Effective legal enforcement, readiness with a robust legal framework supported by a centralised agency, comprehensive public awareness to empower people to spot warning signs and sophisticated technological approaches to detect frauds are crucial for Sri Lanka to combat rapidly-evolving financial scams. People need to remain watchful all the time in engaging in financial transactions online or offline
Financial scams have a long history. A long time ago, even in 300 BC, Kautilya in his famous book named ‘Arthashastra’ gave a description of frauds. His exposition on 40 ways of embezzlement bears the characteristics of some of modern-day financial frauds.
The integration of diverse technological applications, coupled with the fast growth of online users in today’s digitalised era, have created increased opportunities for the commission of financial scams. The Australian Competition and Consumer Commission states that one of the best ways to combat financial frauds and scams is to stay one step ahead of the fraudsters by being aware of scams.
This article is also an effort to educate the general public on various fraudulent schemes with a view to empowering them to be aware of such scams.
Scams come in different faces, sizes and shapes
The rapidly-increasing spread of social media, such as Facebook, WhatsApp, Instagram and Twitter, etc. have created a conducive environment for frauds. According to the relevant literature, 40% of the global population i.e. 3 billion people have become active users of these platforms.
One such social media scam is fraud perpetrated on the ‘e-commerce’ platform. There have been instances where payments are made to online stores to purchase items from a scheme which seems a ‘good deal for a gadget’. However, such goods never arrive. According to research conducted by the Swedish Consumer Agency, consumers with physical disabilities, low incomes, low level of education and poor language skills are more vulnerable to these scams.
The FBI’s Common Fraud Scheme section states that senior citizens are also more susceptible for shopping scams. Specially, elderly people, who live on their own, can be targets for bogus products and services. ‘Grandparent scam’ is another method used to deceive elderly people by informing them a family member is in a big trouble and requesting them to wire transfer some funds. People’s love and care for their families are misused and exploited by scammers through such activities.
‘Clickbait scam’ persuades people to click on a hidden URL which will eventually hack the user’s computer. Anderson (2008) describes these attempts of unscrupulous persons to influence others to engage in misguided behaviour online for financial or other malicious gain as ‘social engineering’.
Once the personal information, such as credit card numbers, PIN, and passwords are obtained, these can be used to commit fraudulent transactions. Invitations to join fake groups/fan pages for a membership fee, joining a fund quiz of a friend, feeding fake advertisements on cryptocurrency are instances where you need to be very cautious before clicking or pressing the button.
Collecting money after natural disasters or similar catastrophic events to help the affected parties is a frequent activity in Sri Lanka. This quality of generosity is also abused by scammers by impersonating genuine charities. During the recent bush fires in Australia, there had been such scams to collect money. These racketeers may operate online/offline to collect money for fake projects such as orphanages, religious institutions, etc.
According to Cromwell (2005), scammers don’t experience the negative emotions associated with face-to-face deception, such as fear or guilt, when they cheat people online. It seems different social norms or ethical judgments govern online transactions. People need to be smart enough to identify suspicious fund collectors prior to transferring any donation.
Opportunities to get rich quick
Research has suggested that people have a tendency to underestimate their vulnerability to scams. This weakness has made it easy to persuade people to invest money in scams for securing job opportunities. Sakvithi Ranasinghe had collected money from the general public claiming that he was recruiting ‘managers’. However, such depositors got neither the promised jobs nor the money back.
During the 2014-2015 period, another scam called ‘ad click’ was reported from the Tissamaharama area. People had been convinced by the perpetrators that money can be earned quickly while doing nothing. All they needed to do was to click on advertisements on particular websites. People had been asked to pay Rs. 65,000 as the joining fee and sign a contract which stated that the fee will not be refunded. In fact, the requirement to view the advertisements had been a trick used by the perpetrators to pretend that the particular scheme was genuine.
Poor financial literacy plays a big role in trapping innocent citizens into these scams. However, teachers, public officials and even police officers had joined such fraudulent schemes. Therefore, poor financial literacy is not the sole cause for such gullible behaviour. According to Mundra (2015) well-educated victims are considered ‘greed-driven illiterates’!
Advertisements and emails appear sometimes inviting people to obtain services from fund management advisers. They are very generously ready to take the burden of managing funds on behalf of other people.
Some companies of a business conglomerate in Sri Lanka had also used this ploy in mobilising deposits from the public without due authority. They had given ‘investment certificates’ instead of deposit certificates to circumvent applicable laws. Being familiar with the definition of a ‘deposit’ under the Finance Business Act No 42 of 2011 of Sri Lanka is, therefore, important to stay away from these scams.
Given the volume and sophistication of internet platforms, people can be misled to make such investments. Offers to invest in crop schemes, such as by purchasing a plot on a teak tree plantation, is another category of online fraud.
