an unsolicited investment pitch, be especially cautious. In particular, offers that are for ‘a limited time only’ or that require an immediate response should be avoided. Fraudsters rely on you worrying about missing out and not taking the time to conduct your investigation. Further, watch out if someone recommends foreign or off-shore investments.

    4. Beware of the pump and dump tactic

    Schemers ‘talk-up’ the investment’s value with misleading statements to encourage investors, leading to increased pricing of the stock. Once the price has been pumped up, the fraudsters move in to dump their shareholdings at the inflated price, resulting in considerable profits to themselves and a sudden downward price correction.

    Unwary investors can be left holding shares that are virtually worthless.

    Australian regulators have very stringent trading laws. See ASIC’s ‘Insider trading and market manipulation’ page for further information.

    5. Trust your gut instinct

    You know that feeling that something isn’t quite right but you just can’t put your finger on it? Well, don’t ignore it. If the salesperson evades your questions or the prospectus seems a little too slick, trust your instincts and dig a little deeper. Don’t be rushed into making any decisions and, if in doubt, seek the advice of a professional, licensed financial advisor.

    And finally, if the offer seems too good to be true … well, you know the rest!

    More information: moneysmart.gov.au

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