Investment fraud: What it is & how to avoid it

22 March 2024 by National Bank Direct Brokerage
A picture of a young woman who is applying security measures to avoid investment fraud.

Technology has transformed the criminal landscape, with financial predators on the web trying to lure unsuspecting victims with new scams or get-rich-quick schemes. When investing your hard-earned money, it's important to be vigilant and to always take the necessary precautions to stay safe.

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What is investment fraud?

In the past decade, fraud has become more widespread and increasingly sophisticated. In 2022, the Canadian Anti-Fraud Centre received reports of fraud and cybercrime totaling more than $530 million in victim losses – a 40% increase from the preceding year.1

The first line of defense starts with you, the investor. That is why it is important to remember that doing your due diligence doesn't stop at choosing the specific securities you want to invest in: it also applies to where you do your investing. 

Nowadays, fraudsters try to present themselves as employees of banks, phone companies, government agencies, or other types of trustworthy institutions. Most of us have in-boxes filled with junk mail that aims to bait us with dodgy investment schemes or fraudulent requests trying to get us to click on links to disclose our credit card information or passwords. 

Even though financial institutions and other major providers in Canada have safeguards in place to help prevent financial fraud, criminals are always trying to find new ways to deceive us and take advantage of our weaknesses or lack of oversight at the first possible opportunity. 

Before investing in any online or offline platform, make sure you do your research: you’ll want to ensure the financial institution has a track record and can be trusted with your money. 

For investors working through established banks and brokerage firms, there are several entities that protect Canadian investors and maintain confidence in the financial system. These include:

  • CIPF - For those of us in Canada, the Canadian Investor Protection Fund (CIPF), a not-for-profit insurance program established by provincial and territorial securities regulators, is designed to protect investors from the risk of losing their money. Investor assets are protected if the investment firm they use to broker their investments goes into bankruptcy. The CIPF does not protect investors from declining stock values. 
  • CDIC - Another important source of financial protection available to Canadians is the Canadian Deposit Insurance Corporation (CDIC). The CDIC's coverage applies to eligible deposits up to $100 000 made at participating Canadian financial institutions.3 Coverage applies to cash, GICs, and term deposits. 

How does investment fraud occur?

If it looks too good to be true, it probably is! Always be skeptical when it comes to 'phantom riches.' These are financial fraud schemes that promise risk-free investments with guaranteed returns. They usually involve the unsuspecting investor putting up a significant amount of money for some promised large sum of money down the line. These schemes rely on an emotional appeal and high-pressure sales tactics and are built on little or no factual evidence.

Here are some things to keep in mind before opening your wallet for the next 'incredible' investment opportunity:

  • Be wary of false returns and fake account balances.
  • Take your time. Don't feel pressured or rushed into buying an investment before you've had a chance to do some research and think about the opportunity and what it entails.
  • Think twice before taking any investment advice from influencers and celebrities. It's always important to ask: What do they gain by getting you to invest?

Any investment that claims to have no risks attached to it is likely a scam. Indeed, very few investments are risk-free. One investment rule of thumb is that the greater the potential return from an investment, the greater your risk of losing money. Any promise of quick and large profits with little or no risk is a red flag.

How NBDB protects its clients

At NBDB, we prioritize the safety and security of our clients' investments by implementing a robust set of measures to safeguard their financial transactions and personal information. Our commitment to ensuring a secure investment environment includes many security features, such as:

  • Two-Factor Authentication (2FA) - A two-factor authentication process to add an extra layer of protection, requiring clients to verify their identity through multiple means, enhancing the overall security of their accounts.
  • Secure Message Centre – The NBDB transactional platform features a secure Message Centre, facilitating easy and secure communication between NBDB and our clients. This ensures that sensitive information is exchanged in a protected environment.
  • Rigorous Security Controls - Stringent security controls swiftly detect and prevent both massive and unsuccessful access attempts, minimizing the risk of unauthorized access to client accounts.
  • Password Requirements with Strong Indicators - Clients are encouraged to create strong passwords with our system's password requirements, which include robust indicators to guide users in selecting secure passwords, enhancing the overall strength of their login credentials.
  • Multi-Factor Authentication (MFA) - NBDB employs multi-factor authentication not only for login purposes but also for communication channels such as email, SMS, and voice, providing an additional layer of verification and safeguarding against unauthorized access.
  • 256-Bit Encrypted HTTPS Communications - To prevent password interception and protect sensitive data during online interactions, NBDB utilizes 256-bit encrypted HTTPS communications, ensuring a secure and encrypted connection between clients and our platform.
  • DDoS Attack Prevention - NBDB has implemented robust security controls to prevent Distributed Denial of Service (DDoS) attacks, safeguarding the availability and functionality of our services even during potential cyber threats.

