How to spot a financial scam

Con merchants have been around since the dawn of time but the electronic age has delivered them more opportunities than ever to find and rip off victims. Government statistics suggest that fraudsters target around 28 million consumers a year in the UK alone, with a total of £1bn lost. One type of scam, aimed at investors in particular, costs each victim an average of £20,000, and in some cases over £100,000, according to the Financial Services Authority (FSA).

And if you think you could never be fooled, the FSA points out that the typical victim of these "boiler rooms" is not usually some gullible old lady, but in fact a middle-aged man with more than a little financial experience behind him often precisely the sort of person who reads investment magazines such as MoneyWeek. Worse still, the FSA says it fields around 100 calls a month.

With this in mind, we highlight the main features of boiler-room' scams, along with three other easy money' schemes and show how you can avoid becoming the next victim.

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Financial scams: the boiler-room'

Boiler-room' scams so called because they're usually run out of small rooms based in hot countries try to convince investors to buy bogus investments, then pocket the cash. First, a cold-calling centre is set up in a location with lax securities law-enforcement. This may be somewhere like Thailand or Panama, but could be as close as Spain. Sales staff on commissions of up to 15%, according to Investors Chronicle, then have the task of persuading overseas investors (often in the UK) to hand over their money. The unsuspecting target is wooed through a combination of slick investment research sent by email or post and finely honed sales patter.

One former boiler-room worker tells The Guardian: "I would always start off by telling cold-call targets they had responded to a marketing survey in the past year never true, as we got names and numbers from UK shareholder lists." Often the investments offered are entirely non-existent; other boiler rooms sell real but illiquid investments, such as Reg-S shares obscure warrants in US companies designed for overseas investors, which always trade at a substantial discount to the real quoted shares. The boiler-room sellers will claim they are worth the same as quoted paper, but available at a small discount to get buyers interested. When the buyer checks the share price, they will find a genuine company, trading at a much higher price than the bargain' they are apparently being offered. In reality, any purchaser who subsequently tries to sell will struggle and losses can easily reach 70% of the initial investment, according to the City of London police.

To allay the initial suspicions of the potential investor, the contact address or telephone number given by the sales team is often European, Asian or American. This adds an aura of credibility to the scheme, but ultimately all calls are routed back to the boiler room, a tiny operation that could be based anywhere. The trick is to persuade as many investors as possible to part with their money in the shortest possible timeframe. Once sufficient cash has been amassed from unsuspecting investors, the boiler room is shut down and any money transferred by the victims is lost. And unfortunately, the FSA is powerless to help: under its financial services compensation scheme, claims against unregulated or unauthorised firms aren't covered.

Don't be conned: Firstly, no reputable financial services company would cold call you out of the blue to try to sell you high-risk investments don't try to talk to them, just hang up. And if you're not sure about a company, check with the FSA whether it is regulated or not you can do so at the watchdog's website, www. fsa.gov.uk, where it also holds a list of companies that are known to be boiler-room operations.

Financial scams: the advanced-fee scam

The chances are that if you've ever had an email account of any sort, you've at some point received a message that looks a little bit like this:

"DEAR SIR,

I HAVE THE PRIVILEGE TO REQUEST FOR YOUR ASSISTANCE TO TRANSFER THE SUM OF $47,500,000.00 (FORTY SEVEN MILLION, FIVE HUNDRED THOUSAND UNITED STATES DOLLARS) INTO

YOUR ACCOUNTS"

The email (approaches are sometimes made by phone or post, but the

broad outline is the same) is usually all in capital letters and replete with spelling and grammatical errors. It goes on to explain how you can

claim a stake in Saddam Hussein's secret gold stash, or asks you to help

get a huge sum of money out of some war-torn dictatorship, in exchange for a cut of the money usually millions of dollars.

This type of fraud, known as the Nigerian 419 (after a section of

the country's penal code that outlaws such activity), involves hooking the investor with an apparently unmissable opportunity to make a life-changing sum for next to no effort, then persuading them to part with either an immediate cash fee to cover "administration" expenses or UK bank account details so that their account can subsequently be drained.

Other, similar scams, that promise vast amounts of money in exchange for an upfront fee (generally a few thousand pounds), include fake lottery games. The target is told of a large unclaimed prize in a non-existent lottery (such as the "Irish Heritage Lottery", for example) and asked to send up-front funds to cover "administration" or "legal" expenses to process the claim, which of course never materialises.

To add insult to injury, the phone number used by the victim to make the claim may even charge a premium rate! Fifty Singaporeans were recently duped out of a total of $150,000 this way.

