How to shield yourself from the growing threat of financial fraud
By understanding common scams, verifying credentials, and resisting the allure of unrealistic returns, individuals can significantly reduce their risk of falling prey to fraudsters, says Trivesh D, COO, Tradejini
image for illustrative purpose
Going by the Reserve Bank of India (RBI) statistics, the number of fraud cases in the banking sector increased by nearly 300 per cent in the last two years to 36,075 cases in the financial year 2023-24 (FY24). In contrast to the increasing number of fraud cases, the amount involved in fraud fell to Rs 13,930 crore in FY24 from Rs 45,358 crore in FY22. Digital payment frauds in India saw a more than five-fold jump to Rs 14.57 billion (Rs 1,457 crore) in the year that ended in March 2024 as compared to the previous period, a report said, quoting the RBI data.
The number of overall online fraud cases has increased by 708 per cent in last two years. These are certainly some of the alarming facts and figures. Aren’t they? Speaking to Bizz Buzz exclusively, Trivesh D, COO, Tradejini, a leading fintech firm, explains how some of these financial frauds take place and how should one protect oneself so that one doesn’t fall victim of all these
What is your idea of financial fraud? Do you think that the Indian financial system often offers a fertile ground for financial fraudsters?
A seemingly Wall Street figure ran history's biggest Ponzi scheme. For over seventeen years, he promised investors steady 10-12 per cent returns. In reality, it was a house of cards. He paid out early investors with funds from new ones. The 2008 financial crisis exposed the fraud. By December 2008, his $65 billion scam had crumbled, devastating charities, celebrities, and even major banks.
Financial markets serve as the backbone of any economy, facilitating capital allocation and wealth creation. However, amidst the allure of profit and promise, lurks a darker side –the scam. India, with its burgeoning investor base and rapid digitalization, presents a fertile ground for financial fraudsters to operate. In recent years, a slew of scams have rocked the Indian financial landscape, leaving investors high and dry and casting doubts on the integrity of the system.
Today's financial fraud is just as common as it was more than a century ago. Forget paper and phones. Today's stock market crooks exploit cyber weaknesses to manipulate prices, just like in Harshad Mehta's era. Back then, a few fraudsters rigged prices and forged documents via non-digital manipulation. Now, cyber scams create a similar illusion, defrauding investors of billions.
Do you think that social media is actually a menace in this regard, helping fraudsters target investors through various social media sites?
Social media and instant messaging apps have taken over the digital era, and scammers have adjusted their tactics accordingly. The unsettlingly widespread method by which this kind of scam targets investors is through social media sites like Facebook, WhatsApp, and Telegram. One scam story that was circulated involved unsuspecting investors who lost over Rs 3 crore as a result of falling prey to a stock market fraud that was carried out through these exact channels.
This incident underscores the sophistication and audacity of modern-day financial scams. Fraudsters leverage the anonymity and reach offered by social media to peddle fraudulent schemes, enticing investors with promises of quick riches and high returns.
What are some of the common scams, people, generally, should be aware of and be very particular about?
Financial scams are a major concern in India, just like in many other parts of the world. Here are some common types of scams to be aware of:
Ponzi schemes: These schemes promise high returns with little risk, but they only function by paying out returns with money from new investors. Eventually, the scheme collapses when it can't find new investors.
For example, you are promised Rs 120 a month after paying Rs 100. But the secret is that the organizer is not actually investing your money. They are using the Rs 120 from new investors to pay you. The scam continues as long as they are able to locate new victims. But eventually, everyone loses their money when it runs out of steam.
Pump and dump schemes: Scammers artificially inflate the price of a stock through misleading recommendations or false information. Once they sell their shares at a high price, the price plummets, leaving other investors with significant losses.
Penny stocks are often targets for pump and dump schemes. These are cheap stocks from small companies, and scammers can easily manipulate their price with false hype.
