Your Money blog: how to avoid an investment scam in the UAE

Investment scams come in many shapes and sizes, so learn to spot the phoney schemes before they sting your finances.

Losses of Dh55 million are estimated from UAE investors alone, with global debts expected to top Dh147 million after hundreds of investors piled money into Bar Works. Silvia Razgova / The National

Two major forex investment frauds have been uncovered in the UAE over the past year, with many gullible investors losing their life savings in a matter of months.

As a new investor, you must never part with your hard-earned money unless you know exactly where it’s going, how it will be invested and who will be managing it – all on paper, all in black and white.

So, to help you evaluate the authenticity of an investment scheme, the team from the financial comparison website, Souqalmal.com, has compiled a quick reference guide with tips on what types of investment frauds exist, how to weed out the phoney ones and the red flags to watch out for:

The usual suspects – common types of investment fraud

Investment scams come in many shapes and sizes. From the easy-to-spot to the more complicated ones, here’s a quick look at some of the widely notorious ones:

• Ponzi schemes

In a Ponzi scheme, fresh investment collected from new investors is used to pay back ‘returns’ to existing investors. So the money you invested will most likely never be invested as promised. Such schemes go bust when new investment stops coming in or when multiple existing investors attempt to pull their money out.

• Pyramid schemes

Pyramid schemes typically promise exorbitant returns in a short period of time. Structured like a hierarchical pyramid, they require each existing investor to bring in new investors - the primary condition for them to be able to earn a profit. Without an actual product or service at the core of the business, such schemes collapse when the base stops growing further.

• Forex scams

Trading in foreign currencies is a complex and risky undertaking, and since it offers the potential of delivering high returns, it’s usually ideal bait for fraudsters. Often being advertised as forex trading schemes, such scams are usually operated from an offshore location. You may be asked to wire money to an offshore bank account. Not only will your investment be inaccessible, but returns may be little to none, and you may never hear from the investment company or see your original investment ever again.

• Pump-and-dump

A pump-and-dump scheme is a type of stock market fraud wherein a handful of investors (usually insiders) buy a stock and then aggressively promote it and recommend a large number of investors to buy it. This inflates the price of the stock, and once it peaks, the original investors sell their stake for a huge profit. Everyone else is left with worthless shares that eventually drop in value.

• Internet investment scams

Ever seen those sponsored internet ads promising 100 per cent returns, or ones that show how an average Joe doubled his money? The internet is teeming with scams and scammers, from fake websites to online crowdfunding scams and everything in between.

• Affinity group fraud

Affinity fraud targets homogenous groups of people based on ethnicity, age group, religion, profession, etc. and thus build trust by exploiting such similarities. By targeting or enlisting a senior member of such a community, they try to rope in other investors from the same group based on word of mouth.

Get smart – how to spot an investment scam

Once you’ve educated yourself about the various types of investment scams doing the rounds, it’s essential to understand the tricks that fraudsters use to lure investors, and the telltale signs of bogus investments. Here are some tips to spot dubious investments:

• Ditch the “Get rich quick” philosophy

Con men try to tap into unsuspecting investors’ desire to make a quick buck, and so they dangle the prospect of wealth to hook you in. Remember, if it sounds too good to be true, it probably is.

• Do your research, make sure it’s thorough

There is no substitute for research. Make sure you do background checks to establish the authenticity of the investment company, understand exactly how returns are being paid and where the money is being invested. Chances are if you seem suspicious and ask too many questions, the fraudsters will leave you alone.

• Be wary of over-the-top marketing

Fraudsters might come at you with a sense of urgency, signalling that if you don’t come on-board now, you’ll miss the money train. Or they might advertise saying that thousands of other investors have made huge profits with testimonials from them (most likely fake). These over-the-top marketing gimmicks are a huge red flag.

• Report suspicious investment activity

If you’ve spotted an investment scam drawing investors in, don’t forget to report them to the local police or the Dubai Financial Services Authority.

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