People should not allow themselves to be deceived by attractive words such as ‘not-to-be missed,’ ‘unimaginable returns,’ ‘get-rich-quick’ and ‘guaranteed opportunity,’ etc. A simple search on the internet would give a basic idea on the authenticity of a particular investment offer.
Dating and romance/sweetheart swindles
Given the rapid growth of internet penetration, this threat too can afflict Sri Lankan society. These scammers use dating websites, apps and other social media platforms to falsely portray themselves as prospective romance partners and deceive innocent people to obtain money and personal information.
The romance element of the scam is a bait to lure victims. Taking advantage of rapid technological improvements scammers can reach a larger pool of victims, who are geographically dispersed, with great ease and anonymity.
In Australia, these scams have involved millions of Australian dollars every year and ruined individuals and families. In Sri Lanka, there have been reports where online lovers have blackmailed innocent people through emotional tricks to get money and various other advantages. Therefore, extremely stringent precautionary measures need to be followed in respect of the people who come into our lives via online platforms.
You may have received emails informing you of winning a lottery, draw or competition and requiring you to make a small upfront payment to get the prize. When such surprise messages are received, think whether you subscribed to any of such lotteries. No matter how enticing it is, an unverified link, video or a file should never be clicked.
Instead of ascertaining the genuineness of these emails, people sometimes argue with authorities, such as the Foreign Exchange Department of the Central Bank of Sri Lanka (CBSL), to send the fee required by scammers. Such small payments add up to a big undue gain for fraudsters. Using names of reputed domestic and international organisations is a trick used by perpetrators to acquire credibility for their illicit activities. For example, there have been cases where people have claimed that the International Cricket Council informed them that they had won big cash prizes.
Once the up-front fee is made, scammers sometimes inform that the money is being withheld by a local authority, for example the CBSL. The CBSL has informed the general public that it does not write to anyone to make any payment to the CBSL to get their funds released. People have been advised to contact the Financial Intelligence Unit of Sri Lanka regarding such fake communications.
There are also events where people get messages regarding the large inheritance of money. Here again, a small processing payment is requested. People should understand that these scams are too good to be true and only the racketeers will win in the end.
This is a scam which originated in West Africa. It has now spread to other parts of the world as well. This is called Advanced Fee Fraud or ‘419 Fraud’ based on the applicable section in the Nigerian Penal code. According to Oriola (2005), this fraud has been unleashed on the Internet at a level and frequency that has led to ‘419’ entering into the online lexicon as a synonym for email scams.
These scammers send emails informing that you have been selected to share a hidden fortune of gold or assets abandoned by a corrupt government official or a large sum of money inherited by a family member of wealthy businessmen. No reply should be sent to such emails. Clicking on any links therein would also compromise the security of your device and social media accounts.
Payment card fraud
Payment cards make executing financial transactions convenient. However, mitigating risks associated with these instruments should also receive priority. According to a study by Neilson (2015), worldwide losses from card frauds increased to $21 billion, in 2015, and it is expected that by 2020 this figure will rise to $31 billion.
Payment card frauds are mainly two-fold. Card-not-present fraud happens online through emails sent by fraudsters impersonating credible institutions to steal financial/personal information. Card present fraud is a form of skimming. Scammers copy information from the magnetic strip on the card and create a ‘cloned’ card with your details on it. It is, therefore, essential to keep your bank informed when travelling abroad so that the bank can verify suspicious transactions.
If the payment cards are not used in a careful manner it will create room for identity theft. Credit card and debit card numbers can be stolen when payments are made through unsecured websites. Fraudsters can use a stolen, counterfeit or a cloned credit/debit card to buy goods and services.
These types of deceptions are designed to steal personal or banking information. They usually come via email or pop-up windows and look like coming from a company which is trusted by customers. Emails which ask for usernames, passwords, PIN, credit and debit card details most of the time fall into the suspicious category.
Banks and other financial entities should also have a responsibility to educate customers about the mode of communications used by them. The British Bankers Association (BBA) has issued a list of eight things a bank would never do: Sending someone to collect cash, bank cards or any other information, asking full PIN number or any other detail over the phone or via emails, sending an email with a link to a payee which asks the customer to enter online banking login details, etc. are some examples. The awareness campaign conducted by the BBA themed ‘Know Fraud, No Fraud’ is a vital project that can be implemented in Sri Lanka as well.
The Action Fraud of the UK, the Scam Watch in Australia, the Anti-Scam Centre in Singapore and the FBI in the USA are efficient and effective institutional arrangements for curbing scams. It would be prudent to introduce such a well-organised mechanism in Sri Lanka too in collaboration with law enforcement authorities. People need to exercise due diligence and care in dealing with government agencies, banks or any other service providers asking for money or personal information.
Pretexting is another dishonest action used for identity theft. People should be cautious in answering to customer service representatives, online research surveys and consumer feedback questionnaires, etc. It is also important to keep computers and other electronic devices up to date and to back up data often. Fraudsters using malware can steal personal information delivered to them in the blink of an eye.
