In February 2019, a Surrey, B.C. pastor, his son and another man were fined for taking $450,000 from two investors. The pastor and his son exploited a shared spirituality with one of the victims, and told her they would use the money to invest in real estate that would generate a high rate of return. Instead, they spent the money on themselves.
It was a classic example of what the B.C. Securities Commission (BCSC) calls the “trust trap” – a common method of conning people out of money. So what exactly is a “trust trap”?
In partnership with the B.C. Securities Commission, we look at how people can protect themselves when investing and how to avoid falling into the trap.
What is the “trust trap?”
When it comes to investment fraud, the “trust trap” is exactly what it sounds like: people are more likely to invest in an opportunity when it comes from someone they know or trust.
“When an investment is brought to people under those circumstances, they may let the trust relationship crowd out all of the other factors they should consider,” says Doug Muir, the B.C. Security Commission’s director of enforcement.
Many investment fraud schemes target specific communities or social clubs and use the relationships and trust formed in those settings to swindle people,” he notes.
“The person may not do their own independent analysis of the investment, and that can often lead them to make an investment that’s not good for them.”
A study released in March 2019 by the B.C. Securities Commission found that about 12 per cent of British Columbians have sunk money into a fraudulent investment.
At the same time, fewer than half of B.C. residents – 44 per cent – could recognize all of the warning signs of fraud. The least recognized warning sign: being encouraged to invest in something by friends and family who have already done so.
Asking the right questions
According to the commission, B.C. residents have lost millions of dollars by making investments on the advice of someone they trusted. Sometimes that person has malicious intent, while others have been caught up in a scam and support the fraud unknowingly. Muir likens the process to a virus, where a person is unaware they’ve passed a sickness along to others.
Instead of following someone else’s investment lead, and to protect yourself from falling victim to a scam, Muir encourages people to do their homework before putting their money toward something. He says it’s important to determine your financial goals and your risk tolerance, as well as how much money you actually have to invest.
Know the signs
Although the “trust trap” is one of the lesser-known indicators of a potentially fraudulent investment, Muir says there are other warning signs to look out for.
Among them is feeling the pressure to invest by the person who brought you the idea, being made to feel as if you’re missing out on a great opportunity and being guaranteed a return with little or no risk.
“That’s a… clear warning sign because there’s always risk,” he says. “But what the fraudsters may do is talk about a guarantee or a variation of risk — claiming it’s ‘backed by assets’ or ‘held in trust,’ to convey the impression that it’s not a risky investment.”
It’s also important to vet the person or company doing the investment pitching before giving them money.
According to the Canadian Securities Administrators (CSA), the national umbrella group for provincial and territorial regulators, only 29 per cent of Canadians actually researched their financial advisor’s background in 2017. Of those, only four per cent checked with their provincial regulator first.
Muir recommends doing a basic Internet search to reveal if anything on the person or company you’ve been contacted by comes up. He also points to the commission’s online tools, which include a checklist, a national registration search database and the CSA’s registration guide as additional resources.
Anyone can fall victim
Muir says most people who’ve been a victim of fraud don’t come forward to report it because they don’t feel their financial loss is that significant.
But the BCSC relies on the public’s help to detect fraud, freeze the assets of fraudsters and stop further fraud from happening.
“People should not feel stupid, or that their loss is too small to report,” Muir says.
“They should appreciate that they’ve been duped by someone who is unfortunately good at what they do. Fraudsters practice and they have slick schemes.”
“All sorts of people from all walks of life and backgrounds fall victim to securities fraud,” Muir says. “People should not feel embarrassed – they should contact us if they have fallen victim to a fraud.”
Visit InvestRight.org for more information on how you can protect yourself from investment fraud and help keep everyone safe.