What are some common finance scams to avoid?

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What are some common finance scams to avoid?

Rounding it up

  • Money was initially introduced as a way to trade commodities and slowly developed as valuable on its own.

  • There are lots of different types of money scams, all of which take advantage of human ignorance or scarcity.

  • “If it’s too good to be true, it probably is” are words to live by.

6 min read

Dan Bucherer
#finance scams#personal finance#debt management

Financial scams have been around as long as there’s been money. Scammers who defraud folks out of their hard-earned cash are a threat every consumer needs to be aware of. It is also an issue that regulators and governments have tried to contain for decades. Sometimes, efforts are fruitful and bad actors end up in jail. More often than not, however, it’s the job of consumers to keep an eye on their own accounts. After all, you’re likely the first one to notice if something looks amiss.

But what exactly should you be looking for? Are there hallmarks of a financial scam that are consistent across different types of scams? Here, we’ll look at some of the most common financial scams and talk briefly about what you can do to avoid them.

The history of money

You may think that financial scams have only come about in the last few hundred years as consumers have become more separated from objects of value. Paper money, after all, is really worth nothing–the only reason it’s valued is because people believe that it represents the value that’s written on it. For the vast majority of human history, people transacted with actual objects. Kings, queens, and those who ran markets would determine the value of various items. Two sheep, for example, may be worth 100 Kg of grain or a gold bracelet may be worth a cow. In early history, societies across the world–from Asia to Europe and Africa–all used tokens that denoted certain values. They did not, however, correspond to a specific value in the economy.

Then, nearly 5,000 years ago, the earliest known currency was established. The mesopotamia shekel was used as “commodity money,” representing a specific weight of barley. Mesopataiian culture and many others, including ancient Egypt, minted a variety of different coins which represented various items in a commodity warehouse. Because they were exact, they could be traded in place of the actual objects. The buyer would then go to the commodity house and pick up the value of the coin.

In the middle ages, around the 13th century, gold and silver coins began being minted. Gold and silver held intrinsic value–meaning the metal itself was worth something and didn’t necessarily represent another item. The paper banknote was established in Asia in the 11th century, stemming from the receipts merchants would generate when items were exchanged. Paper money made its way to Europe in 1661, and for several hundred years was issued by private banks for debts drawn on customers’ accounts. Slowly, over the next four hundred years, the issuance of bank notes shifted from banks to central governments. In 1971, President Richard Nixon announced that the US dollar would no longer be directly convertible to gold. Since then, all currencies are free-floating, meaning their value is completely reliant on the faith of the government offering it and the people who use it.

The history of fraud

Financial fraud is a tale as old as time. In fact, it can be traced back to 300 BC when a Greek merchant took out an insurance policy on a shipment of corn, then tried to sell the corn and sink the ship for the payout. This was the first recorded instance of fraud but you can bet it wasn’t the first true incident. Financial fraud has gotten a lot more complicated than this over the last 2,000 years, but it hasn’t strayed too far.

In 1792, Williem Duer defrauded the newly established US government by using insider information he obtained from George Washington’s cabinet to trade against state debt bonds. Secretary of the Treasury Alexander Hamilton was replacing the bonds with new ones issued by the US government and the key to profit was to know beforehand which bonds he was going to select to replace. He’d leak the information to the public, drive up the price of the bond, then sell it at a profit. He also started dipping into Treasury funds (he was a member of Washington’s cabinet) to make the bet even larger. He succeeded for years before being caught and dying in debtors' prison in 1799.

In the early 1920’s, ordinary Americans discovered the stock market and fraudsters appeared to take advantage of all the new, undereducated money flooding the market. They manipulated the value of stocks so that the value was far higher than the underlying asset, then the fraudsters sold their shares before others discovered they were worth far less than advertised. This left honest, ordinary investors high and dry.

These are just two examples of very large scale fraud activities that have occurred. There are countless more examples from ponzi schemes to fake cheques and everything in between. There are a few common financial scams that are easily recognisable if you’re vigilant about protecting your money. Let's run through a few.

Common scams

There’s a financial scam for nearly every financial product out there, from insurance to credit cards. There are a few big ones, however.

Fake cheques

This is the original scam if there ever was one. Someone calls you saying that you’ve won the grand prize for a lottery that you, conveniently, don’t remember entering. They’re sending you a cheque and when you receive it, all you have to do is send back money for taxes and fees. Here’s where things go left. When you cash the cheque, the bank will initially approve it and you’ll send the money for ‘taxes and fees’ back to the scammer. Unfortunately, the cheque will later bounce because it's counterfeit and you’ll be out of both your “winnings” and the cash you paid to the fraudster.

This is also a common scheme in virtual payments as well. You may receive extra money for a sale you made online via an online account like Paypal, only to be asked that you send back the difference. In reality, the scammers are using stolen credit cards to send you money and when the credit card company catches wind, you’ll be out the sale, your item, and the cash you sent back as a refund.

The President’s Scam

Let’s say you work for a large Canadian company. You’re going about your daily business when you see an email from the president of your company. He is asking for immediate assistance with an important matter and requests that you promptly reply to him. You do so and he tells you that he needs you to purchase several gift cards to a local big box store. He promises you’ll get reimbursed. It isn’t until after you email the gift cards, using your own bank information to buy them, that you notice the email address isn’t from your company’s domain at all.

This common scam takes many different forms and can be far more complicated. Many wealthy individuals were defrauded out of millions of dollars using an elaborate version of this scam in the early 2000s. The “ambassador” of France would ask the mark (or the victim) to send several million dollars to an offshore account to pay the ransom of an individual who was kidnapped by terrorists. The French government doesn’t negotiate or pay terrorists so they’d ask a private citizen to help. The mark would do so, only to find that the whole thing was a ruse.


Debt Collection Scams

Unfortunately, many Canadians are in debt and some have had their debts sent to collections. Collection agencies purchase debt that companies no longer want to deal with and attempt to collect that debt from consumers. Collectors are governed by fairly strict laws, especially how often they contact you and when, but they can be a bit pushy. Fraudsters know this and exploit these situations. The scam is simple: someone posing as a collector will call you, and tell you that you owe a business a certain amount of money. You can take care of it right there on the phone if you just provide your credit card information. Sometimes, the thief will ask you to pay in gift cards.

Home Repair Scams

This one is usually targeted at homeowners and the elderly. A contractor may knock on your door and say that he’s doing a job down the street and has extra materials. He’ll then say that he can take care of your roof or deck or other home project for cheap, but only if you agree to pay for it the same day. Just hand over a deposit and he’ll come back the next day to complete the work. If you’ve read this far in the article, you get the jist–he’s not coming back and is probably instead going on a shopping spree with your hard earned cash.

What can I do?

We’ve got a whole article on some tips and tricks to avoid financial scams. Here are the main points:

  • Be wary–if it’s too good to be true, it probably is.

  • Avoid “today only”–these deals are almost always fake.

  • Call back–if you receive a call saying you owe a certain amount, hang up and call the institution back using a number you find on a legitimate website.

  • Debt collection–ask for a verification letter, in writing, then cross check that with a phone call to a reputable number.

  • Domain–be skeptical about every email you get; take a close look at where the email originates (the part after the ‘@’).

Conclusion

Financial scams are as old as money itself and are still common today. They don’t have to be extremely complicated to be effective. Using your common sense, however, can help protect you from being taken for a very expensive ride.

Dan Bucherer

Dan is a runner and writer living in the Washington, D.C. area, where he currently works for a financial services trade association as the Communications Director.

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