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As originally published exclusively in “Escape Artist Insider Magazine – May 2023 edition”.
I started in the international legal business 34 years ago after having lived and studied abroad for much of my youth. I won’t say I’ve seen every scam invented by man, but I’ve seen a lot of them.
Some are easy for anyone to identify and dismiss:
-No, there’s no Nigerian prince who wants to transfer $38 million to your bank account.
-No, there’s no Russian supermodel dying to date you.
-No, there’s no long-lost uncle from Germany who has left all their fortune to you.
The list goes on and on. But what these scams and all others have in common is they get you to suspend your normal way of discerning and weighing information by appealing to powerful needs all people have such as greed, love, fear, etc.
Once “suspension” of common sense has occurred, people will fall for just about anything. As the old saying goes, “A fool and his money are soon parted.” Let’s face it. We can all be fools at times. We want to believe a magical investment can only go up and provide us with everything we need in retirement. We want to believe people wouldn’t lie or take advantage of us. We want to believe our own private Shangri La exists where the weather is always nice, the cost of living is low, and we will never have to pay a dime of tax ever again.
I remember talking to a client who was so sure a particular multi-level marketing program (aka Ponzi scheme) was going to make him millions that he was ready to send off a small initial downpayment to the promoter for $5,000. I walked him through all the signs that it was just a scam, but he responded by saying:
“Joel, I can live without this $5,000, but if there’s even a five percent chance it’s legitimate, then I want to participate.”
My arguments of fact and logic had no effect. He had suspended his common sense. The money was gone, never to come back, and a scammer on the other side of a P.O. Box in the Caymans was all the richer. Fortunately, my client was already rich, and the $5,000 was small tuition for him to hopefully not be scammed in the future on an even greater scale.
I see this occur commonly at investment conferences. A good promoter speaking about “whatever” manages to get the folks in the audience to suspend their common sense. The audience wants to believe and therefore does believe the “pitch” no matter how “too good to be true it is”. In the Caribbean and Latin America, we call this suspension of reason, “Margarita Madness”.
It’s painful to see, and legitimate project promoters and developers have a very difficult time competing with these charlatans at these events. As my good friend Mike Cobb frequently tells people, “If a scammer is planning on stealing your money, nothing limits the promises that he’ll make.”
If a legitimate developer can talk about future gains of 12 percent, a scammer can promise 20, 25, or 40 percent. If a legitimate pre-IPO company can talk about going public in three years, a scammer will tell you it’s right around the corner in six months. If it sounds too good to be true, it almost always is.
Here’s my top ten list of things you can do to identify and avoid scams.
1. You are being pressured to act quickly.
If it’s a good deal it will still be there next week. There’s no reason to write a check or give anyone your credit card today. If you are at an investment conference, tell the promoter you want your attorney, wife, husband, or neighbor to review the deal with you when you get home. A legitimate offer will wait another week. Legitimate business people are in business for the long haul. Scammers are not. How they react to your need to wait a week or two before you invest will say a lot about which camp they are in.
There are times, especially when buying property in a hot real estate market, that you might lose out on a particular property by waiting. But most solid developers have other similar properties if the one you wanted gets sold. I’ve also found if I ask a promoter, developer, or salesperson to hold an opportunity for me on a complimentary or refundable basis for a limited period (say one week) so I can do my due diligence, the answer is almost always “yes”.
2. Buying anything sight unseen.
I encourage all my clients to go see whatever it is they are considering as an investment. If there’s an agro investment in Malaysia, a textile opportunity in India, a truffle farm in France, a coconut farm in Brazil, a mango plantation in Panama, or a mining company in Chile, go see it.
I really can’t emphasize this point enough. The worst scammers (or best, depending on your perspective) frequently hide behind beautiful websites linking to P.O. boxes, anonymous crypto wallets, and credit card processors in places like the Comoros Islands in Africa.
But the worst of these scammers have literally nothing to show you except pretty pictures. As soon as you make arrangements to go and see the proposed investment, you might stop hearing from the person. A high percentage of all scams would fall apart if the investor did their own “in-person” due diligence.
If you can’t make a trip, reach out to an accounting or legal firm in the same city or region to vet your investment for you. Most offer a variety of audit services. Ask them as your hired professional to go to the place of the investment, take pictures and sit down with the principals to ask questions or review their balance sheet. They are getting paid to represent you and will take that responsibility seriously. Whatever you spend on that service is money well spent. And even if the company is legitimate and operating, you may learn independent information that makes you feel better or worse about your intended investment or cause you to ask for different (better) terms in making your investment. I’ve never met a client who was upset about spending money on due diligence. Ultimately, it’s much cheaper than trying to recover lost funds after the fact.
