The rising threat of fraud

There is no doubt occurrences of fraud, being reported globally, are on the rise. You cannot open a newspaper these days without reading articles covering instances of unsolicited or scam calls, e-mails alleging banking problems offering links to bogus websites, or parcels and online payments being held up while a release fee is demanded. There are many other examples, all leading to unsuspecting victims being coerced into parting with their legitimately earned funds or their personal data.

What type of fraud?

According to the US Securities and Exchange Commission (SEC), those who might be desperate to make up for lost income as a result of the pandemic are at a heightened risk. Fraudsters work overtime to target these vulnerable individuals in an attempt to steal their hard-earned money through securities fraud. One of the initiatives to combat this is an Investor Alert issued by the SEC’s Office of Investor Education and Advocacy, highlighting the pitfalls such as Ponzi schemes, fake certificate of deposits, stock promotions involving covid-19 claims and community based financial scams.

Who are the victims?

Many frauds are undertaken as a result of financial grooming. While people of all ages are potentially vulnerable to fraud, according to a report (“Older people, fraud and scams”) by Age UK, almost 5m older people (65+) believe they have been targeted by scammers. There is also the likelihood many frauds remain unreported, and as such are not investigated, hence resulting in a much higher figure.

Unfortunately, low interest rates present those inclined to commit fraud with a golden opportunity. Incidents such as a recession or the pandemic simply increase such opportunities for exploitation. Supplementing a pension from bank savings is a thing of the past, meaning cash-rich pensioners are increasingly going in search of higher returns – without fully understanding the risks they are taking. The “retired with resources” sector provides fraudsters with a pool of potential victims – particularly if they have recently suffered the death of a partner who managed their financial affairs, or are socially isolated. Fraudsters are often charming, believable, and hugely ambitious – and little is known about how fraudsters financially groom their fraud victims. Understanding such vital information could help society to protect our most vulnerable from the trauma of falling victim to fraud – and assist in the investigative process.

Which laws help?

Article 2 of the Investors (Prevention of Fraud) (Jersey) Law 1967 (“the Law”) creates the offence of making any statement, promise or forecast which a person knows to be misleading, false or deceptive or by any dishonest concealment of material facts or by the reckless making (dishonestly or otherwise) of any statement, promise [or] forecast which is misleading, false or deceptive and which induces or attempts to induce another person to act in circumstances listed from Article 2(a) to 2(d) of the Law. Some of the most significant convictions of prominent figures within the finance industry in Jersey have been secured under Article 2 of the Law, which carries a seven-year term of imprisonment and/or a fine. Similar provisions exist in the UK and many other jurisdictions.

Any financial services businesses drafting a prospectus or marketing material should be acutely aware of the requirements under Article 2. Securing a sense check of such material by a legal adviser with experience of the Law is highly advisable. Releasing a misleading prospectus, even if not done dishonestly, is a sure way to end up on the wrong side of the law.

How can this be prevented?

So, what can be done to combat such behaviour? In short, if you or someone you know is concerned, seek advice from an expert with experience of identifying or dealing with financial grooming, such as your bank. Ensure any documentation provided (loan agreements etc.) is subject to proper review and scrutiny. If no loan agreement exists, be suspicious. If you are a financial services business, you should implement policies and procedures to prevent a rogue member of staff acting as a financial groomer, ensure you have a strictly enforced policy on dealing with vulnerable clients and any conflicts of interest are declared and managed. Check the policies are being adhered to and require employees to sign and acknowledge they have understood the requirements of the conflicts and vulnerable person policy on an annual basis. If you are an investment business, it is a Jersey Financial Services Commission Investment Business Code of Practice requirement to identify and afford appropriate protection to vulnerable clients.

Lastly but importantly, if you suspect a fraud is occurring, do not overlook your responsibility to file a suspicious activity report with the police. The financial groomer may be targeting other vulnerable victims – and failing to file could leave them exposed.

Sharon Sargeant is a compliance consultant with Baker Regulatory Services, St Helier, Jersey: bakerregulatory.com