Unfortunately, not only are these scams becoming more commonplace but, as they evolve, they are also becoming more sophisticated and are therefore hooking victims in greater numbers.
“Boiler rooms” is the phrase given to companies, usually working from an overseas office – although this is not necessarily clear given that their first contact with potential victims is often a phone call – offering shares, often in a “no-lose” foreign investment.
This of course is the first alarm bell - as with most things, if something sounds too good to be true, then it usually is.
For example, a UK investor may be targeted (the fraudsters may have found the name on a company register showing that he or she owns other shares) with the promise to invest in a company which, at best, is not a listed company and, at worst, does not exist. Not only this, but the fraudsters may attempt to lure potential investors further into the scam by making the first few investments appear relatively successful. It is when the investor then attempts to withdraw some of their “gains” that the house of cards comes tumbling down and the investor is left high and dry.
The company itself is usually domiciled abroad which means that it is outside the remit of the Financial Services Authority (FSA). The very fact that an investor is cold called at all should ring further alarm bells, since cold calling is not allowed by UK authorised investment firms.
Such is the scale of the crime, the City of London Police has taken the lead in attacking the fraud. It comes under the national umbrella of “Operation Archway”, which gathers intelligence from police forces, the FSA, the Office of Fair Trading and local trading standards. According to the City of London Police, “This is one of the biggest single consumer issues we deal with. It is affecting tens of thousands of people every year in the UK and is a crime which can go undetected for a long time until people try to realise the value of their shares.” They go on to describe this as a “four dimensional” crime.
Firstly, the “boiler room” itself is usually in a country abroad, most typically at the moment Spain. Secondly, the victim is UK based. Thirdly, the chances are that the shares being offered are in yet another country (such as the US) with payment required to be made to a different country entirely. This web of crime, potentially across four jurisdictions, means that the scam is increasingly sophisticated and difficult to convict.
So, what should investors be keeping a particular eye out for to prevent themselves being lured into this fraudulent activity?
As a first rule of thumb, check whether the company calling you is regulated by the FSA – if not, it is almost certainly best avoided. For their part, the FSA have been proactive in issuing general consumer alerts and freezing orders against those unauthorised schemes coming to their attention. To date, they have managed to place at least two companies into liquidation via the High Court.
The next suggestion is something which investors should have in their armoury in any event – research. They should research the supposed location of the firm which has contacted them, let alone the existence or otherwise of the “sure fire” investment which has been peddled to them.
Above all, however, if the investor is in any doubt, the simple thing to do is to walk away from the situation.
By way of warning, the amounts lost can be significant – the FSA calculates that the average amount lost by the typical boiler room victim exceeds £20 000.
Richard J Hunter
Head of UK Equities
Hargreaves Lansdown Stockbrokers