3. Review the business plan, PPM (private placement memorandum), and company financials.
Don’t be shy about this one. Scammers spend loads of money on sales and marketing materials but generally not so much on legitimate-looking books and records, beginning with a business plan and PPM and continuing with ongoing financial statements. If you are sending money to a company, ask to see the last three to six months of their bank statements. Are there any funds there, or does all the money immediately go out to the promoter?
I remember one especially good con artist who scammed people out of tens of millions of dollars in one Central American country before the local government authorities and a few investors began hunting for him. He got up from the middle of a dinner meeting and skipped town without anything. I kid you not; he excused himself to go to the bathroom and never returned.
When his local business records were seized, they showed every time he got any new investment, the funds came into his corporate bank account one day and were wired out to his various personal offshore accounts the next day.
Most professional scammers are prepared to get up from the table before dessert and skip town. Nothing is holding them there if the scam becomes known. So, you need to get as much information about the business as you can before you send any of your hard-earned money.
4. How will your money be treated?
Most start-up entrepreneurs are thrifty. They put their money into the business and want the focus there, not on ancillary things or themselves. They don’t stay at expensive conference hotels because they can stay a few blocks away at the Best Western or their cousin Frank’s house in order to save money. They will frequently tell you they flew a circuitous route to the conference because the ticket was a lot cheaper, or they had frequent flier miles on a less convenient carrier.
Scammers, on the other hand, are trying to impress you with themselves. But If I’m being wined and dined to make an investment, my first question is, where did the money come from for this? If I’m being fed an expensive steak and high-end wine, who’s truly paying for it? Because most likely it’s the last investor the scammer got to invest, in which case your money will be paying to impress the next investor and not going to generate future returns.
Scammers frequently also talk about how wealthy they are. They fly international business and first class, wear Armani suits and Rolex watches. These are all huge red flags. And it’s not that I don’t like these things, because I do like them all. The problem is wealthy people don’t need your money to build their businesses, and the legitimate folks who do need your money to build a business won’t be spending your money on first-class airfares and Rolex watches. So where does that behavior leave us? Probably a scammer.
I remember asking one of my super successful clients who was a wildcat operator in the oil and gas business why he never syndicated his deals or took on investors. He said simply, “When the well strikes, I don’t want to share a penny with anyone, and if it doesn’t hit, I don’t want to have to apologize to anyone either.”
His answer makes sense. After our meeting, we got in his extremely expensive car and drove to an incredibly expensive restaurant for a exceptionally expensive meal. My client picked up the tab, and there was no doubt who paid for it. But if a start-up company looking for money takes me out the same way, I just wouldn’t know whose money was being spent. I would incline to finish my cheesecake and politely decline whatever was being offered.
5. What’s the real return?
I was speaking at a global wealth conference in Medellin, Colombia, a few years ago. Speaker after speaker was touting their horns about how well their various investments were doing. Many had solid track records of nine, 12 and even 15 percent over the previous five years.
But then I asked in which currency the returns had been achieved, and the answer was Colombian pesos. I asked whether the returns were pre-tax or post-tax and whether they were before or after management fees, and the answer was pre-tax and before.
I don’t think most of the investment promoters there were scammers (although a few definitely were), but their claims had been allowed to stand for the audience and go unchallenged.
The reality was the Colombian peso had been depreciating at roughly 15 percent per year against the dollar during the same period being tracked. The management fees were on average 20 percent of the income, and the peso performance net of fees was subject to Colombian and U.S. taxes.
In reality, investors were on a gerbil wheel running fast with their investments but getting nowhere. Instead of doubling their money in five years, they were lucky to break even. Many suffered losses when converting their paper “gains” back to dollars.
All the promoters vilified me for my comments, but several savvy investors cornered me privately for giving them the facts.
I wasn’t invited back to the event the next year.
6. Are there any happy earlier investors?
Sometimes when I’m speaking at events, people will try and corner me about which investments I like there. I always try and avoid that question because in fairness, I’m not an investment adviser, and I don’t usually even watch the other speakers. I also don’t want to disparage anyone who might then go to the event organizer and say I’ve said bad things about them to potential investors.
Instead, what I usually say is, “Well, I don’t know them very well, but you should ask them how long they have been in business and whether you could meet several investors who have been with them for a while and who have actually received the promised returns.”
