Education Is Key to Preventing Elder Fraud

Elder investment fraud is big business. Every year, fraudsters scam older Americans out of billions of dollars. What makes the crime even more intolerable is the fact that many of these victims suffer from age-related medical conditions such as dementia.

As discussed in our previous blog on elder fraud, perpetrators of elder financial abuse can be anyone – family, friends and strangers alike.  Financial scams targeting seniors have become so widespread, in fact, they’re now considered “the crime of the 21st century.” About 20% of Americans 65 years of age and older have fallen victim to some form of financial fraud, according to a recent survey by Investor Protection Trust.

According to the FBI, frauds that specifically target the elderly vary, but some of the more common ones include the following:

Letter of credit fraud. Legitimate letters of credit are never sold or offered as investments, says the FBI. They are issued by banks to ensure payment for goods shipped in connection with international trade. Payment on a letter of credit generally requires that the paying bank receive documentation certifying that the goods ordered have been shipped and are en route to their intended destination. Letters of credit frauds are often attempted against banks by providing false documentation to show that goods were shipped when, in fact, no goods or inferior goods were shipped.

Other letter of credit frauds occur when con artists offer a “letter of credit” or “bank guarantee” as an investment wherein the investor is promised huge interest rates on the order of 100 to 300 percent annually. Such investment “opportunities” simply do not exist.

Prime bank investment fraud. In these schemes, the fraud artists purport to have access to a secret trading program sanctioned by the Federal Reserve Bank, the Treasury Department, the World Bank, the International Chamber of Commerce, or the International Monetary Fund. Prime Bank programs often claim investors’ funds will be used to buy and trade “Prime Bank” instruments. Promoters make the schemes seem legitimate, using complex, sophisticated and official-sounding terms. The investment may be described as debentures, standby letters of credit, bank guarantees, an offshore trading program, a high-yield investment program, or some variation.

For example, if $10 million worth of “bank guarantees” can be sold at a two percent profit on 10 separate occasions – or “traunches” – the seller would receive a 20% profit. Such a scheme is often referred to as a “roll program.” The purpose of these frauds is generally to encourage the victim to send money to a foreign bank, where it is eventually transferred to an off-shore account in the control of the con artist. From there, the victim’s money is used for the perpetrator’s personal expenses or is laundered in an effort to make it disappear. You can read more about Prime Bank investment fraud here.

Ponzi schemes. Ponzi schemes have been around a long time, dating back to the 1900s when Charles Ponzi launched a scheme that guaranteed investors a 50% return on their investment in postal coupons.  A modern-day version of the Ponzi scheme occurred in December 2008 courtesy of Bernie Madoff. The former NASDAQ chairman pleaded guilty to 11 federal felonies and admitted to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors of billions of dollars. On June 29, 2009, Madoff was sentenced to 150 years in prison.

Ponzi schemes generally promise high financial returns or dividends not available through traditional investments. Instead of investing the funds of victims, however, the con artist pays “dividends” to initial investors using the funds of subsequent investors. The scheme generally falls apart when the operator flees with all of the proceeds or when a sufficient number of new investors cannot be found to allow the continued payment of “dividends.”

Preventing Fraud

Getting educated and taking a few basic steps may well keep you or an elderly loved one from becoming a victim of an investment scam or fraud scheme. To begin, be careful of any investment opportunity that makes exaggerated earnings claims. Exercise due diligence in selecting investments and the people with whom you invest. In other words, do your homework. Do not sign anything that you do not fully understand. Finally, consult an unbiased third party such as an unconnected broker or licensed financial adviser before investing.

For more information on elder fraud schemes and what to do to prevent them from happening to you, visit the FBI’s Web page, as well as the Securities and Exchange Commission Web site.