Investors, no matter how sophisticated, make mistakes. Even presumed experts like financial advisers and wealth managers investing in good faith still lose money.
Sometimes, however, financial managers are negligent, making it easy for fraudsters to take advantage. In other instances, purported financial managers are the scammers themselves, and those who entrust their money to them fall victim.
Digitalisation has made financial fraud that much easier. Borders mean little online, so a scammer in one country can target people on the other side of the world. The international nature of these scams frustrates efforts to seek recourse.
As is the case with the recent spate of self-invested personal pension claims that have been closely covered by this publication, individual investors are often left floundering, unsure whether investment losses are legitimate, or if someone can be held accountable.
How is it possible to unpick professional negligence from financial crime?
Fraudsters rely on ambiguity, hoping to conceal their schemes under the guise of legitimate business downturns. More than ever corporate investigators are asked to resolve that ambiguity.
Far from trench coat and fedora-wearing figures – a common misconception – the investigations industry has professionalised over the years.
Investigations firms nowadays act as extensions of legal teams, working hand in glove with lawyers to obtain the best evidence that may otherwise be inaccessible, and determine if fraud or negligence has occurred.
Fraudsters routinely attribute losses to poor corporate performance, a bad market, or rogue employees.If it has, the investigator will help build an evidential case and ultimately recover losses through creative strategy.
Corporate investigators are not hampered by red tape, lack of bandwidth or funding that constrains regulators and other authorities. They can be anywhere in the world in the time it takes to book a flight.
Legitimate loss vs evidence of a scam
Fraudsters routinely attribute losses to poor corporate performance, a bad market, or rogue employees. An investigator’s first step is to identify anomalies in these narratives.
The tell invariably, but not always, lies within the entities that receive investments. Those entities, usually unlisted or non-public, are often false fronts or knowingly mismanaged.
Personal relationships between an investment manager and the company receiving investment are another red flag. Such a relationship immediately raises questions: why was this company chosen? Was there due diligence?
One of the more common features of pension scams are pump-and-dump schemes, where money pours into a company stock that hardly trades, only for that company to go into administration a short time later.
In all of these scenarios, there are usually discernible signs of something amiss: a fake address, a company with no employees, a website that plagiarises others.
It is vital to approach every case with fresh eyes. A good investigator will look sceptically at information that supports their case theory. When they hear hoofbeats, they think horses and zebras.
Is the money gone forever?
It is important to consider whether losses are recoverable. Misappropriated investments can be concealed. Guilty parties could be in a jurisdiction where courts have a poor track record of enforcing foreign judgements.
The answer to these obstacles is creativity. The best legal and investigative minds are those that see beyond stale interpretations of the law. The question of whether money is lost forever will turn as much on the ingenuity of the case team as on the facts of the case itself.
A prudent assessment up front will help investors avoid throwing good money after bad.
Fraud has a face
Whatever the fraud, there are always individuals behind it, and others who may have crucial information.
Corporate investigators routinely gather information through interviews. Using tenacity, curiosity and emotional intelligence, interviewees can contextualise facts and reveal the real story behind otherwise opaque transactions. The paper trail can be misleading – people bring it to life.
In the most complex and high-value claims, interviewees identified by investigators often become key witnesses.
The final piece of the puzzle
Once a judgment is obtained, the final and usually most difficult part of recovery is securing payment. Fraudsters will do everything possible to conceal their assets.
Investigators play a vital role in identifying assets, proving ultimate ownership, and determining a path to recovery.
Where individuals can look for red flags
The mystique with which many investigators shroud themselves belies what they really do.
Many of the tools used by investigators are available to the average investor. Anyone can sift through information in public forums to identify red flags. There is often enough to discourage making a risky investment.
Whatever the fraud, there are always individuals behind it, and others who may have crucial information.As an information source the public domain is richer than ever, if you know what to look for and where.
To determine if a company is viable, scrutinise its website and the press, its corporate records and social media.
See if the company has employees on LinkedIn and run a simple Google search to see if there is adverse chatter in blogs. You can even check to see if founders are connected on Facebook or Instagram.
Something as simple as an address can be illuminating.
If a company is incorporated in a jurisdiction that has a strong regulatory framework and disclosure obligations, that is a clue it is meeting certain standards. If it is incorporated somewhere else, it may warrant more scrutiny.
When to call in the pros
If a scam is complex or grand in scale, legal teams collaborating with investigators will be needed to assess facts and help you determine if you are a victim of a crime.
The right information can win or lose a case. The best investigators have the tools to collect that information and the knowledge of how to use it, thanks to their deep understanding of jurisdictional context and opportunities.
With time, the work of lawyers and corporate investigators will lead to regulatory tightening around financial products that have been abused by fraudsters as vulnerabilities are recognised and loopholes closed.
For now, individuals assessing investments can and should consider themselves empowered to use the public domain to mitigate their risks.
Nicholas Bortman is co-founding partner at Raedas
