How Big Tech platforms have turbocharged investment fraud
By Mark Kenkre
Mark Kenkre explores how fraudulent investment schemes have proliferated, and how social media companies may be profiting from them.
The use of social media in luring people into investment scams has exploded, partly due to an overall increase in fraud.
The Victims Commissioner, Dame Vera Baird, argues fraud has now reached “epidemic proportions.
“The scale of its recent growth is truly staggering... Fraud has become the volume crime of our times – an epidemic within a pandemic. It is the biggest crime in England and Wales by a whopping margin, accounting for as much as 39 per cent of all crime in the year ending March 2021. That’s nearly two in every five crimes.”
Social media fraud
Investment fraud via social media has been particularly significant, resulting in £63mn in losses in the UK in the first quarter of 2021. Superintendent Sanjay Andersen of the City of London Police’s National Fraud Intelligence Bureau warned “reports of investment fraud have increased significantly since the start of the coronavirus pandemic, which is unsurprising when you think the vast majority of us have had to conduct nearly every aspect of our lives on a computer or mobile phone. Being online more means criminals have a greater opportunity to approach unsuspecting victims with their scams.”
The Chairman of the Financial Conduct Authority (FCA), Charles Randell, has called on both the social media companies and the government to take action. Mr Randell recently told the Cambridge International Symposium on Economic Crime, “Google has committed to stop promoting advertisements for financial products unless an FCA-authorised firm has cleared them. Google is doing the right thing … We now need other online platforms - Facebook, Microsoft, Twitter, Tiktok – to do the right thing too. And we think that a permanent and consistent solution requires legislation.”
The growth of such frauds is demonstrated clearly by the Office of National Statistics figures which showed a 44 per cent increase in overall financial investment fraud in the first quarter of 2021. That financial year was the first full year of the pandemic. Action Fraud reports, in the same period, 5,039 reports of investment frauds cited a social media network. Instagram was mentioned in 35.2 per cent of such cases, while Facebook appeared in 18.4 per cent of reports of investment fraud carried out via social media.
Mr Randell has welcomed the government's proposals to include a limited number of financial harms in its draft Online Safety Bill, such as where a fraudster directly messages a target online. However, he noted “paid-for advertising, the main source of online investment scams, is still not covered - we consider it should be.”
Misleading advertisements, which offer high returns, guaranteed income or other promises, are becoming rife on social media. Such ads are becoming increasingly sophisticated, and involve the use of realistic cloned websites, which pose as legitimate and trusted financial institutions. Other common ruses involve fake celebrity endorsements, where fraudsters use celebrity photos to give the impression a trusted public figure is endorsing their investment. Many also falsely state they are regulated by the FCA.
Social media enables fraudsters to reach a large number of victims swiftly and cheaply. What’s more, social media advertising can be tuned to specifically target groups who may be particularly vulnerable to fraud. One purveyor of questionable ads told Bloomberg bluntly social media companies, “go out and find the morons for me.”
The FCA says consumers can check a firm’s bona fides on the FCA warning list and the FCA register of regulated firms. Yet the adoption of cloned websites can sometimes give a false impression. You can spot a fake website by searching for the company and ensuring you have been guided to a legitimate website. Bad grammar or spelling are other signs a site is fake.
It’s worth checking whether a padlock appears alongside the URL, which indicates the site is encrypted. While it may be useful to search for reviews to find out whether a website is valid, the reviews could be fake too. A large number of similar positive reviews can also indicate the reviews are fake. It's easy for fraudsters to appear credible and difficult for investors to tell the difference between fact and fiction.
Users are not only subjected to targeted ads, but also to personalised direct messages. Action Fraud reports 8 per cent of all cloned company fraud victims had initiated contact with the suspect following a direct approach, or after seeing an advert on a social media platform.
Elderly users, who are often less internet savvy, have traditionally been the regarded as particularly vulnerable to such scams. However, when social media is used to carry out investment scams, it actually seems the younger demographic is more at risk. The City of London Police says the under 30s are most affected by social media investment scams. 27.5 per cent of all investment fraud victims who mentioned social media in Action Fraud’s report were aged 19 to 25. By contrast, when social media wasn’t involved, the average age of victims was over 50.
This may be down to greater social media use amongst younger demographics. It also may be due to young people being more open to investing in new cryptocurrencies. Fraudsters are targeting interest in crypto assets, with 44.7 per cent of all social media investment frauds reported by Action Fraud involving cryptocurrency scams.
A large proportion of such scams involve online trading, whether it be in cryptocurrency, stocks or foreign exchange. The FCA guidance on online trading scams says such scams are “are often promoted online and via social media channels.” It also notes “Most consumers report initially receiving some returns from the firm to give the impression their trading has been successful. They will then be encouraged to invest more money or introduce a friend or family member to invest. However, eventually the returns stop, the customer’s account is suspended and there’s no further contact with the firm.”
Fraudsters typically present professional and credible looking online adverts, emails, and websites which advertise fake investment opportunities in cryptocurrency, foreign exchange trading or bonds. Often, fake testimonials are accompanied with a picture of a well-known personality.
Once someone has fallen for a scam, their risk of being targeted again immediately increases. They are likely to be added to what’s known to fraudsters as a “suckers list.” Fraudsters may sell on their contact details or target them again themselves. The FCA warns “If you have already invested in a scam, fraudsters are likely to target you again or sell your details to other criminals. The follow-up scam may be completely separate or related to the previous fraud, such as an offer to get your money back or to buy back the investment after you pay a fee.”
It is well within the competency of social media companies to vet ads and to only permit ads for genuine, responsible, FCA regulated firms. Unfortunately, this is not being done. This means it is up to consumers themselves to be on their guard for the warning signs an investment may not be genuine. Any social media advert promising unusually high returns, unrealistic guarantees or ‘get rich quick’ schemes should be avoided and reported, both to the social media platform and the police.
The liability of social media companies
The question of whether social media companies could be held civilly liable for negligently failing to prevent fraud would of course depend on the facts of a given case. However, some social media companies outsource vetting ads to third parties, perhaps in an effort to also outsource liability.
A Buzzfeed investigation noted social media companies typically keep the money earned from investment scam ads. Bloomberg also reported social media companies even look the other way, even when users accounts are hacked and then used to promote scams. The reality is many social media companies are making millions from fraudulent advertising, which disincentivises them to crack down on scams.
The government should impose regulations requiring social media to properly vet ads before publishing them. However, perhaps the most crucial aspect of any such regulation may enable users to hold social media companies liable for any losses they suffer from fraudulent advertisements.
For now, consumers should keep their wits about them online. Perhaps the best advice is: if it sounds too good to be true, it probably is.
Mark Kenkre is a Partner at Keller Lenkner UK kellerlenkner.co.uk