Sales and Investment Fraud - Essay Example

Sales and Investment Fraud Introduction One of the biggest problems facing sales and investment businesses is fraud. A fraud can be described as an ingenuity devised by an individual who resorts to the taking advantage of the other people through false representation (Albrecht, Albrecht and Albrecht 2009, p7). Sales fraud usually targets the consumer and it exits in other context in which it is hidden in the organization’s behavior descriptions. These behaviors include auditing failures, poor management practices, bribery, and accounting adjustments. Sales frauds usually go unreported, rarely investigated and are not included in the operating reviews because they do not look like material problems (Kim 2006, p1). Investment frauds are sale of fraudulent and worthless investments to unsuspecting investors. Sales of worthless partnership interests and telephone marketing frauds are among the common categories of investment frauds (Albrecht, Albrecht and Albrecht 2009, p12). Financial Problems from the Sales and Investment Fraud When sales and investment frauds occur, investors, the government and customers are bound to lose financially in one way or another. According to the Federal Trading Commission (FTC) (2011), investment fraud represents over 50% of consumer dollar injury noted by the organization’s Telemarketing Complaint System. The organization notes that on average, consumers lost 15,000 USD per fraud. In 1996, the organization challenged a case in which fraudsters made more than 100 million USD in total from several consumers over the period in which the scams occurred (Federal Trading Commission 2011). When investments and sales frauds are committed, in many cases a breach of taxation regulations also occur. This mean that the government gets to lose valuable incomes as the fraudsters never remit taxes from illegal activities. Investment frauds such as insider trading can impact greatly on the performance of a company in the capital markets. People start distrusting investment companies since they fear that they may be defrauded. Similarly when the public becomes aware of cases of sales frauds leading to a company’s poor reputation, the company is bound to encounter reduced sales as customers opt for other suppliers. The loss of reputation can negatively impact the company’s performance in the stock markets. Different Types of Sales and Investment Frauds There are several types of sales and investment frauds. These frauds or scams may be committed online or on the trading floor. Investment fraud includes insider trading and front running. Ponzi Schemes In this type of fraud, the early investors are paid with assets of the later investor and thus they tend to believe they have great investments and tell their friends, family and associates. The phenomenon is capable of creating many customers. The scheme can sustain itself for a long time as long as there is no excessive demand for the distribution (Waymire 2009, p1). Promissory Notes Promissory notes are very popular and are commonly sold to the old people who require low risk and high interest rates to finance their retirement. The promissory appears to be perfect until it is exposed as a fraud and the individual learns there was no actual investment (Waymire 2009, p1). Loans (Private Placements) The individual is unaware if the money was really given to a credit-worthy borrower. The individual receives false monthly reports that indicate the assets are generating great returns (Waymire 2009, p1). Currency Scams It is very popular with most of the criminals because currency trading is trendy and has the ability of generating high returns (Waymire 2009, p1). Currency scams normally are committed when forex traders get promised high returns for their investments against the truth. In some cases fraudsters place attractive adverts in the media urging people to invest with them. Once investors commit their monies to the fraudsters, the fraudsters go underground and beyond the reach of the investors. Investing in Precious Metals Trading in precious metals is a business that is quite uncommon. In scams that involve precious metals, one may purchase an item hoping to trade or collect it later. The bullion an individual is supposed to own may fail to exist. The criminals are aware that the individual will not visit the company storing the bullion (Waymire 2009, p1). Life Settlements (Viaticals) Seniors (the elderly) are vulnerable to this type of fraud. Most of these seniors are terminally ill and the criminals may take advantage of that. They also take advantage of the investors who trade in false life settlement programs (Waymire 2009, p1). Unregistered Investments Not all financial documents have been properly registered by the regulatory agencies. It is very easy for the criminals to copy the real documents and create for the fake companies unregistered securities (Waymire 2009, p1). Prime Bank Scams This type of fraud targets individuals who believe that the ultra-wealthy have all the elusive investments opportunities that the general public cannot access. The opportunities generate exceptional returns that look very real because