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Protecting yourself from Investment Scams

It seems like every month or so we hear of a financial predator that has conned another group of investors. Whether it's Earl Jones from Montreal, Ian Thow from Victoria or Bernie Madoff in New York, the list of con artists and their victims grows yearly.

The natural reaction from the public is that the group who were victimized must have been naive and gullible, however that is not the profile of the average victim. Shockingly, the typical profile of a victim is a married male in his 50s. This individual tends to have a high level of education, above-average income, and complete confidence in their decision-making capabilities. Greed is the primary motivation for this group of investors to get involved.

Lottery of sweepstakes victims tend to be female, more elderly and with lower incomes. These victims are often not motivated by greed; they often get involved with these bogus lotteries to help their favourite charity, religious group or relatives.

Here's a quick list of the most common types of fraud and their characteristics:

Affinity Groups

• The fraud artist tends to prey on members of the same association and uses his/her connection to the group as validation. This includes religious congregations, ethnic communities, non-profit organizations & charities, sports associations and business groups.
• Credibility is established once they do business with one member, who in turn refers them to another member of the group. This is especially true if one of the early participants is someone held in high esteem by the other members, such as a pastor, a director on the board, or someone who is in senior management.
• In most cases, the fraud is based on the belief that investing with the advisor will not only benefit the individual, but the group itself will also gain from the transaction.
• The fraud itself could be based on unrealistic returns and can mimic classic pyramid schemes. Others are promoted as unique investments (not sold by traditional banks or other legitimate investment firms) and are offered only to a select group.

Pyramid & Ponzi schemes

• Named after the Italian swindler Carlo (Charles) Ponzi, who is the early 1920's defrauded thousands of investors in the Boston and NYC area.
• Ponzi promised returns of 50% in 45 days, and a full 100% in 90 days by using investor's funds to buy postal reply coupons.
  
• The basic premise of this scheme and all other "Ponzi Scams" is that early investors are paid with the deposits from those investing later into the scheme. The pyramid structure can only succeed if new investors are consistently brought in, so the early investors can continue to receive their artificial returns.
• The scheme collapses when no new investors are brought in and payments can no longer be made.
  

Exempt Tax & Security Frauds

•  This fraudster creates the illusion that  he/she has developed a new financial product that has very favourable taxation benefits. This could be because the product or company is registered offshore or because they have interpreted existing tax or securities law to their advantage.
• Unless CRA has given an advanced ruling, these schemes tend to collapse once investors are audited, and the deductions disallowed.
  

Bioler Room and Pump & Dump Stock Swindles

• In the 1970s and 80s, the Vancouver Stock Exchange (VSE) had the dubious distinction of being one of the most unregulated exchanges in the world. After being merged with the TSX in the 1990s to form the Venture Exchange, the worst of the offenders were expelled. They have since reformed on the OTC Markets, trading on the notorious "Pink Sheets".
• OTC Markets allow private companies to go public by issuing shares known as the "Initial Public Offering". Due to the lack of regulations, many of these companies are fronts for organized crime groups. Others simply have no credible business plan and are designed to enrich a closed group of insiders.
• Investors who buy in after the IPO is floated tend not to be part of the insider group, and end up suffering the greatest losses.
• Many of these stocks are sold through telephone solicitation, email enticements and through Affinity Groups.
  

So how can you protect yourself?

1. First and foremost - if it is too good to be true, it usually is! Common sense dictates that no legitimate investment doubles your money without risk - the higher the promised rate of return, the higher the risk.
2. Do a background check. Check the Better Business Bureau or contact the Securities Commission in any of the provinces. Most have a list of past offenders. At the very lease do a "Google" search of the individual or company. You never know what will show up from their past.
3. If the investment is being offered only to a select few, or information is not to be shared with others; the chances are high it is a fraud. "Insider Trading" is illegal in North America and this should be an immediate red flag.
4. Are you being rushed into a decision OR are given only a short window of opportunity to buy the investment? High-pressure sales tactics with limited time offers should make you very concerned about the investment's authenticity.
5. Do you really understand how the investment works? If you cannot describe the inner workings of the product in a few sentences to a friend or family member, remain cautious of it. If you don't understand it - don't buy it!
6. Educate yourself. If you have an interest in investments, securities, stock or bond markets, take a course. While the Canadian Securities Course is still the preeminent source of knowledge in the investment sector, others that are less expensive and demanding are available. Many discount brokerage firms offer basic financial courses to their clients for little or no cost. Courses are also available through community colleges, recreation & retirement centers.
7. Never, ever write a cheque to the individual or their private company. Any legitimate investment will demand the cheque is payable to the actual firm and not the broker or advisor. You have little recourse should you invest directly with the advisor and circumvent the financial institution. When Ian Thow was exposed as a fraud, his firm Berkshire Securities Inc. compensated some of the investors if the investments were held by Berkshire. However, those who invested directly with Thow (considered as "off book transactions") were not eligible.
8. In the event you have been defrauded, contact the authorities as quickly as possible. Too often these types of fraud are not reported as the individual feels shame and embarrassment for their indiscretion. Once the proper authorities (including the RCMP) are advised, they can move quickly to freeze the perpetrator's assets. This is especially true for investments that are moved offshore, making recovery of assets even more difficult.
   

