Don’t Let Crooks Take You for a Ride Overseas
Whenever some type of investing gets hot, you can bet that con artists will be quick to try to capitalize. That’s what’s happening now with international investing.
Growing euphoria about overseas investment opportunities--fueled by the opening of Eastern Europe and the 1992 trade integration of Western Europe--has sparked a growing “internationalization of fraud.”
By simply adapting time-honored cons honed in domestic investment swindles, scamsters are peddling bogus or high-risk investments in foreign stocks and precious metals, overseas certificates of deposit with sky-high interest rates, coins and international currency speculation. They all promise inflated returns that appeal to greedy, uncritical investors.
The North American Securities Administrators Assn., a group that represents state regulators, lists a number of examples of such scams, including:
A Ponzi scheme in which a La Jolla promoter, Jack B. Backer, had investors pouring money into supposed high-yield Australian, Indonesian and New Zealand bank certificates of deposit. One promotional item suggested that investors could earn a net return of 38%. Backer, after learning that he was under investigation by the FBI and the state Department of Corporations, committed suicide with $25 million of investor funds unaccounted for.
A scheme that promised returns of 12% per week from swapping dollars for Mexican pesos. As much as $150 million was taken in this scheme, masterminded by a Tulsa, Okla., man who even attracted funds from members of a Texas motorcycle gang.
Other frauds involve investments that are initially legitimate but highly risky. Promoters often don’t fully disclose such risks. If the deals go sour, the promoters may cover up losses by improperly using investor funds.
“Many of these are U.S.-based con artists who have simply cashed in on the international investment euphoria,” says Scott Stapf, investor education adviser for the North American Securities Administrators Assn. “They figured out where investor psychology is and have come up with scams to cash in on that.”
“This is something that we’re just beginning to see; a year or two from now, we’ll have seen an explosion of this type of operation,” says G. William McDonald, enforcement chief for the California Department of Corporations. McDonald adds that Los Angeles will be a primary center for such fraudulent activity.
Regulators and law enforcement authorities such as McDonald also have a new problem. More telemarketing “boiler rooms” based in Southern California or Florida have shifted their operations to such places as Panama, Costa Rica, the Bahamas, Canada, Europe and even South Africa.
State and federal regulators--already hard-pressed to monitor fraud based in the United States--find it nearly impossible to track and prosecute these cross-border scams. Con artists working from foreign outposts usually can avoid extradition and U.S. banking regulations. It’s far more difficult, if not impossible, for consumers to recover their funds.
How can you avoid being taken in such deals? In many of the same ways you avoid domestic frauds.
First, recognize the telltale signs of these scams. Con artists often use similar approaches. Many try to get you to invest quickly, promising returns that may vanish if you don’t hurry. Some try to get you to wire your money to an offshore bank. Some use couriers who show up at your home or office, a way they can speed up receipt of your cash while avoiding mail fraud problems.
Second, don’t invest in anything you can’t verify the existence of. If anybody asks for cash before you can see or independently verify what you’re investing in, just hang up or walk away.
Third, use common sense. If the investment is really guaranteed to make a 50% profit in a year, as some fast-talking salesman might promise, ask yourself why he is telling you about it and not keeping it to himself instead and putting all his own money into it. If you knew of such a sure-fire investment, would you tell total strangers about it?
Fourth, get good advice before investing. If you see a brochure from a salesman promising high returns from some overseas deal, show it to an accountant or other professional who could tell you whether it makes economic sense and would pass muster under tax laws and other regulations, California enforcement chief McDonald suggests.
Finally, remember that there are plenty of legitimate foreign investments offered by reputable, regulated professionals or firms. These include scores of mutual funds investing in foreign stocks or bonds. They are required to file prospectuses and other documents that spell out past performance and risk factors.
“If you want to invest internationally, do it through a regulated professional rather than some bozo calling and offering Singapore options,” McDonald says.
MARKET IDIOSYNCRASIES
Not all foreign investments are bogus. A growing number of investors are buying stocks of legitimate firms in overseas markets.
If you decide to do this, be aware that there can be significant differences in procedures, rules and regulations between foreign markets. The North American Securities Administrators Assn. notes just a few examples:
* Belgium, Italy, Spain, Sweden and Taiwan. They have no prohibitions against insider trading.
* Britain. The London Stock Exchange allows “bear raids”--speculators trying to drive down stocks through short-selling. That practice is strictly limited under New York Stock Exchange rules.
* Colombia. The Bogota exchange is considered by some law enforcement officials as a front for various illegal operations, including the laundering of drug dollars.
* Hong Kong. This colony’s stock exchange has been plagued by scandal since crash of October, 1987, including the arrest of its chairman and seven other officials for taking bribes from companies trying to float new issues.
* South Korea. This market is one of the world’s least open. Nonresidents can only own South Korean stocks indirectly through nine trust funds.