Pyramid schemes are illegal transactions. The Securities and Exchange Commission of the USA describes these schemes as follows: “The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.”
Accordingly, the absence of a genuine product or service, promises of high returns in a short time period, easy money or passive income, no demonstrated revenue from retail sales, complex commission structure and emphasis on recruiting are notable characteristics of pyramid schemes. They may involve gimmick products or overpriced products or services that have little or no resale value and are not likely to be purchased again.
The FBI states that ‘franchise fraud’ or ‘chain referral schemes’ are also pyramid schemes in which an individual is offered a distributorship or franchise to market a particular product. The real profit is gained from the sale of the new distributorship and not by the sale of product.
Since the number of possible new recruits to the scheme in any community is limited, most of the participants at or near the bottom of the pyramid are vulnerable to lose the promised return on their investment. During 2007-2008, Sri Lankan citizens paid into a foreign company, using their payment cards to join a pyramid scheme. Ultimately, only the people at the top gained all the benefits. Bottom level members fell prey of a fraudulent scheme. The well-known case in Albania also revealed the dark side of these fraudulent financial schemes.
In terms of the provisions of the Section 83(C) of the Banking Act of Sri Lanka, conduct of certain schemes in the country is prohibited. The general public should be vigilant in making payments online or in cash to purchase goods and services and should not be deceived by racketeers who operate prohibited schemes. No document or contract should be signed at any seminar or other events to join suspicious marketing schemes.
Ponzi schemes depend on a continuous stream of new depositors/investors for their sustenance. According to historical records, Charles Ponzi conducted the first Ponzi scheme in 1920. There have been several episodes of Ponzi schemes in Sri Lanka, such as ‘Sakvithi,’ ‘Danduwam Mudalali’ and other similar unauthorised deposit taking institutions. These are schemes that promise to pay relatively high rates of returns.
There are online Ponzi schemes as well. Plotters claim that money is invested in high return earning instruments. However, what really happens is that every new deposit is used to pay off earlier deposits. Once operators take the remaining money and run these schemes fall apart.
The largest Ponzi scheme in history, which defrauded approximately $ 65 billion, was run by Bernard Madoff, who was arrested in 2008. He is still serving a 150-year sentence in prison. Thomas Petters and Allen Stanford are two other criminals who ran Ponzi schemes.
It is important to check the authority possessed by deposit/investment takers to accept money from the general public. Without a license from the CBSL, mobilising deposits from the public, in Sri Lanka, is prohibited and permission to mobilise other investment is given by the Securities and Exchange Commission.
Guaranteeing high investment returns with zero risk and insistence to roll over the investment should be identified as red flags. People need to make sure that their assets are always held by a legitimate entity.
Taking loans at exorbitant rates and borrowing more and more to repay such loans have put innocent citizens into debt traps. It is observed that unauthorised micro finance companies have contributed most to this vulnerable condition afflicting rural people.
The latest addition to this saga in Sri Lanka is ‘online lenders’. The modus operandi used by these lenders is sometimes highly questionable. Social media platforms are used heavily for marketing online loans. People complain that such lenders offer loans claiming that there is no interest but only a processing fee.
However, after a week people from the lending company call and ask a very high interest fee. Failure to pay such interest has sometimes led to harassment based on very unethical actions. The emotional well-being of borrowers is also damaged due to these loan schemes. In a number of instances, this has even led to suicides.
Each individual should be aware of his/her repayment capacity and affordability prior to borrowing from informal sector lenders. At present, ‘credit only’ institutions do not come under the remit of the CBSL or any other regulator. The CBSL has proposed a Credit Regulatory Authority Act to address this lacuna in the legal framework.
Prior to downloading any loan app/application, people need to be aware of the exact details of the terms and conditions of such loans offered by virtual lenders. Some of such lenders don’t even have physical offices and misuse the advantages of digitalisation.
Let’s be scam smart
Effective legal enforcement, readiness with a robust legal framework supported by a centralised agency, comprehensive public awareness to empower people to spot warning signs and sophisticated technological approaches to detect frauds are crucial for Sri Lanka to combat rapidly-evolving financial scams. People need to remain watchful all the time in engaging in financial transactions online or offline.
The CBSL has declared 2020 as a ‘Digital Year’. However, cyberspace should not be a breeding ground for frauds. While promoting innovation to enjoy the benefits of digital platforms, room should not be left for financial abusers.
“Technology and techniques involved in online scams have evolved and so have our responses. But, the underlying flaw remains human nature itself” – Markus Jakobson
(The writer, a Deputy Director, CBSL, Attorney-at-Law, can be reached at firstname.lastname@example.org. The views and opinions expressed in this article are those of the writer and do not necessarily reflect the official policy or position of any institution.)