Covid-19 has a significant impact on the socio-economic-political landscape, leading to a shift from face-to-face transactions to digital transactions. The advantages are that you can do any transaction at any time without physically placing yourself in some financial institutions. However, the downside is that it had provided different bad guys opportunities to dupe innocent people into various scams.
If you are preparing for Certified Fraud Examiner Exam, then you will find this article very useful. But even if you are not, the article contains a ton of useful information that will prevent you from falling victim to various fraud scams which are dicussed in this article.
Let’s talk about the various common fraud scams that are prevalent today. Although they have changed their form, the modus of Operandi remain the same.
It is one of the most common fraud schemes. The most widely known Ponzi scheme was Bernie Madoff, who masterminded the largest Ponzi scheme in history. In a Ponzi scheme, new investors’ money is used to make payments to earlier investors. The investment opportunity is typically presented with the promise of uncommonly high returns. The perpetrators of this scam take in as much money as possible and then disappear. This scheme usually runs for one year. However, there are some red flags to identify this scheme.
- If the investment sounds too good to be true, then it probably is.
- This scam promises low risk but high and quick returns, which is very unlikely in real-life situations.
- It provides consistent returns regardless of any market conditions.
- The perpetrators pressure investors to reinvest the money in the schemes to keep the fraud going on.
Although this looks straightforward fraud scheme, many people have been deceived. To Justify this with the example, Bernie Madoff just sold a wealth management scheme that promised high returns to his investors. Instead, investors came lying up to him, begging to take their money. So he deposited money in his personal savings accounts and paid “returns” to earlier investors using the funds obtained from later investors.
This scheme generates revenue by continually recruiting new members. It also involved selling high-priced products, which are usually worthless, so significant income comes from recruitment. You can quickly identify these schemes if the business emphasizes more on recruiting people rather than selling products. When we talk about pyramid schemes, multilevel marketing comes into our minds. The organization tries to push different products like nutrition supplements, household goods, cosmetics, insurance, work-from-home deals, training material which are usually high priced and often worthless. It is similar to the Ponzi scheme, where early investors will earn money from a new investor. The scheme falls apart when it is not able to recruit new members. This scheme is called a pyramid because they lure new investors on the pretext that they can also rise through the ranks of the pyramid by hiring new members. This scheme is attractive as their pitch is simple and full of false logic. You can earn money if you can sell the goods or sign up three or four people below you. But soon, these people will run out of their friends and associates. That is when the house of cards comes crumbling down.
How pyramid works:
- They pay initial investors, which helps to lure other unsuspecting investors. Initial payoffs also keep the early player coming back.
- They usually operate on groups like community, a religious, social club as these schemes require a pool of participants. The fraudsters manipulate the trust people face in these groups.
- Their pitches are grand and loud but with a lot of logical holes. E.g., medicinal supplements to make people younger and so on.
There are various flavors of it. But, in this article, we will focus specifically on the fraud perpetuated using popular messenger apps like WhatsApp. Some people call it hacking, but it is another version of telemarking fraud. This is also known as vishing. Here, a scammer, by way of phone calls, uses social engineering to get you to share personal information and financial details. Here fraudsters offer a great deal to customers, like winning the lottery, and ask them for money or identification documents to receive that money.
We have made a detailed analysis of this scheme, like how fraudsters perpetuate it, how money flows, and how they never get caught.
This scam usually begins with a user receiving an audio recording about 1.30 minutes long, claiming that they have won a lottery ticket worth Rs 30 lakh or more on behalf of WhatsApp. To win the prize money, the victim will have to contact a bank branch located in the country. They also share images evidencing that such a lottery program was organized, as shown in the figure below, which includes the KBC logo. It is widely referenced in media as Ghar Baitho Jeeto Kaun Banega Crorepati (KBC) competition scam. This image will be modified depending upon the country you belong to. E.g., in Nepal, we have seen the logo of Nepal rastra bank along with other banks. Scammer insists on calling the so-called branch manager only over WhatsApp.
Once the victim is lured to call the scammer, he would be asked to deposit a registration fee or pay taxes for the lottery amount of Rs 30 lakh. If the victim pays that amount, they will lose money entirely. On the other hand, scammers may even ask the victim to install an app, which is like a remote desktop app, through which they may try to steal the banking details and another password.
Now, let’s talk about the modus of Operandi that fraudsters might use so that they never get caught. We are writing this in the context of Nepal. For other countries, they may follow similar methods.
First, they will ask the victim to deposit money in a certain account number of some bank. Then, the credentials for these bank accounts are divulged out of the account holders by using the same pretext as before. They have won a specific lottery, and to receive that, they have to give their banking details, as well as citizenship id. Why citizenship Id? We will discuss this later.
Then, the money moves to another account, probably whose account credentials are stolen. After that fund usually goes to a digital wallet. In Nepal, it is effortless to create a digital wallet using a Citizenship Id and phone number. Here also the money moves from one digital wallet to another. Then, money transfers to another account. Finally, this amount is withdrawn, maybe by the scammer or by their accomplice.