they are being used by the ultra wealthy according to Waymire (2009, p1) and Fraud-stoppers (2011). Investment Seminars They may be fraudulent because the only individuals making money may be the ones presenting those seminars. Most of these seminars campaign for the get rich quick schemes. The schemes are false because they do not work at all for the targeted audiences (Waymire 2009, p1). Annuities Annuities may become investment frauds when the financial advisor makes a replacement to the current annuities with the lesser commodities so that they can create a new form of commission from the individual’s assets (Waymire 2009, p1). Investor Trading Investor trading normally occurs when a person holding vital information of an organization leaks it to other persons so that the company’s performance in the capital markets is impacted. The impact of such an exposure of information may lead people to buy more of the company’s stocks or to sell their shares depending on the company’s situation at a particular time. Tools and Equipments used to Perform Investment and Sales Fraud The modern world greatly relies on computers and software to accomplish certain tasks. In cases where products are sold online, sales and investment fraud is committed behind computers, websites and using software as was the case with Alibaba’s Sellers fraud (Chang 2011). In some cases, sellers alter the prices of goods so that the customer pays a higher amount when checking out online. In this respect, the internet pays a great role in the perpetration of sales and investment frauds. In some cases, investment fraudsters take advantage of marketing tools like telemarketing and infomercials to contact customers according to the Federal Trading Commission (2011). Yet again, fraudsters may mimic legitimate investments by filling imitation security offerings. Structures to Prevent Sales and Investment Fraud Most sales and investment fraud cases occur over the Internet. When trading online, credit and debit cards are often used. Payment processors normally use the CW2 numbering system to validate ownership of credit cards. Furthermore, payment processors always request individuals to verify their addresses to ensure that the cash is not stolen from customers and merchants. Customers can avoid investment frauds by verifying the existence of the organization with which they intend to trade. Instituting strict measures to ensure that workers abide by strict legislative guidelines is also another way of preventing sales and investment frauds. When an organization institutes such measures, it becomes easier to detect the fraud before it actually happens. Punishment for Sales and Investment Crimes Sales frauds and investments frauds are against the law and are punishable when one is convicted of the crimes. In the process of committing the frauds, those behind fraudulent schemes breach securities registration laws. Apart from serving jail terms for breaking the law (including taxation laws), fraudsters can be subjected to sanctions. Those convicted of crimes can also be fined heftily besides serving their ail terms. Punishments for sales and investment crimes normally vary deepening on the nature of the crime. This means that more severe crimes attract6 more severe punishments and vise versa. Conclusion In a bid to make quick moneys, fraudsters sometimes opt to commit investment and sales frauds. These frauds are generally targeted at consumers or investors although sometimes the company concerned also gets to lose some money. Investor and sales frauds come in various forms including insider trading, prime bank scams, annuity scams, and forex exchange or currency scams among others. Detecting the two types of crimes and especially sales fraud is often difficult and normally happens when the damage has already been done. The frauds have the potential to cause a lot of financial damage to consumers and investors. For organizations, there is the possibility of lowering their reputations which ultimately leads to losses. Dealing with the two types of frauds may not be easy since they are not easily detected. Organizations should institute stringent accounting measures that will ensure workers abide by the laws that govern trade so as to overcome sales frauds. When fraud is detected, concerned organizations should investigate and take legal actions against the fraudsters. Fraud cases should be dealt with the seriousness they deserve if sales and investment companies are to References Albrecht, C. O., Albrecht, C. C. & Albrecht, W. S. (2009) Fraud examination. Mason, OH: Cengage Learning. Chang S. (2011) Alibaba’s Sellers Committed Fraud. Retrieved 12th March, 2011 http://micgadget.com/11398/alibabas-sellers-committed-fraud/ Fraud-stoppers (2011) High Yield Investment Fraud. Available from [Accessed 14 March 2011]. Federal Trading Commission (2011) Investment Fraud. Available from [Accessed 14 March 2011]. Kim, R. (2006) Internal sales fraud against the company and the credit manager [online], AllBusiness. Available from [Accessed 14 March 2011]. Waymire, J. (2009) Top 10 types of investment scams [online], Investor Watchdog. Available from [Accessed 14 March 2011]. Read More