How to Spot the Red Flags of Financial Fraud

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How to Spot the Red Flags of Financial Fraud
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Learn to recognize the persuasion tactics and red flags associated with financial fraud. ©iStockphot …

Investment fraud criminals use a wide array of sophisticated and highly effective tactics to target and influence potential victims. The truth is, you encounter these tactics every day because they are used by legitimate businesses, in retail stores and advertisements. But when fraudsters use them, the goal is to steal your money.

Learn to recognize these five tactics and red flags associated with financial fraud:

Phantom Riches

Dangling the prospect of wealth by enticing you with something you want but cannot have, such as a guaranteed or risk-free investment. "These gas wells are guaranteed to produce $6,800 a month in income."

Red Flag Rule: Take time to think through the pitch. What is the salesperson really saying? Is he dangling incredible returns? Guarantees? Is he saying that the investment itself will lead to a different and much better lifestyle? Remember, all investments carry some risk.

Source Credibility

Trying to build credibility by appearing successful, claiming affiliation with a reputable organization or touting a special credential or experience. "Believe me, as a specialist in senior living and an executive at XYZ firm, I would never sell an investment that doesn't produce."

Red Flag Rule: A seller may have a corner office, framed diplomas or certificates and wear a suit. But credibility can be faked. Check out the seller's actual qualifications.

Social Consensus

Leading you to believe that other savvy investors, like you, have already invested. "I know it's a lot of money, but I'm in—and so is my mom and half her church—and it's worth every dime."

Red Flag Rule: Does the pitch focus on how many others are interested? Investing is a personal decision. Ask yourself if you are interested in the investment and if the objectives and risks are right for you.

Reciprocity

Offering to do a small favor in return for a big favor. "I'll give you a break on my commission if you buy now—half off."

Red Flag Rule: Was the pitch preceded by a free meal, book or video? Do you feel obliged to do the salesman a favor? If someone does a small favor for you, don't feel compelled to do a big favor for them in return.

Scarcity

Creating a false sense of urgency by claiming limited supply or time, or claiming the opportunity is exclusive. "You are one of only a few select investors I've told about this opportunity. But you need to act quickly or it'll be gone."

Red Flag Rule: Is the offer good for only a limited time or in a limited quantity? Do you feel as though you are part of a special group for being notified? Take time to evaluate the offer and don't allow yourself to be rushed into making any financial decision. Most legitimate offers will be there tomorrow.

Knowing the tactics and red flags of financial fraud can help you avoid becoming a victim. The most important actions you can take with any investment offer are to ask if the salesperson and investment are registered—and check to make sure they are.

To learn more about how to ask and check go to www.saveandinvest.org.

FINRA is the largest independent regulator for all securities firms doing business in the United States. Our chief role is to protect investors by maintaining the fairness of the U.S. capital markets. FINRA does not endorse, sponsor, or guarantee, nor is it sponsored by, any advertisers on this site, and any dealings with those advertisers are solely between you and the advertisers.

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