Investor Alert: Advance Fee Fraud

By Geoff Hafer, Spring 2017 Student Intern

The SEC receives thousands of complaints every year describing a scam known as “advance fee fraud.”  An investor will be asked to pay a fee up front before receiving any proceeds, money, stock or warrants.  This up-front fee is often described as a deposit, underwriting fee, processing fee, administrative fee, commission, regulatory fee or tax, or sometimes an incidental expense that will be paid back later.  Unfortunately, in cases of advance fee fraud, once they have your money you can bet you will never hear from them again.

According to the Department of Justice (DOJ), one such scheme involved direct mail solicitations.  The recipients were allegedly informed that they had won, or would soon win, cash or valuable prizes.  Recipients responded to the solicitations by completing a form and submitting a payment anywhere from $15 to $55 via mail.  Once the money was received by the fraudsters, they were allegedly never heard from again.  The DOJ alleges the advance scheme raised more than $18 million annually in the US.  For more information on this particular scheme, click here.

So how can I spot and avoid advance fee fraud?

First and foremost, do your homework and use the tools available to you.  Make sure you check whether or not the investment offering is registered with the SEC or your state securities regulator.  Next, you can check the SEC’s EDGAR (Electronic Data Gathering, Analysis and Retrieval) database for corporate information.  The system allows you to research a company’s activities, registration statements, prospectuses, and financial statements.  Finally, you can also do a BrokerCheck to research the broker’s registration/license status and disciplinary history.

Advance fee fraud schemes often times carry with them official-sounding websites and email addresses.  Be wary of a website or correspondence claiming to be from a U.S. government agency if the website or email address does not end in “.gov,” “.mil,” or “fed.us.”  It is also important that you can actually locate the business or person with whom you are dealing.  Businesses that operate out of a post office box or mail drops without a street address should raise a red flag.  Additionally, persons who do not give you a direct telephone line or communicate solely through email should put you on heightened notice.  Ask that person whether they are licensed and whether the offering they are promoting is registered with the SEC or the state you reside.

It’s also important to simply trust your gut.  Does this particular investment sound too good to be true?  If so, it probably is.  Make sure you fully understand any investment before committing any of your hard earned dollars.