DOB: International Investment Fraud

The Informed Investor

International Investment Fraud

{World Globe}

A new breed of con artists is cashing in on our interest in global investing with a variety of  international swindles. Informed investors should be able to recognize common danger signs before sending their money overseas on a one-way trip, never to return.

American investors, swept up in the overseas investment boom, would do well to temper their euphoria with caution since a new breed of con artists is cashing in on the rush to global investing. U.S.-based swindlers, with bogus overseas investment schemes and high-pressure telephone "boiler room" sales operations located outside the United States, may defraud investors of billions of dollars during this decade.

Complaints about overseas investment swindles involving precious metals, penny stocks, mining, coins, currency speculation and special foreign banking instruments, such as certificates of deposit (CDs) with "sky-high, no risk" rates, are regularly reported to state securities agencies and local Better Business Bureaus (BBBs). Officials warn that the rise of off-shore boiler room operations will make it much more difficult, if not impossible, for investors to recover their funds and for law enforcement agencies to investigate and prosecute cases. Even mainstream foreign investments sometimes involve special risks and circumstances due to differing standards of marketplace regulation.

Legitimate Overseas Investments

North Americans are investing overseas in greater numbers and with more money than ever before. In part, this is a reflection of the fact that the international marketplace is becoming increasingly integrated and that international funds have made investing abroad easy. Today, there are hundreds of mutual funds which can be grouped into four basic categories: 1) global funds that invest in both U.S. and foreign markets, 2) international funds that invest only outside the U.S., 3) regional funds, and 4) country funds. The number of foreign listings have also grown steadily on U.S. exchanges.

Investors venturing overseas for the first time need to remember, however, that there are major risks involved. A strengthening U.S. dollar can reduce the value of foreign investments owned by American investors. A 20 percent drop in the value of a foreign currency relative to the U.S. dollar has the same impact as a 20 percent drop in that country's stock market prices. On the other hand, if the dollar weakens, foreign assets rise in value.

Foreign governments could be overthrown -- touching off market declines -- or they could nationalize industries. In some countries, only a few hundred stocks trade in large quantities. This may result in exorbitant premiums not justified by the book value and fundamentals of the company involved.

Although the trend is toward more open markets, major differences exist among national markets in procedures, practices, rules, and the threshold for fraudulent conditions can still trip up investors. For example, the Korean Stock Market, which is considered to be one of the least open in the world, bars nonresidents from owning South Korean stocks, except indirectly through nine trust funds. The Bogota (Columbia) Exchange has been identified by some law enforcement officials as a major front for many illegal operations, including the laundering of drug dollars. Investors who participated in Taiwan's 104 percent return in 1993 were disappointed when they tried to bring their capital home. The Taiwanese government imposed a three-month waiting period before capital could be repatriated.

There also are differing views among nations about what constitutes acceptable market practices. In some countries, there exist few prohibitions against insider trading. Other countries have no government agency to safeguard the interests of investors and to guard against marketplace misconduct.

These are among the issues and differences that regulators will grapple with as the world's marketplaces become even more tightly interwoven. Through the North American Securities Administrators Association (NASAA), state securities agencies have taken a major role in the promotion of uniform registration requirements in the U.S. for foreign offerings and have joined in cooperative enforcement agreements in the international arena.

Phony Overseas Investments

Con artists are quick to pick up on the psychology of the current investment climate and they try to create "look alike" investment swindles that mirror "hot" investments in legitimate markets. During the worldwide oil crisis of the 1970s, scammers capitalized on the inclination of investors to dip their toes into the rising oil market by concocting oil and gas lease lottery application mills. After the "Black Monday" stock market crash of 1987, investment swindlers were quick to jump on investors' newfound distrust of paper investments by fashioning their own phony versions of tangible gold and mining investments, the so-called "dirt pile" scams that took an estimated $250 million from investors.

Today, con artists see that U.S. investors are paying increasing attention to overseas investment opportunities. A new generation of scams has also "gone international." Most troubling is a growing pattern of former U.S. boiler room operators who have moved their telephone sales operations outside the U.S., frequently to Canada, Hong Kong, the Bahamas, Panama, Costa Rica, Europe, Liberia, and even South Africa. Some of these veteran con artists originally did their business in Florida and then moved on to southern California, and now have hopscotched once again offshore. The locations of the boiler rooms are carefully chosen, with con artists dialing out of countries that have no extradition arrangements with U.S. law enforcement agencies.

Protect Yourself From International Securities Swindles

What is true of all securities swindles -- that the best protection is to hang on to your money and not turn it over to a con artist -- is perhaps "truest" when it comes to international securities swindles. Enforcement efforts aimed at con men located overseas are extremely difficult and, in some cases, virtually impossible, due to poor relations between some nations and the absence of crucial enforcement mechanisms, such as extradition treaties. Here are some simple steps that investors can take to protect their interests:

Don't be stampeded into international investing.

If you listen to fellow investors and read the business news columns, it is easy to get the impression that everyone is investing overseas. But don't give in to the pressure to send your dollars overseas just to join the crowd. Make sure an investment is appropriate for your financial goals and, in particular, your ability to assume risk.

Learn about foreign markets.

How are investments regulated in the nation where you are thinking about sending your money? To what extent are investors in this market protected from investment fraud and abuse? What if you have to resolve some sort of dispute related to your investment? To what government agency would you go for assistance in resolving your problem?

Remember: International isn't necessarily better.

Even if investing overseas is one of the "hottest" activities going today for investors, it doesn't mean that the quality of the investment opportunities in other nations is any higher than those in the U.S. In fact, because of enforcement complications, the actual level of risk in overseas investments -- even in mainstream market products -- may be considerably higher than it is here, where markets are well regulated. (And once your money is gone, it may be impossible to recover, due to the practical difficulties involved in pursuing court action against foreign entities and individuals.) Keep your head on your shoulders when it comes to the hoopla about international investing.

Consider U.S. investment alternatives that provide foreign exposure.

Many American corporations listed on U.S. exchanges have large operations in foreign countries and get a significant portion of their revenue from sales overseas. Investing in the stocks and bonds of these companies, or in mutual funds made up of several of these companies, is one way to participate in the growth of foreign markets while keeping your dollars invested in U.S.-regulated corporations. The business reference section of the library is a good place to research these companies. Keep in mind that while these U.S. corporations may face stricter regulations than foreign firms, a company's earnings, and potentially its stock price, will still be affected by foreign currency fluctuations and political instability.

Check with the Securities Division and the BBB for complaints.

If an investment is being sold to you, its promoter should be registered with the Securities Division. Ignore claims that overseas investment promoters are somehow exempt from state and federal securities law registration requirements -- they aren't. Also, take the time to inquire with your BBB about the company in question. It may have a record of customers' experiences with, or government actions against, the company.

Remember that if you are dealing with a stranger about something you can't personally check out... trouble may follow.

Just because someone says that they have an oil well in Europe or a gold mine in South America does not mean that you have enough information on which to base an investment decision. Don't be deceived by slick-produced brochures that may make an enterprise look legitimate. If you don't have the contacts or financial resources to personally inspect your investment, consider carefully before giving up your money. In general, investors are best advised to deal with people they know and in investments they understand. If a stranger calls, pressuring you to invest "right away" in the huge profit potential of Singapore options, think twice!

This publication is adapted from a fact sheet prepared by
the Council of Better Business Bureaus and
the North American Securities Administrators Association