Be careful with cryptocurrency investments

Though there are many legitimate cryptocurrency investment opportunities, fraudsters are increasingly preying on the hype around blockchain technology as well as the public’s curiosity and lack of knowledge to take money from unsuspecting investors.

Cryptocurrency is complex, unregulated, and full of risks. One common fraudulent scheme involves faking initial coin offerings and disguising them as funding for the development of new cryptocurrencies. Others involve pyramid schemes, fraudulent market manipulations, or fund transfers to unknown crypto wallets.

If you are committed to adding cryptocurrency exposure to your investment portfolio, investing in a crypto exchange traded fund (ETF) may be an option. ETFs are overseen by licensed fund managers and though you may not be protected from the volatility typical of cryptocurrency trading, your investment is protected by the added layer of security that an ETF issued by a legitimate financial institution can provide.

How does fraud affect investors?

Financial fraudsters don’t just steal hard-earned money from investors: they also discourage new and inexperienced investors from participating in the stock market in the first place. In addition to the loss of significant sums of money, financial fraud can have other devastating consequences, such as identity theft.

With our reliance on smart phones and computers, it is particularly important for investors to protect themselves against cyberthreats. It is also important to recognize phishing and spoofing scams. These usually take the form of fake caller IDs, text messages, emails, websites, or suspect customer service calls. 

Phishing and spoofing scams typically occur when a fraudster pretends to be from a legitimate well-known provider like a bank, phone company, or government agency. Their goal is invariably to get you to reveal your passwords, credit card number, social insurance number, or all three!

The main rule to follow when faced with an unusual, unjustified, insistent, or alarming message is to doubt, stop, and think! Here are some other important strategies to consider:

  • Implement strong cybersecurity protection on all of your devices.
  • Keep personal information safe by creating strong passwords and using a reputable password manager.
  • Enable multi-factor authentication on all of your devices.
  • Avoid giving service providers remote access to your computer.
  • If you receive a suspect text message or e-mail, don’t click on any attached links or files.
  • When you receive an unsolicited phone call from a provider, check the source yourself. Contact the alleged caller using an official phone number, not the one in the message, and ask them questions about their legitimacy. Never divulge any personal information if you are not the one who initiated the call or contact. 
  • When navigating a financial services website, make sure that the site is secure.
  • Keep all your systems up to date.

For more information about staying safe online and how to identify phishing and spoofing scams, visit the Canadian Anti-Fraud Centre's page

With fraudsters lurking in the dark corners of the web using social engineering to come up with their latest criminal scheme, both new and seasoned investors should be doing what they can to protect themselves. The information sharing, the convenience, and the benefits of digital technology, like self-directed online investing, may have their risks, but these can be mitigated by enabling available cybersecurity features and remaining vigilant. 

Starting your investment journey is easy but remember to take the necessary precautions to invest wisely and safely!

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Key Takeaways

  • Due diligence is important: Research what you invest in AND who you invest with.
  • Remember that all investments carry risks. A risk-free investment is likely promising something it will not deliver.
  • Enable cybersecurity features on your devices and be vigilant. 
  • Never divulge sensitive information to people or organizations you’re not sure about, especially when they’ve reached out to you first.

Legal disclaimer

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This article is provided by National Bank, its subsidiaries and group entities for information purposes only, and creates no legal or contractual obligation for National Bank, its subsidiaries and group entities. The details of this service offering and the conditions herein are subject to change.

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Views expressed in this article are those of the person being interviewed. They do not necessarily reflect the opinions of National Bank or its subsidiaries. For financial or business advice, please consult your National Bank advisor, financial planner or an industry professional (e.g., accountant, tax specialist or lawyer).






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