In another variation, the initial leaflet or phone call promises huge commissions from home-working for a fast-growing and fabulously successful business. All it asks from the enthusiastic future employee is cash to cover start-up "franchise" costs or training materials. The job turns out to be non-existent, or the initial projections of future "on target earnings" prove wildly optimistic.

More recently, some scams have involved the payment of an upfront "arrangement" fee in return for a loan on preferential terms. The target is often someone with a poor credit history who would otherwise struggle to borrow. In the current environment of spiralling household debt, these offers can seem all too tempting.

Don't be conned: It does seem extraordinary that people can fall for these scams, but they do. Why would a complete stranger offer you millions of dollars, or how could you win a lottery for which you don't even have a ticket?

Financial scams: The investment seminar

"Learn here how you can have a career change by becoming a stockmarket investor/trader," claims Darren Winter's Win Investing publicity. It would seem that the route to stockmarket riches is available to all and a free seminar will show everyone how it is done. So far, so tempting. Unfortunately, the seminar is just a taster promising unlikely returns of up to 450%, according to one BBC participant. Unearthing the real "secrets" requires willing investors to part with just over £2,000 to cover the cost of a two-day follow-up course. Similarly, at Inside Track, you can learn to "quickly build a property investment portfolio" while "avoiding the mistakes that amateur landlords make" for just £2,495, says The Guardian. But that is just the start budding investors are then asked to part with up to £12,995 as a membership fee, followed by £250 per month thereafter.

Don't be conned: The harsh reality is that investing successfully in either shares or property actually requires experience and hard work rather than two days listening to investment advice that could be picked up for a fraction of the price by simply reading a decent book on the subject. Remember the majority of fund managers, backed by armies of analysts, fail to beat the market on a consistent basis, so the chances of a group of amateur investors finding some hidden stockmarket secret in a weekend are more than unlikely. For every major winner there are countless losers in a free market, an awkward point that the investment seminars tend to gloss over. They also play down inconveniences such as void periods and the impact of interest-rate rises when targeting buy-to-let investors.

Financial scams: fee claim services

These schemes make money by offering to pursue compensation claims on behalf of clients in return for a percentage of the amount recovered. Past claims have ranged from mis-sold endowment policies to accidents and personal injuries. The latest firms in this market pursue claims for excessive bank charges. The service is marketed on the basis that the claims process is complicated for customers without access to the internet. This justifies the payment of 15%-30% of the amount recovered to specialist firms such as Renaissance Easy Claim, Bank Justice and Conkers. In reality, as Which? magazine says, you can recover these charges simply by writing to the bank direct. You can download a step-by-step guide from www.moneysavingexpert.com.

Overall, there's just one golden rule to remember with scams and over-the-top offers: if it sounds too good to be true, it almost certainly is.

Tables turned on the con artists

You might think a seasoned con artist would be able to spot a fellow scam merchant at 100 paces but it seems not. Some e-vigilantes turn the tables on email scammers with amusing results. In one exchange, Mr William Smith, apparently "a member of the Special Budget and Planning Committee for the Ministry of Petroleum in Nigeria", writes to Mr Arthur Dent, requesting details of a UK bank account into which $10m from sales of Gulf War oil can be transferred. Dent replies that he hasn't got time, as his firm urgently needs handwriting samples for a research project and will pay $100 a page does he know anyone who can help? Smith is sucked in and ends up supplying Dent with 300 pages of handwritten copy, over a period of several weeks, before finally realising he's been conned himself.

In other cases, scam merchants are persuaded to take pictures of themselves in ludicrous poses or holding up insulting signs to persuade the target' of their genuine intentions. For a look at this rogues' gallery, and more on 419 scams, see 419eater.com.

Financial scams: Beware cash-rich buyers on the Costa

The latest scams to come to light target desperate sellers in the increasingly rocky Spanish property market where cash payments are still a regular feature of many transactions. Victims are being caught out by two types of dodgy practice; the "rip deal" and the "B - money scam"

In a "rip" a buyer contacts a seller pretending to be very keen on getting a deal done quickly. They ask the seller help them convert a large sum out of one currency into another to enable them to pay a large cash deposit on the property. The gullible seller may agree to meet to do the currency swap not realising that the cash they are getting in return for their own is counterfeit.

The second scam plays on the victim's greed and may result in them ultimately losing their property and cash a double whammy. The seller is persuaded to transfer title to their property in return for only part of the sale price. The balance is paid in cash and not declared to the authorities. The cash later proves to be fake money at which point the seller has already given up title to their property and risks prosecution for tax evasion and/or money laundering should they take up the issue with the local authorities.

Our advice? Always be suspicious of anyone offering to do a large deal in cash especially if they want to move fast or the deal is to be based on a non-market price.