If it’s a new or start-up business without a track record, I suggest they connect with the company and follow them for one year before investing. If it’s a business requiring one, two, or three years (such as an agro investment) to get a return, I suggest they wait until they can meet people who’ve received the promised return.
A scammer sells something in the future but has no intention of being around to deliver any return to anyone. A three-year growing cycle can give him time to get in, sell a lot and run away before the investor has any expectation of receiving anything. The scammer is on to his next scam before the investors even realize they were duped. By meeting a few happy investors who have already received their returns you greatly increase your chances of also getting a return.
7. Let me see the title.
I can’t believe how many investors have handed over their hard-earned money for investments centered around real estate without asking to see a copy of the promoter’s title. Scammers have all types of excuses for why they don’t have the title. In many cases, it’s the fault of the government or someone else. No matter how sympathetic a figure they are, do NOT invest—this is very likely a scam.
If they don’t have fee simple title to the underlying property, they shouldn’t be selling you anything. I work with several large hotel companies, and that is always question one, “Show us your property title.” If the title doesn’t exist, there is no second question.
8. Permits and licenses, please.
Closely related to the title question above is the issue of licenses and permits. A developer may say they are building the next Taj Mahal, but that requires not only title to the property but also a building permit. Can I see it, please?
An investment manager generally needs to have a license from their regulatory agencies. Can I see it, please?
If they are offering banking, insurance, brokerage, or other financial services they should have a license. Can I see it, please?
You can further verify the credentials with the regulatory body. Are the company and individual properly licensed and in good standing? Having a ten-year-old license is not enough as most regulated entities require an annual license or certificate of good standing to be operational. The regulators will gladly answer the question as to whether or not the person (or company) you are engaging in is properly authorized to do business in that country.
9. Signatures, social security, passport numbers, and personal information. Protect your identity.
When you are looking at investing, buying property, or even interested in employment overseas, you’ll be asked for certain personal information. This may be a completely above-board request, or it could be a scam. You need to figure out which.
Sometimes it’s hard to know the difference, but always approach these requests with a healthy degree of skepticism. There’s almost no scenario where a foreign investment opportunity should require you to disclose your U.S. social security number. The one exception might be for a foreign bank account application where a U.S. tax disclosure form is required.
Your information is valuable, and the combination of your social security, passport, bank account, utility bill, birthdate, mother’s maiden name, and something with your signature on it is quite frankly a dangerous combination that can compromise you and your finances completely.
Scammers can use the information to open credit cards or try and hack into your existing bank account.
Whenever I’m looking at supplying information on a potential investment or land purchase contract, I let them have my name. Period. Even then, I usually ask for the contract in my name together with the words afterwards, “and or assigns”. This means I can transfer my interest to a trust, a company, LLC, or another individual.
When I’m asked to provide any additional information, I generally say I’m willing to provide personal due diligence after I’ve completed my due diligence on the company and promoters. Remember, the promoters are the ones asking you for your money. You have the absolute right to ask them for their corporate and personal information before you provide any information to them.
Not too long ago, one of my clients was making a substantial investment in a Swiss-based company. The client came to me with a four-page questionnaire asking for disclosure of just about any bit of information about him you could imagine.
I had my secretary scan the document and change the exact form to a form requesting the same information from the other party. The promoters came back and said they couldn’t supply the information because it would violate Swiss privacy laws. I said my client would not be able to provide the information to them for the same reason. We had a standoff.
Maybe they were totally legitimate, and maybe they were scammers. Neither my client nor I will ever know, but we eliminated the risk of his information ending up somewhere for sale on the dark web.
The bottom line here is you must protect your personal information at all costs. If someone asks me for my personal information, my response is, “Why and what do you plan to do with it?”
I might give someone my address and a copy of my passport if they give a good enough reason why they need it. If the person says, “I don’t know, that’s just our corporate policy.” I respond by smiling and saying it’s not my personal policy to give out that information. That usually leads to the issue being elevated to a higher authority within the company, but again they need to have a good reason, or they’ll get nothing more than my name.
I generally use my business address rather than my personal address, so if someone goes phishing for my personal account information, they will automatically be using company information that doesn’t match my personal account information.
If they need a copy of my passport to show I’m a foreign national, I’ll respond by providing it but blocking out the passport number. If they need a bank reference, I’ll make sure the bank account number is not included. If they want a cell phone number, I’ll give them the number of my office receptionist.