Finally, if you are intrigued by a specific investment opportunity but don't fully understand it, ask questions. Get second opinions from your accountant, lawyer or other financial advisor.  

Posted: June 2010

2010 Federal Budget highlights

On March 4, 2010 the Harper government released its fifth 2010 budget. The focus of the budget is to continue to support economic growth, jobs, infrastructure and industry in recognition of the recent recession. Proposed changes that will affect taxpayers include:

•  Child benefit entitlements (shared custody) -The government has proposed to allow parents who live apart, and equally share the primary responsibility in raising the dependent children, to equally share the Canada Child Tax Benefit and the Universal Child Care Benefit.
  
• Universal Child Care Benefit for Single Parents - For 2010 and subsequent taxation years, single parents are entitled to elect to have the Universal Child Care Benefit transferred to the tax return of the eligible dependent for with the benefit is being paid for. This is to allow single parents to take advantage of the lower tax margins of their dependent children.
• Medical expense tax credit - purely cosmetic procedures - Expenses incurred after March 4, 2010 for cosmetic surgery, which is defined as procedures purely aimed at enhancing a taxpayer's appearance, will no longer qualify for the medical expense credit. Cosmetic procedures that are required for medical or reconstructive purposes will still be eligible.
  
• RDSPS and RESPS  - Certain measures relating to Registered Disability Savings Plans (RDSPs) and Registered Education Savings Plans (RESPs) have been relieved.
• Rollover of RRSP, RRIF and RPP proceeds to an RDSP - The budget proposes to allow the RRSPs, RRIFs and RPPs of a deceased individual to now be eligible to roll into a Registered Disability Savings Plan of a financially dependant infirm child or grandchild of the deceased. The transfer amount is limited to the available contribution room of  the RDSP. This transfer will not attract a matching grant contribution from the government. The allowable rollover will apply to any deaths after March 3, 2010 and transitional rules apply to deaths occuring after 2007 and before 2011 to allow the estate to take advantage of this tax treatment. Once the child withdraws the funds, it will be taxable at their hands.
• Carry forward of RDSP grants and Bonds - The budget proposes to allow a 10 year carry forward of Canada Disability Savings Grants and Canada Disability Savings Bonds not used by the RDSP beneficiary. Currently, beneficiaries are not entitled to this carryforward.

Source: Kroft, Ed. April, 2010. Taxmatters. Outlook: A Publication of the Certified General Accountants Association of British Columbia.  Volume 37, no. 1, pg. 5. 

For further information please contact Athcison Palmer Leslie, C.A.'s in Duncan B.C. or Ladysmith B.C.  

Eligible Home Renovation Tax Credit Expenses

• Home renovations for a kitchen, bathrooms or basements; including new flooring, window replacement and doors, blinds, shades, shutters, lights and ceiling fans.
• Heating improvements - furnace or wood stoves, insulation, fuel tanks
• Water heaters and water filtration systems.
• Electrical upgrades and improvements.
• Re-roofing, shutters and awnings.
• Wells and septic systems.
• Painting – either the interior or exterior of your home.
• Heat pumps and solar paneling – for homes, pools and hot tubs.
• Air conditioning and ventilation system.
• Building additions including a deck, garage, storage shed or fencing.
•  New driveway or re-surfacing a driveway.
• Swimming pools and hot tubs of a permanent nature, including installation costs.
• Home security system equipment and installation.
• Retaining walls.
• Landscaping, sod or rocks, trees, shrubs and flowers of a permanent nature.
• Yard improvements – ponds, garden ornaments or lighting.
• Costs associated with improvements or renovations; such as building plans, permits, professional services, equipment rentals and incidental expenses.

You will not be required to submit copies of your expenditure invoices, however you will need to indicate the name of the supplier of the goods and services together with their GST number [so you can be sure CRA will track the expenses to ensure the service or material providers are filing their GST and income tax returns.]

In order to ensure your claim for Home Renovation Tax Credit is complete and correct see Atchison Palmer Leslie Chartered Accountants. 

Posted: February 2010