Common Financial Fraud and Scam in India

In the last chapter, we learned about the psychological biases that can often skew investment decisions. Some of them include FOMO (Fear Of Missing Out),  overconfidence, anchoring bias, loss aversion, and herd mentality. The awareness of these biases is an important step in securing your financial decision-making process.

As we turn the page to a new chapter, the importance of vigilance becomes even more pronounced. Besides making informed investment choices, the dark underbelly of the financial world also means steering clear of pitfalls that can undermine your hard-earned money. We are talking about financial scams and frauds.

Did you know that the Reserve Bank of India recorded bank frauds worth around ₹30,000 crore during FY 2023? Last year, another investment fraud worth ₹712 crore was uncovered in Hyderabad. Put simply, recognising and understanding financial scams is of utmost importance when engaging in financial investments. 

Here are a few reasons why -

• Prevent financial losses 
• Keep stress, anxiety, and emotional distress at bay
• Avoid the hassle and serious consequences of legal proceedings and investigations
• Prevent the invasion of your privacy and stop any sensitive data from being compromised
• Stay away from criminal activities 
• Protect your relationships with people who share your accounts or finances 
• Minimise repeated attacks 
• Protect others from getting exposed to similar scams 

Some common financial scams include identity theft, phishing, Ponzi schemes, impersonation scams, and more. These not only impact your current financial well-being but also pose the risk of future instability. 

So, let’s look into some widely-known and perpetrated financial scams, their characteristics or types, and warning signs.    

Phishing Scams 

The attacker poses as a reputed company and sends an email, text message, or social media communication, encouraging you to disclose personal and sensitive information. These usually contain malicious attachments or links, and if you click on them, you might end up on a fake website, or the attacker might install malware on your device. On fake sites, you might be prompted to share personal details like card information, passwords and bank account numbers, which leave you vulnerable. 

Phishing can happen through phone calls, too, where the attacker might pretend to be an authority figure and ask for your details. Here are some warning signs to look out for - 

• Obvious grammar and spelling mistakes 
• Email or message that creates a false sense of urgency, asking you to click a link or share information instantly to avoid a penalty or bag a reward
• Unsolicited messages or emails 
• A link with a web domain name that doesn’t align with the message’s content
• Sender’s email address is not in line with that of the concerned company 
• Attachments that look suspicious and have a .exe extension, clicking which can run a possibly dangerous programme on your device
• An offer that seems to be unusually good, like a massive bonus or discount, especially if you are asked to pay a small sum to enjoy the benefit 
• Any message that asks for your login credentials, occupation, or account number  

Identity Theft  

Identity theft is one of the most common financial scams where someone steals your personal data like name, credit card information, and bank account number, and uses them without authorisation to commit fraud. Scammers can use your identity to buy goods and services, avail credit, obtain medical benefits, and even avoid getting arrested for a crime.   

You might receive bill statements for items you didn’t purchase or get calls from debt collectors about loans you didn’t take. This can lead to not only financial losses but also a negatively impacted credit score. Here are the common warning signs for identity theft -

• Inquiries on your credit report that seem unfamiliar or not related to any activity that you have undertaken (scammers might have applied for credit)
• Transactions on credit cards or bank accounts that don’t seem authorised (fraudsters might have cloned or stolen your cards)
• You stop receiving the usual credit card or bank statements (hackers might have taken over your account) 
• Sudden, significant drop in your credit score without any obvious cause (scammers can take a loan and not make repayments)
• Your credit application gets rejected despite a good history (criminal activity can hamper your credit score)

Ponzi Schemes

In a Ponzi scheme, funds are collected from new investors to pay old investors, thereby perpetuating a false belief that an enterprise or business model is successful. Con artists usually promise to invest the money you give them and generate high returns at zero or little risk. 

In reality, they don’t make any investment but rather lure new investors to keep the cash inflow going. And while paying old investors, the scammers keep some of the money for themselves. 

Ponzi schemes don’t involve any legitimate earnings and fail when fraudsters cannot attract new investors anymore. Here are the warning signs to watch out for - 

• Consistent positive returns, irrespective of market fluctuations
• The promise of high or guaranteed returns despite low or nil risk
• Unregistered firms or unlicensed individuals selling attractive investment schemes 
• Errors in account statements indicating that your funds are not getting invested as assured
• Inadequate information about the investment scheme or it seems too complex 
• Not receiving timely payouts or being discouraged from cashing out 
• Scheme organisers are more focused on recruiting new investors rather than making actual investments  