So regardless of what they say, I’ll never give them anything more than what they absolutely need for the specific reason stated. I’ll never connect all my personal data for them in a way that can be used against me for fraudulent purposes.
You mustn’t keep all your personal data in one place. Computers and phones are becoming more susceptible to hacking. Once the word is out you have money, you will become a target. Older people are especially being targeted by all types of scammers who have many tricky ways to get you to disclose your personal data. My 83-year-old mother-in-law was recently hacked by a scammer who took control of her computer remotely by posing as a “help desk”, and then he hacked all her accounts from the inside. My son spent several hours cancelling all her credit cards and resetting all her various passwords. Later that day, someone called her to say they were from Apple Care and were checking to make sure everything was secure and reset. They then proceeded to get all her new passwords and hacked her a second time.
And even if you think your wealth isn’t all that great, it may be a fortune worth the lifetime incomes of many people in a developing country. In India, for example, GDP per person is about $2,000 per year. That gives scammers there (and elsewhere) a strong incentive to hack your data and sell it or use it fraudulently. The more dots you connect for a scammer, the easier for them to hack whatever pieces are missing. My goal is to never give them any two dots to connect.
10. Watch out for the pitch, “With this investment, you’ll never have to pay tax again.”
As a lawyer whose done plenty of tax work over the years, it never ceases to amaze me how far people will go to avoid taxes. Scammers know this as well and they will use your desire to avoid taxes against you.
Unfortunately, there is no magic fairy dust which will eliminate your taxes. The common refrain, “I won’t owe tax until I repatriate the money to the U.S.” is patently false, yet this fabrication is played up by scammers everywhere.
The simple truth is that for Americans, the starting point is you owe taxes because you are a citizen. Period. Where you live, work, your investments, and when you repatriate funds to the U.S. is largely irrelevant. Yes, there are certain exceptions through existing deferral rules involving IRAs and insurance products, for example, which can give you an element of legal tax deferral (not tax evasion). There are also limited exceptions, such as the foreign earned income exclusion or becoming a full resident of Puerto Rico and operating a business there, which can have specific tax advantages.
Scammers will take these specific exceptions and try to promote them in twisted ways the IRS will never allow but instead cause you to end up paying fines, penalties or even face criminal prosecution while the scammer is long gone.
So, my quick response to these types of promoters is to ask them whether they’ve registered their scheme with the IRS as a registered “tax shelter”. The Internal Revenue Code requires promoters of programs aimed at reducing or eliminating taxes to register that promotion with the IRS so it can be vetted for legality. Failure to do so is a crime. People are pitching very specific things like opportunity zones in the U.S. which can reduce or eliminate capital gains tax in especially specific situations. These types of programs have been approved by law and are fine.
If an overseas investment opportunity claims to reduce or eliminate your taxes, ask them for a copy of their tax shelter registration. If they claim what they’re doing doesn’t require tax shelter registration, ask them for a copy of their legal opinion from a reputable tax lawyer or CPA firm explaining the legal authority for their position. If they have neither, you should be on your way and don’t look back.
Otherwise, these types of scams will bite you twice since the scammer is after your money which you won’t see again. But additionally, if you’ve taken an improper position with the IRS in reporting your tax obligations, you’ll have fines and penalties to deal with. The fact you were scammed and lost all your money won’t be a defense to the IRS. Under the law, you are always responsible for the positions you take on your tax returns. In this worst-of-the-worst scenario, you’ll lose your money twice.
An ounce of prevention is always better than a pound of cure. This is especially true when it comes to avoiding scams. Most scammers try to bring you into their dark world by appealing to greed or some equally strong emotion causing you to let go of your normal methods of discerning reality. You believe the story the scammer wants you to believe.
But keeping your sense about yourself isn’t hard. Shine a bright light of due diligence on any project in which you are interested in investing using these techniques. The legitimate projects will stand up to the light. They will relish and appreciate your efforts. Your investment bond with the company and its people will only grow stronger in the process.
Scammers, on the other hand, will run, hide, make excuses, and blame people or circumstances for whatever it is they can’t easily provide to you. They might try to make you feel awkward for not trusting them. Don’t buy into that game. “Trust but verify” was a simple phrase Ronald Reagan used in his negotiations with Mikhail Gorbachev. If that concept was good enough to bring down the Iron Curtain and the Berlin Wall, it’s certainly good enough for anyone looking to do business abroad. Shine the light of verification on every investment you consider making. It won’t ensure all your investments are a success, but it will change the odds of investment success greatly in your favor.
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