Insider trading: Imagine an executive at a company who knows they are about to release a revolutionary new product. Legally, they cannot buy a lot of company stock before the announcement because it gives them an unfair advantage. The executive uses this secret knowledge to buy stocks in that company before the news breaks, profiting unfairly from information not available to everyone. That's insider trading.
Front-running: In the stock market, front-running is when someone with special access to information about a big trade (like a broker or advisor) uses that knowledge to buy the stock themselves first. This drives the price up before the original trade goes through, leaving the original buyer with a potentially higher price. It's like cutting in line unfairly using insider knowledge.
Investment fraud: This is a broad category that encompasses many different types of scams, such as unlicensed investment advisors, fake investment opportunities, and online investment scams.
UPI-related scams: The RBI reports that bank frauds totaling more than 302.5 billion rupees were reported during the fiscal year 2023.
UPI is a great way to send money, but scammers can misuse it. Imagine receiving a message that looks like a cashback offer from your bank, but it actually asks you to transfer money. Always double-check the sender and purpose before authorizing any UPI transactions.
QR code scams: Scammers create fake QR codes that, when scanned on your mobile phone, steal your login information or redirect you to malicious websites that steal your data. Be cautious about scanning random QR codes.
What about global financial scams? Are they more or less similar in nature?
Financial scams are a problem all over the world. Scammers often use similar tactics in different countries. However, some scams are more common in certain parts of the world. At just over 26 per cent of all fraud cases worldwide, the USA had the highest number of reported cases. India came in second with 11 per cent and China with 8 per cent in rankings.
In the US, the most prevalent scams are impersonation scams, such as those involving Social Security and IRS officials, and tech support scams. In India, common scams include job offer frauds, tech support, and lottery scams. In China, financial scams like Ponzi schemes and e-commerce frauds are widespread. While all three countries face impersonation and online scams, specifics vary: the USA sees many Social Security and IRS scams; India deals with job offer scams due to high unemployment and China contends with investment and e-commerce frauds reflecting its booming online market.
The growing complexity of financial crime demands a unified approach from regulators, institutions, and businesses. This requires a deep understanding of the evolving risks and stronger collaboration, including information sharing across borders, to effectively combat these threats.
If one is not to fall as a victim of all these, what should one do? What do you suggest?
I would like to answer this in this fashion:
Educate yourself: Knowledge is your shield. Stay updated on common scams and how fraudsters operate. Government agencies like the RBI and financial institutions regularly publish information on current scams and how to avoid them.
Unsolicited contacts: Be wary of unexpected calls, emails, or messages, especially from unknown sources. Fraudsters are enticing victims through online trading courses, seminars, and mentorship programs in the stock market.
Don’t fall for the hype: High returns with little risk are a red flag. Always research and verify the legitimacy of any investment opportunity. Consider seeking guidance from a registered financial advisor.
Verify credentials: Always ask for a valid SEBI/RBI license before taking any investment advice. Trusted institutions won't hesitate to provide this information. Remember, the scamsters of the past allowed investors to participate in an IPO even after it closed - such claims are a clear sign of manipulation.
Be wary of unrealistic promises: Don't chase after offers of quick and easy riches, especially online. High monthly returns (like 5-20 per cent) are a red flag for scams. Be content with steady, realistic gains (like 1-2 per cent per month).
Practice secure online habits: This includes using strong, unique passwords for each account, never saving them online, and keeping personal information private, even from close friends. Update your login credentials regularly to add an extra layer of security. Don't spend money on unverified websites.
Report Suspicious Activity: If you suspect a scam, report it immediately. In India, you can report to the local police, the Cyber Crime Cell, and organizations like the RBI.
By following these tips, you can navigate the exciting Indian market while safeguarding your hard-earned money. Even if a crowd claims to be making huge profits, don't be swayed. Exorbitant returns often signal a scam. Stock markets offer good returns over time, not overnight. Remember, scammers thrive on creating a sense of urgency and FOMO. Take a deep breath, research, and invest wisely.