Investment Fraud 

In an investment fraud, scammers trick investors into investing their funds in bonds, stocks, commodities and other financial instruments. Fraudsters use false representation or information or deceptive tactics to earn your trust and steal money. Here are two common types of investment fraud:  

• Pump and dump schemes – Fraudsters spread false information about a stock to generate a buying frenzy, which causes the stock price to rise or get pumped up. They then dump or sell their own shares at the falsely inflated price and stop hyping the stock further. Hence, the stock price falls, and other investors who bought shares during the buying frenzy end up losing money.
• Pyramid schemes – These involve recruiting members in lieu of an initiation fee. Recruited members are promised a specific percentage of the money that will flow in once they recruit additional members. The scheme’s structure resembles a pyramid, where the scammer at the top and early investors in the upper layers make money from participants in the base layers.
  Pyramid schemes rarely involve the sale of actual goods or services, and any income generated is from recruitment fees. Since it gradually becomes challenging to recruit new members, these schemes are unsustainable.

Here are some of the warning signs of investment fraud - 

• Pressure to invest fast without reading the fine print or due consideration 
• The promise of unbelievably large profits at low or no risk 
• Lack of transparency in communications and a tendency to avoid questions
• Involvement of unregistered investments or unlicensed individuals 
• Insufficient information available or the scheme is termed as too technical or classified 
• Unprofessional behaviour of the sales agent, like not answering calls or refusing to share an office address

Lottery/Prize Scams 

This is one of those financial scams where the fraudster sends emails, letters, or text messages stating that you have won a lottery or prize. These communications look authentic and usually require you to pay a certain fee or tax to claim the prize. Or you might be asked to send your bank details so that the prize money can be credited. In reality, no such lottery or prize exists. 

Watch out for the following warning signs - 

• Receiving prize notification from a lottery in which you never participated  
• You are asked to pay a fee, tax, or service cost to release the winnings
• Generic salutations like Sir or Madam, since legitimate sweepstakes know you and always use your name 
• Pressure to respond quickly by making a payment or sharing personal details
• Claim that the lottery is approved by the government or legal

Tech Support Scams 

In tech support scams, con artists try to scare you into buying unnecessary technical services for software problems or device issues that don’t exist. The objective might be to make you pay for a useless service, steal your financial or private information, or install malicious programmes that can damage your device or data. 

To conduct the fraud, scammers usually call you, pretending to be representatives of a reputed tech organisation. They might also display false error messages on certain websites you visit, along with technical support hotline numbers, so you are tempted to call. Or a pop-up window might appear on your system’s screen, mimicking an error message from your antivirus software or operating system. Here are the common warning signs to look out for -

• Someone contacting you unexpectedly to say there is a problem with your device
• Pop-up warnings that ask you to click on a link or call a number
• Someone pressuring you to make a quick decision and pay for the technical support service 
• You are asked to share personal or financial details 
• You are asked to grant remote access to your device to fix supposed technical issues 
• The caller or emailer asks you to pay via gift card or wire transfer 
• The alleged provider’s website or contact information doesn’t match the legitimate details of an authentic provider of the same name
• Emails or texts containing glaring grammar or spelling mistakes

Impersonation Scams 

A fraudster poses as a trustworthy or authoritative entity and convinces you to share sensitive information or make payments. You might receive a text, phone call, or email that appears authentic, as scammers can clone phone numbers, email IDs, or websites. 

There are two common types of impersonation:

• Government agency impersonation – Con artists pretend to represent respectable government bodies to win your confidence or pressure you into divulging personal details or shelling out money. To sound genuine, they might even mention employee IDs. 
• Romance scams – Fraudsters show romantic interest to gain your trust and affection and then ask for money, citing various reasons like medical emergencies or professional crises. They usually connect via dating or social media sites. 

Here’s how you can identify impersonation scams - 

• Someone claiming to be a government official threatens deportation or arrest if you don’t pay a certain tax, bill, or fine
• You receive a message or email asking you to share sensitive information or containing a link that leads to a fake website 
• You are asked to take action urgently by making a payment or sharing personal data
• You are advised to transfer funds for further investigation or safekeeping 
• You are told about an unauthorised transaction or asked to confirm the details of a payment you didn’t make
• Spelling errors or inconsistencies in official logos, language, and formatting 
• Messages or friend requests from suspicious social media accounts 
• Lack of verifiable credentials, like registration details, business address, and others

Learn More 

Being aware of various financial scams is the first step towards protecting yourself against monetary losses, mental distress, and dangerous situations. So, be vigilant at all times, trust your instinct and place your trust in people and communications only when you have researched enough. 

In the next chapter, we will explore the steps you can take to prevent financial fraud and resort to legal measures.