Here, readers need to note that, while transferring the amount, the amount is broken down into small figures from one account to another. In money laundering terms, this is known as placement. The process of moving money from one account to another is known as layering. This process is carried out to hide the source of income and frustrate law enforcement agencies to trace the money.
In this way, the victim can never track their money. So the best option is to take the help of local police authorities as soon as possible. Further, people who share their credentials with scammers should inform their banks immediately to close the account so that their funds cannot be used in this scheme, and further, police will not come to their doorsteps charging for the crime they have never committed.
It is also worthwhile to mention, usually in Nepalese banks, non-face-to-face bank account opening is not allowed. So this left scammer no other choice to steal banking credentials from existing account holders. Equipped with the credentials and citizenship Id of some poor soul, they can easily open a digital wallet. Although the limit for the digital wallet in Nepal is around Rs.150K, it is sufficient to launch mass-scale fraud.
Although it sounds like a complicated scam, this scam is another version of Ponzi or pyramid scheme. This scheme takes advantage of its obscure investment strategies and a very lucrative promise of high returns.
Let’s talk about one of the biggest cryptocurrencies frauds of the century, OneCoin. OneCoin scam was a pyramid scheme, where they lured innocent investors in buying educational materials on investment in cryptocurrencies. For each purchase, the investors will receive the token. Using these tokens, they can mine OneCoin utilizing some digital wallet. In addition, the investors could exchange OneCoin with other currencies by OneCoin Exchange xcoinx, which was an internal marketplace. But there was a catch; Members were able to access this exchange if they bought more than just the beginner package.
For those new to bitcoin, bitcoin has no real value as it is not backed by any central government authority like fiat currency. Instead, the value depends upon the law of demand and supply. The same concept applies to other cryptocurrencies. This is the reason why cryptocurrencies are very volatile.
But, in the case of One Coin, it was full of false promises. In 2017, the exchange was shut down; now, investors were left with worthless OneCoin crypto and the education material which content mainly was plagiarized.
Scams cost individuals, organizations, and governments trillions of dollars each year . There is no other crime that affects so many people from almost all ages, backgrounds, and geographical locations.
There was research conducted by some researchers regarding mass-market scam solicitations. Please visit this site to know more. There were astonishing results.
- 48% of participants indicated some willingness to contact the number of this kind of scam.
- 25% of participants will pay a certain fee in return for the significant return promised by these schemes.
This brings to the significant question of why people are attracted to these scams. Various research in these areas have identified by following:
- If a person believes other people are doing something, they feel it is okay to do it themselves. This is known as social acceptance. That is why pyramid schemes because people see their friends and relatives all around them are involved. They also want that piece of the action.
- “Principle of Scarcity,” says of thing there is, more people demand it. This is why every advertiser uses the phrase like for limited time only, or there may be stock of goods left. Naturally, I want to miss out on opportunities.
- Usually, these schemes work at full potential when there is chaos or stressful situations, like Covid Pandemic. There is a kind of uncertainty like many people are dying, have lost their source of income. This creates fear, and fear creates anxiety and stress, which affects our decision-making capability. It is often found people making the wrong decision during stress; they usually neglect negative information while making decisions and fall directly into the trap of fraudsters. So, it is always better to be calm, alert, and relax while making any financial decision.
- This is a simple reason, but yet people don’t like to admit it. The reason is greed, and we are greedy. We want to earn money in a short time with less effort. When some offer us a massive reward in exchange for some cash as a fee or taxes. We gladly accept that without looking at whether the offer is too good to be true. So, we need to be skeptical about such an offer.
- We are trusting people. We believe other people prefer to tell the truth than a lie. If we have to verify everything, it will be very difficult for us. For e.g., we pay for the goods at a price quoted by the shopkeeper. How do you know shopkeeping is not lying and asking for more money. You have to go to every shop and asked the price of that particular product, which is time-consuming. But, this bias exposes us to unwise. We tend to believe that fraudster who is selling us the scam is working to benefit us. Therefore, you can trust, but that trust should be verified.
- The majority of people always conform to authority, they obey those who are superiors to them. They don’t want to break laws and try to conform to norms and values. This has also resulted in numerous scams. , In Nepal, recently there was a fraud scheme on Facebook where fraudsters use to create a fake profile of some big-shot bankers, business and they use that fake profile to ask for money from their juniors. People unquestionably transfer the money, because it was their superior who was asking for the money. Next, if this happens to call, call them, trust me, you will both have a conversation to tell your grandchildren.
- Sometimes, we are in vulnerable situations like most of them have found themselves during Covid Pandemic. Some people have lost earnings, close relatives, and associates, others are living in fear that livelihood will be taken. Fraudsters usually feed on these insecurities of people and try to manipulate them. So if you receive promises to provide money in exchange for your banking credentials, identification details or ask you to pay some cash to receive lottery prizes that you have never applied for. Then block the caller or even better report to police authorities. This is for your own good.
We like to conclude this article by saying that during this pandemic time you not only need to stay safe and healthy physically but also financially.