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Spotting Financial Fraud
Donít be a victim of a financial scheme

Each year, Americans lose an estimated $50 billion to financial fraud schemes. The most likely to be victimized are well-educated, financial-savvy males, age 55 and older. That’s why it’s important to be able to detect financial fraud.

There are a several financial schemes to be aware of.
 
“Ponzi schemes, pyramid schemes, stock, pump and dump schemes, all of which sound very scary,” explained Ann Harkins, president and CEO of the National Crime Prevention Council.
Ponzi scheme: When people are tricked into putting their money into a fraudulent investment.

Pyramid schemes: A scam that typically involves an exchange of money in the hopes that there is money to be earned (it usually involves a sign-up fee), but in the end, there’s no product or service.
 
"There are a lot of pyramid schemes that like to disguise themselves as legitimate direct-selling companies. That creates an environment where there can be confusion,” said Joe Mariano, president of the Direct Selling Association.

Pump and dump scheme: In an attempt to sell stock, the price of it gets raised “through recommendations based on false, misleading or greatly exaggerated statements,” according to Investopedia. That way, the stock can be sold at a higher price.

Since all of these schemes are done so sneakily, they are not able to be easily spotted. There is no oneway in which people commit scams. The Credit Management Association compiled a list of the many ways in which people perform financial fraud.
 
“The encouragement of investment through the sale of stock; demonstrating increased earnings per share or partnership profits interest thus allowing increased dividend/distribution payouts; covering the inability to generate cash flow; obtaining financing, or more favorable terms on existing financing; dispelling negative market perceptions; receiving higher purchase prices for acquisitions; demonstrating compliance with financing covenants; meeting company goals and objectives and receiving performance-related bonuses,” According to the Credit Management Association.

Here are some ways to help you steer clear of becoming a victim of financial fraud:

Talk to experts. “The way to prevent [financial schemes] is to check and ask. Get expert advice and make sure the people you’re talking to are appropriately registered with their states and the SCC,” said Ann Harkins.

Confirm that your adviser is legal. Anyone can call themselves a financial adviser, so it’s important to make sure they are legit — meaning the adviser is either from the National Association of Personal Financial Advisers, the Financial Planning Association, the Certified Financial Board of Standards or other national organizations.
 
"Reputation and apparent track record are not enough," said Tim Kochis, chief executive of Aspiriant, a wealth management firm with offices in California. "You have to go way beyond that to really investigate the operations of the org and find out if what is claimed is real."

Know the intention. “Most times, fraudulent financial statements are used to deceive people to gain credit,” said Bruce Dubinsky, MST, CPA, CVA, CFE. “Learning to understand the motive of why financial statements are submitted to you will give you a heads up of detecting fraud.”

Evaluate financial statements. There are a number of inaccuracies that can occur in a financial statement that may represent fraud. Any recorded revenue or expenses should match that of the company’s — otherwise, if the amount is off enough to affect the actions of users, it could be considered fraud. "Put your level of professional skepticism as high as it can be without hindering the performance of your job,” said Dubinsky.

Be skeptical. Always keep this thought in your back pocket. If it seems too good to be true, it probably is. Ask questions, and make sure you understand what you’re really investing in. “If you don't understand it, you shouldn't be in it,” explained Jim Wiandt, editor and publisher of the Journal of Indexes.

If you believe you’re a victim of financial fraud, or you suspect financial fraud, visit this website for help: http://www.fincen.gov/help4victims.html

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Published by Central Bank of Kansas City
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Disclaimer - All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.  This is an advertisement.
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