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How to protect yourself from the trust trap

12% of Okanagan residents say they have sunk money into a fraudulent investment
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"Trust trap" fraudsters take advantage of your networks of family, friends, colleagues and other social groupings, according to the BC Securities Commission. (iStock)

Investment fraud is more common in BC than you might think.

According to research carried out by the BC Securities Commission (BCSC) a shocking 12% of Okanagan residents say they have sunk money into a fraudulent investment.

That figure is even more startling given the fact that as a province we’re actually pretty good at spotting the warning signs of a scam. Indeed the BCSC’s research found that two-thirds of Okanagan residents were able to correctly identify most of the common warning signs of financial fraud, such as investment schemes that promise guaranteed returns with little or no risk.

So what’s causing the discrepancy?

Beware the trust trap

“What we find in a lot of the fraudulent schemes, is that the fraudsters take advantage of networks,” explains Doug Muir, Director of Enforcement at BCSC. “That network could be based on friends or family or religious groups or cultural-social groups.”

This kind of fraud is what BCSC calls a “trust trap” and it’s something that British Columbians are particularly susceptible to. In fact, when surveyed, almost 44% of Okanagan residents didn’t believe that being encouraged to invest by a friend or family member was a warning sign for potential investment fraud.

“What happens is, the fraudster may not have direct contact with the ultimate investor, but instead the investment opportunity is often unwittingly brought to somebody through a friend or a family member, someone who is part of your network, someone that you trust,” states Muir.

“People then pass it along like it’s a flu bug. You may not even know you have it but you’ve passed it on to somebody else. It’s like a virus that can really infect a network.”

Why do people fall for the trust trap?

When it comes to investing there is an almost overwhelming array of information for you to wade through, which means that it can be difficult to know whom to trust. As a result, people are understandably inclined to be guided by someone they know, even if that person isn’t a financial professional.

But fraudsters know that, and they prey on it.

“What we’ve been finding is that when you trust someone, you let your guard down and you don’t do your own independent analysis or assessment,” says Muir. “The common sense they use for most other decisions just seems to go out the window.”

An unreported problem

Whether it’s because they don’t know where to turn for help, or they are simply too embarrassed to contact anyone, the full extent of this problem often goes unreported according to BCSC.

“I think embarrassment is a big part of it,” says Muir. “I think what people think is that they’re stupid because they fell for this. And that’s not the case. I don’t want people to think that. I want them to realize that they’ve been taken in by a fraudster who’s good at what they do.”

The BCSC has powers to help stamp out these kinds of scams before they dupe more people out of their hard earned cash, but they can only do that if they know about it. As a result, reporting is exceptionally important to stamp out this kind of investment fraud.

So if you believe you’ve been approached by a fraudulent investment opportunity, or if you think something doesn’t feel quite right, contact the B.C. Securities Commission. You can reach out by phone at 604-899-6854 / 800-373-6393. Or you can email inquiries@bcsc.bc.ca, you’ll also find links to an online complaint form at bcsc.bc.ca.

Educating investors

To help the public better educate themselves BCSC has an investor education website, investright.org, which offers a wealth of information on everything from the basics of investment to tools that help your spot potential frauds. One of these tools include the “Scam Meter,” which allows investors to see if the investment they are considering shares any common traits with past scams.

“You’ve got to be careful,” concludes Muir. “There’s risk in everything and investing is a complicated thing to do, but there’s legitimate help out there that can guide you.”

Some of the most common groups and communities that are targeted by fraudsters include:

Clubs & Organizations

Fraudsters will often promote their scheme by befriending a respected member of a club or organization. If anyone associated with the club starts promoting a fraudulent investment, everyone in the club is at risk, including friends and family of club members.

Ethnic Communities

Fraudsters strive for legitimacy by getting influential members of the community to trust them. New immigrants are at risk as they may be more isolated from the larger community and could be less likely to seek outside advice. Members of ethnic communities who are looking to help people can also be targeted in a fraudster’s scheme.

Pre-Retirees

Fraudsters use promises of high returns with little or no risk to attract people to their schemes. Pre-retirees feeling the pressure to ensure they make it comfortably through their retirement may be attracted to these types of pitches.

Religious Organizations

Often the fraudster will claim to be an ex-religious leader or at least someone who is faithful to gain people’s trust. The fraudster’s involvement in the place of worship attracts members to invest. Fraudsters target all denominations – no one is immune.

Small Communities

In small towns or cities, there is often a strong sense of community and people often trust and know their neighbours. To gain people’s trust, a fraudster may try to work through an established member of the community or get involved in an influential organization in order to get access to people.

Seniors

Seniors without wide social networks are at risk because fraudsters often isolate people, discouraging them to report abuse or suspect investments. While anyone can be a victim of investment fraud or an unsuitable investment, seniors have less time to recover from a financial loss.

How can you recognize a fraud before you become part of it? Take the quiz at https://www.investright.org/ to find out.

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