09 July 2012


What's striking about the new Australian Institute of Criminology and Australian Crime Commission report [PDF] on Serious and Organised Investment Fraud - apart from the document's superficiality - is the small scale of that fraud relative to the depredations of corporate criminals such as Alan Bond.

The 40 page report is thin, very thin ...  something that might be expected after reading previous ACC documents (eg noted here, here and here) that are distinguished by problematical analogies, woolly statistics, emotive language and a decided absence of legal analysis.

The authors explain that -
In 2011, Task Force Galilee was established to broaden the understanding of Serious and Organised Investment Fraud and to develop a national response. As at April 2012, the Task Force estimated that Australians’ losses to this type of fraud since January 2007 were in excess of A$113 million, with this figure likely to be conservative. During this period more than 2,600 Australians were victims of Serious and Organised Investment Fraud. These figures have largely been established as a result of intelligence analysis, and do not reflect the actual level of reporting by victims, which remains low. 
This report has been prepared to provide an insight into the nature and extent of this type of fraud as it currently affects Australia. Since the Task Force’s establishment, knowledge and understanding of Serious and Organised Investment Fraud has grown exponentially, and continues to do so. The information in this report is a compilation of the key characteristics identified via available literature and relevant Task Force member findings. The research and assistance of the Australian Institute of Criminology (AIC) is also acknowledged. 
This report uses the definition of Serious and Organised Investment Fraud which has been adopted by Task Force Galilee. This Task Force defines it as: 
a) any unsolicited contact, by telephone or internet, of persons in Australia (potential investors) by persons (callers) usually located overseas, where such callers engage in conduct that is fraudulent, false, misleading or deceptive with the purpose of inducing potential investors to buy, sell, or retain securities or other investments and where such callers do not have the license or authority to engage in a securities business, or investment advice business in Australia; and
b) may include superannuation and investment fraud.
The report indicates that -
Serious and Organised Investment Fraud (or ‘boiler room frauds’ as they are referred to in some jurisdictions) use sophisticated techniques to solicit investment in non-existent or essentially worthless shares and other securities. The frauds are well organised and convincing, with constantly evolving modus operandi. They generally operate from an overseas location; however recent investigations have identified operations based in Australia. Combined, these factors contribute to their ability to evade detection. These characteristics also reflect those of frauds in general, and can be attributed to offenders adapting their methods once the investment is recognised as a fraud and/or is not generating the same return as it has in the past. Serious and Organised Investment Fraud tactics are considered sophisticated, complex and very effective. They are difficult to identify - even for experienced investors - and are usually initiated by cold-calling potential victims using persuasive techniques that are fraudulent, misleading and deceptive for the purposes of inducing victims to purchase investments. Some Serious and Organised Investment Fraud operators have also been identified operating ‘recovery rooms.’ Once investors have realised they have invested in fraudulent or worthless shares a second arm of the operation ‘the recovery room’ makes contact with victims and attempts to convince them that for a ‘fee’ they can assist recovery of some of the investment. Recovery is, of course, futile. ... 
The effort and time invested in the planning and conduct of Serious and Organised Investment fraud activities indicate it is principally a well-planned and organised criminal activity. In addition, offenders typically dedicate a great deal of effort to convince an investor of their legitimacy with some strategies in place prior to placing the cold call. This includes:
• producing and using bogus prospectuses (hardcopies, internet-based, etc) 
• falsifying company details 
• sending paperwork to the investor 
• coordinating with complicit accountants and lawyers to launder the proceeds of the fraud, conceal the nature of the fraud and sometimes promote the fraud 
• contacting ‘shareholders’ to advise against other suspect companies, isolating themselves from any pending investigations and blaming regulators/law enforcement for ‘victimising’ their company 
• having country-specific scripts for cold callers 
• paying a dividend to convince the investor of the legitimacy of the organisation, and to often lure the investor to reinvest 
• remaining in constant contact with the victim, and trying to build a relationship 
• providing links to fraudulent international regulatory sites 
• engaging in misleading use of a complex series of websites to promote stocks 
• creation of professional looking but false websites 
• monitor and manipulate search engine results moving negative feedback down the list of results 
• circumvent the prevention messaging and on-line feedback that has previously alerted potential victims that they are being scammed, and 
• issuing account statements to reassure investors that their investments are safe.
A 2012 Task Force Galilee assessment found that the average amount transferred by victims of Serious and Organised Investment Fraud was A$18,174 (with a range in value between A$9 and A$1,293,390). In 2002, ASIC found that the median (not average, but middle of the distribution of known fraudulent transfers) amount lost was A$17,000 (with a range in value between A$3,900 and A$500,000). Most of the monies sent to Serious and Organised Investment Fraud operations from the Australian victims surveyed by Task Force Galilee in 2011 were funded by their superannuation (n=20, 37%) and investment funds (n= 34; 63%). Analysis of serious and organised investment fraud in the United Kingdom showed most victims typically lost £20,000 each, with one loss totalling £1.2 million.

