Home | Databases | WorldLII | Search | Feedback New Zealand Securities Commission

You can help stop fraud. Securities Commission brochure [2004] NZSecCom 4 (1 June 2004)

Last Updated: 9 November 2014

YOU CAN HELP STOP FRAUD

SECURITIES COMMISSION NEW ZEALAND
Helping people make better investment decisions

DID YOU KNOW THAT YOU MAY BE A PRIME TARGET FOR CON ARTISTS WHO PEDDLE INVESTMENT SCAMS?

Fraudsters prey on people who trust each other, particularly members of religious, social, or cultural groups. They use the trust that exists within these groups to help them steal money.

This sort of fraud – called affinity fraud – can have serious consequences. One scheme that flourished within a church during 2003 collected $14 million from New Zealanders before it was exposed. In almost all such cases the money is lost for ever.

Make sure you and your associates don’t become victims of affinity fraud. Learn how to identify and avoid investment scams. Report suspected fraudsters to the authorities so these scams can be stopped.

WHAT IS AFFINITY FRAUD?

Affinity fraudsters exploit our tendency to trust people who belong to the same group.

The people behind these scams frequently are - or pretend to be - members of the group. They put considerable effort into winning over community or church leaders. If leaders endorse the "investment", members of the group are more likely to join up without asking questions.

As well as promising investors very high returns the fraudster may say that some profits will go to a charity or church mission.

This makes the scheme attractive to members of the group, and means anyone who questions the scheme is seen as questioning the worthy cause that apparently stands to benefit.

Affinity scams are hard for authorities to detect. When victims realise they have been scammed they are often shocked and embarrassed by what’s happened, so they keep quiet instead of going to the police. This is particularly true where a community or church leader has encouraged people to invest. As a result, the fraudster remains at large and is free to start up again somewhere else.

HOW THESE SCHEMES WORK

Affinity fraud can take many forms. Common scams are Ponzi or pyramid schemes where money from new investors is used to pay "interest" to earlier investors to give the illusion that the investment is successful.

This tricks new people into the scheme and lulls existing investors into believing their investments are working. Often investors persuade friends and family to sign up – making them unwitting accomplices of the fraudster. In reality, the fraudster almost always steals investors’ money for personal use.

Initially the fraudster has no problem keeping up the "interest" payments but these schemes depend on a continuous supply of new investors. When this supply dries up the scheme collapses.

People then discover that most - if not all - of their money is gone.

Don’t make the mistake of thinking you couldn’t be taken in by an investment scam. These fraudsters are very clever. Many intelligent and well-educated people have fallen victim to affinity scams.

HOW TO AVOID AFFINITY FRAUD

Most investment scams can be avoided by using common sense and asking a few questions. If someone offers you an investment you should:

• ask for the Investment Statement. Almost all investments offered in New Zealand are required by law to have an Investment Statement.* This document contains important information about the investment and the people behind it. If there is no Investment Statement there’s a good chance you’re dealing with a scam.
• be as sceptical and careful about paying money to someone who claims to share your beliefs or interests as you would be with anyone else.
• never invest solely on a friend’s recommendation. The person who told you about the scheme may not know they’re a victim of a scam. Get independent advice from a financial adviser, lawyer, or accountant from outside the group.
• not fall for promises of spectacular profits or "guaranteed" returns. If an investment seems too good to be true, then it probably is.
• be very wary of any investment said to have no risks. All investments have risks. The greater the potential return from an investment, the greater your risk of losing money. Promises of fast and high profits, with little or no risk, are classic warning signs of fraud.
• be suspicious if you are told to keep the investment opportunity secret. There is no reason why a legitimate investment needs to be confidential.
• take time to think over the investment. Ignore pressure to invest quickly or risk missing out on a "once in a lifetime opportunity". This may be a ploy to get your money before you’ve had time to check out the scheme.

HELP STOP FRAUD

Report scams or suspected scams to the police or the Securities Commission. If you don’t contact the authorities the fraudsters may go on to target another group of victims.

* The few types of investments that do not require an investment statement are required to have other documents with similar information about the investment.

This leaflet is for general guidance only. If you are in doubt or would like definitive information you should seek professional advice.

HOW TO CONTACT THE SECURITIES COMMISSION

Level 8, Unisys House
56 The Terrace
PO Box 1179
Wellington

Fax 64 4 472 8076
Email seccom@seccom.govt.nz
Website www.seccom.govt.nz
2004

This information is also available as a printed brochure from the Securities Commission at no cost.

The Securities Commission is New Zealand’s main investment regulator.
We help build confidence in New Zealand’s securities markets.