Continuing Education for Financial Service Professionals
Financial Fraud: How to Protect Yourself, Your Clients and Your Business from Financial Fraud
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Table of Contents Introduction …………………………………………………………………3 The Cost of Financial Fraud …………………………………………….......7 What is Fraud? …………………………………………...…………………9 The International Perspective …………………………………………...…12 Common Understandings/Misunderstandings about Fraudsters ………..…14 Advisors as Targets ………..………………………………………………17 What Makes Them Do It? …………………………………………………30 The Catalogue of Crimes ………………………………………………..…37 The Worth of Financial Data ………………………………………..…..…62 Preventing Financial Fraud ……………………………………………..…65 The Victim’s Remedy …………………………………………………..…79 Privacy Not Piracy ………………………………………………….…..…87 What You Can Do …………………………………………………..…..…95 Legislation and Liability ………………………………………………..…97 Conclusion ……………………………………………………………..…103 Copyright notice and Contact details ……………………...…………..…104
Introduction While you read the following pages, you can certainly be excused if you start to feel paranoid, on both your clients’ behalf and personally. The facts speak for themselves: financial fraud is everywhere you turn. Fraudsters reach out by email, mail, telephone, through word-of-mouth by friends, family, and acquaintances, and they will even knock on your front door. They are creative, nervy, smooth, and persistent. Every one of us is exposed to becoming a victim and, unfortunately, whoever among us falls prey might not possibly know for months afterwards that it has happened. In the meantime a good name and reputation can be ruined, not to mention the financial losses that can ensue. Many fraud schemes take place within a framework of legitimate business. For instance, selling securities is completely legal providing the firm and its advisors doing so are properly registered. So, how does the client know whether such registration exists? Yes, databases of registrations exist that can be checked but, for the most part, clients are going to trust that a person who holds themselves out as an agent or advisor or other financial professional, is who he or she claims to be. This raises the issue of trust. Who can be trusted? How can anyone be absolutely sure that someone or something that appears trustworthy, actually is?
Trust was easily established when our society existed in a “smaller� world, even if it was between individuals as nodding acquaintances: customers of businesses knew who they dealt with, sometimes as personal friends. People knew their bankers and bankers knew their customers. A life insurance agent might also be a member of the local tennis club, church, or bridge club; children of the adults attended the same schools and played together. Times have changed. A patina of anonymity protects people from getting to know each other, fear of differences cement distance, and cultural differences may exist that also become barricades. The saying goes: Tall fences make good neighbours. But, is that really true? Do the tall fences we build around us at home and business serve to reinforce the distance that underlies so many relationships? Trust becomes an abstract notion when there is no basis on which trust can be built. Unfortunately, people --- especially seniors and those who have not yet built a shell of cynicism or knowledge of the extent of fraudulent activities --- continue to trust others and this keeps the fraud industry alive and well. There isn’t any easy answer as to whom you can trust. In the following pages we will provide many tips and techniques that can help you and your clients from becoming victims of fraud but there is no absolute 100% guaranteed method of ensuring fraud protection. One of the best and easiest solutions is to become a harder target so the fraudsters move onto the next victim who perhaps has not taken self-protection to heart. In addition to the measures we will review that will help to make you and your clients more fraud-proof, here are three overriding suggestions to bear in mind: 1.
Know your client. You are continually reminded of the need for client knowledge
to meet suitability requirements that apply to product recommendations. However, knowing your client in the sense of: -
recognizing his or her voice on the phone,
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recognizing his or her legitimate email address,
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your client’s preferred form of communicate with you,
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what to expect from your client in terms of his or her behaviour, or
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how he or she treats you creates a business relationship with your client instead of one that is solely transactional in nature. This will go a long way towards fraud prevention. More suggestions on this subject are provided in the following text.
2.
Know the professionals who you work with or refer clients to. Your goal will be
to establish an ongoing relationship with someone – or a team of cohorts – who are proved to be trustworthy. To find such professionals, you can ask for a referral from a trusted professional colleague, or use association or membership listings. Check out the person yourself before providing his or her name to others by first ensuring the professional’s license (e.g., a lawyer, real estate agent, accountant, stockbroker or another financial advisor) is in good standing. If you are on the receiving end of a referral because another professional has referred you to a client, make sure you know who has referred you. Check them out if they are unknown to you; otherwise, you could become a perpetrator by association. Using social media, such as LinkedIn, can be helpful but it is not absolutely reliable unless you can establish a known connection between you and the person you are checking out. In short, what is needed is a return to the old-fashioned value of getting to know the people around you and to develop a professional relationship in which you learn to trust them, and they learn to trust you. 3.
Make yourself known to your clients. Just as you need to understand how your
client “does things” so, too, does your client need to know how you operate and your business practices. Your client should know, for instance, that you would not ask for account information via email, and that you would not ask for passwords or other
sensitive financial information. Also assure your clients that you take their privacy seriously and that you have systems in place to ensure that their confidential information cannot be stolen or divulged. As former Bank of Canada Governor David Dodge commented, “The damage from economic crimes may extend far beyond the financial loss incurred by the immediate victim. These crimes undermine the financial health of our entire country. When you learn to spot and report counterfeit money, marketing scams, and other forms of fraud, you do more than protect yourself: you foil criminals and help ensure a safe marketplace for all Canadians.� Reducing financial fraud requires four steps be taken: 1.
Prevention;
2.
Detection;
3.
Investigation;
4.
Prosecution.
This Course will help you with ideas to complete steps one and two, and it will provide some details on three and four. Remember as you read that paranoia is not the answer to combating the widespread problem of financial fraud; knowledge about the subject that leads to implementing safer practices for financial information is one good remedy.
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