From a privacy and data protection perspective the most interesting comments are those relating to the scammers' identification of targets -
Financial lists are treated as a valuable commodity among those involved in Serious and Organised Investment Fraud activities. Cases have been identified where individual telemarketers (cold callers) have stolen market lead lists from their employers to initiate ‘rip and tear’ rooms (where the telemarketer/cold caller operates the scam on their own) or to sell to competing fraud operations. Analysis of the modus operandi of Serious and Organised Investment Fraud operations and the literature has identified a range of techniques used by operators to identify and contact potential victims. ... These strategies include:
• Internal company telephone lists: these can be stolen from employers. 
• Accessing the member lists of financial/credit ratings agencies.
• A ‘snowball’ scenario. In this situation a victim refers the fraudulent ‘opportunity’ onto family and friends, or the victim passes on their details to offenders. This scenario results in a pool of investors being generated through word of mouth. It is possibly for this reason that Serious and Organised Investment Fraud offenders frequently pay dividends to victims as a means to both feign legitimacy and encourage investors to share this opportunity with friends and family. This method of accessing potential victims highlights the need for individuals not to rely solely on the advice and recommendations of family and friends but to conduct their own checks of potential investment opportunities through authorised regulatory agencies.
• ‘Free lunch’ investment seminars
• Public lists. These include names and details extracted from public telephone directories and shareholder lists, trade journals, professional directories and newspapers. 
• Buying lists from legitimate companies in the leads brokerage industry: ACC intelligence indicates that Serious and Organised Investment Fraud operators have also utilised the services of legitimate leads brokerage companies. An example of this is illustrated in Case Study 3. 
• Buying lists from illegitimate leads brokers: Also known as ‘sucker lists,’ Serious and Organised Investment Fraud operations can purchase leads lists from other illicit operations and criminal leads list brokers. This includes selling victim bank account and credit card information, and contact details (phone number, addresses etc). It has also been observed that Serious and Organised Investment Fraud operators have utilised social networking sites to trade lists of victims as well as recruit accomplices.
The authors conclude that
Analysis of Australia’s response and the response by international agencies to Serious and Organised Investment Fraud indicate that this type of fraud is widely recognised, and reports of Serious and Organised Investment Fraud in Australia are increasing. This could be due to many factors including greater awareness of the crime, improved reporting rates or a general increase in Serious and Organised Investment Fraud operations. As the report demonstrates, Serious and Organised Investment Fraud is not an opportunistic crime, but in fact is a calculated, sophisticated, organised criminal event. These factors also highlight why law enforcement agencies and regulatory agencies globally face difficulties with Serious and Organised Investment Fraud prevention, detection, disruption and prosecution. As Serious and Organised Investment fraudsters are continually evolving their modus operandi, the responses to this crime need to be flexible and responsive. Therefore, it is unlikely that there is one strategy that is a panacea to the crime, particularly as Serious and Organised Investment Fraud involves many different elements. One of the main challenges in developing responses to Serious and Organised Investment Fraud is the overall lack of available, proven good practice examples in Serious and Organised Investment Fraud disruption. 
Raising awareness and education campaigns has been a common strategy for Australian and international agencies to prevent Serious and Organised Investment Fraud. These campaigns are largely directed at potential victims, alerting them to this fraud type, characteristics of the fraud and explanation of what to do if a person suspects an investment fraud operation is active. 
Information sharing and collaboration is also considered an essential part of responding to investment and Serious and Organised Investment fraud. This is a key characteristic of Australia’s response and is a central focus to Task Force Galilee’s prevention and intervention strategy development. 
As a prevention measure, law enforcement and regulatory agencies both nationally and internationally highlight it is essential prior to investing to check numerous sources to ensure the legitimacy of the investment. Investors are also encouraged not to become complacent. Due diligence is required even if an investor has a financial advisor because they may also be unaware of the fraud. It has been suggested that investment and Serious and Organised Investment frauds (e.g. Bernie Madoff fraud) could have been prevented with ‘due diligence’ and verifying information by either investors or hedge fund managers.
Well, you don't say!