Scam-proofing

Since the start of 2019, the Securities and Exchange Commission (SEC) has already issued at least 17 advisories against unregistered entities which have been soliciting investments from the public. Last year, around 40 such warnings were issued by the SEC. These advisories, from 2015 to 2019, are accessible online at the SEC website.

These warnings show that many people still fell victim to these entities who purportedly offer high earning investment products or promise substantial guaranteed profits.

Recently, the religious corporation Kapa-Community Ministry International (Kapa) is in the spotlight after the SEC ordered it to stop soliciting investments from the public. In fairness to Kapa, there have been no complaints yet against them.

But the SEC has maintained that soliciting investments from the public requires a license from the commission. It also noted that Kapa’s investment method resembled a Ponzi scheme. A Ponzi scheme, as defined by Investopedia, is a type of fraud that promises investors high rates of return with little risk. It attracts more investors by generating quick and massive profits for early investors, using new investors' funds to pay these early investors, until the inevitable collapse.

Last year, the SEC also warned against a newer form of soliciting investments – the unregistered online investment scheme. At least 14 groups were named, and these groups share many conventional methods of fleecing the public. Through Facebook and chatrooms, they offer investment contracts promising unrealistic profits ranging from 10% to 200% per month purportedly from trading bitcoins and other cryptocurrencies.

Another investment scheme the SEC warned against is the recruitment of members under the guise of sponsoring a person into the investment system. Schemes such as these are forms of investment solicitation or sale of securities which require a permit or license from the SEC under Section 8.1 of the Securities Regulation Code.

It’s easy to blame others for falling into such schemes and lump them together into one typical gullible group. But the results of a study done several years ago in the United States by Titus and Gover (Journal on Crime Prevention Studies, 2001) show that greed and gullibility were not the only character traits that increased a person’s vulnerability to become a victim of personal fraud. Other characteristics were carelessness, lack of interest in the news, and susceptibility to flattery and bullying.

Evidence showed that higher education did not protect persons from becoming victims of fraudulent schemes. Many educated people became victims of fraud because, for one, they were capable of setting aside money for investment. Another possible reason was that better-educated people “have wider interests, engage in a broader range of activities, and have more consumer participation in the marketplace than other demographic groups, thereby increasing their exposure to fraudulent solicitations.”

Another surprising revelation in the said study was that the usual offender was somebody known or close to the victim. In other words, an attempted fraud was unlikely to succeed if the perpetrator was a stranger to the potential victim. It makes sense because we don’t usually let our guard down with strangers.

The study is almost two decades old, so it is about time that regulatory agencies like the SEC do similar studies, particularly in the Philippine setting. Solving such a decades-old problem requires a closer examination of the conceptual, structural, legal, and cultural issues.

In the meantime, the SEC urges us to coordinate with its Enforcement and Investor Protection Department at [email protected] should we have any suspicions about an investment offer.