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Each month we try to include an article on some aspect of fraud, whether it is designed to raise awareness of the size of the fraud problem, provide some information on types of frauds, or provide some information designed to help people avoid becoming a victim of fraud. This month’s article has one foot clearly in the avoidance of becoming a victim camp, and the other foot in an insolvency camp – or at least as far as it extends to lending money.

Whilst the action in this case may not have actually been fraudulent – and that is not the basis of the article – the actions of the ‘victim’ meant that he lost hundreds of thousands of dollars. I call him a victim as he was certainly a victim either of a fraud or his own bad decisions. Regardless, the result was the same. Obviously I have not included any names and paraphrased the information to protect identities.

We were recently appointed to a bankruptcy file where the main creditor was a person who had handed over money to someone (the now bankrupt). As part of the action to try to recover this money, the victim drafted a statement of the circumstances. The following passages were in the first two paragraphs of that lengthy statement.

These passages set out the circumstances and the information that the decision to enter the deal was initially based upon and seemed important enough to the creditor to include in the statement. I have included some comments from both a fraud prevention basis and a loan protection basis. This article is designed to raise some of the common tactics used by people (sometimes fraudsters) to obtain money from people, and some of the steps that people miss when considering lending or investing money.

" .. my best friend called me to tell me about a deal offered by [a friend] from a special friend of [that friend] .."
" .. as he was a very good friend of my best friend I was sure it was going to be ok .."

- Trust by association -

This was the first sentence of the statement. ‘Friend’ is probably one of the most misused words in our language. It is not only used to mean someone that you know and trust and can rely upon. It is also used as a matter of convenience to describe someone that you met once or twice and with who you may have shared a two minute conversation. It is an easy word to use when ‘some bloke I met at the pub, had a beer with and talked to about the football last Friday night’ is too difficult.

Unfortunately people place too much reliance on the use of that word, not realising the context in which it should be interpreted. A ‘friend of a friend of a friend’ suddenly becomes someone you can trust by association. You are sure that your friend would not introduce you to someone ‘dodgy’, and therefore their friend’s friends must also be Ok - especially when they are a 'special' friend.

Many bad investment decisions (and blind dates) have been entered into on the advice of people that have been called friends but who do not meet the strict definition.

" .. he told me a lot about his life and family .. and how the bank had given him a hard time .."
" .. after telling me lots of very personal things about himself, I thought he was a very honest and caring man who I could trust."

- Relationship building -

The name con-man came from a man who undertook a confidence trick. He gained the confidence of his victim in order to commit his fraud.

One method fraudsters used to gain your confidence is to let you know about themselves, their history and family, the past businesses, the people they know and the struggles they had in order to succeed. Naturally the whole story may be invented, but the idea is to build rapport and a certain amount of sympathy with the target. The theory is: Let them know about you and they will trust you because you have been open and 'honest' with them.

As most people like nothing better that to talk about themselves, fraudsters also ask their target a lot of questions and get them talking about their lives. Once people have told their life story to someone, they fell they have ‘connected’ with the person and can trust them. This feeling of trust is simply based on the 'they kept quiet while I talked about myself' theory.

Before too long the target starts to feel comfortable with the new ‘friend’ as they have been ‘open with me’ and ‘took an interest in me’. Confidence is built.

"I felt sorry for him and wanted to help him."

It worked!

" .. after telling me how honest he was and how he had never done any wrong to anyone in his life."

- Would I lie about being honest? -

I am always amazed at why an honest person would feel the need to tell you they are honest. The answer is they don’t. Honest people expect to be believed. Dishonest people do not, and have to sell their story. Telling you that they are honest is part of that sales pitch, a very important part of the sales pitch and one worth emphasizing. One of the biggest red flags I know is a person telling me that they are honest. Always ask yourself why they feel that they need to do so - because there is a reason.

" .. I could buy a house .. for $550,000 and [he] had sold most of them for $1.2 million .."
" .. my house would be finished .. and I could make a large profit .."

- Money, money, money -

The basis of the intended investment was the purchase of a real property at half its ‘true-value’ and - after it was completed - a quick sale netting hundreds of thousands of dollars profit. "If it seems too good to be true, it probably is", as it was in this case.

Effectively greed stepped in and pushed aside reasoning and common sense. This is a very common tactic and it used in many frauds, particularly investment frauds and Ponzi schemes. The lure of easy money is irresistible to some people.

When the deal is that good, you have to ask yourself why it is being offered to you. If there were hundreds of thousands of dollars to be made, why wouldn't the other person want to make that money them self?

" .. [he] told me it was a great deal."

- What else is he going to say? -

The last person who you get advice from on whether a deal is good or not or from the person that is going to get your money. They are hardly going to have a reasonable or independent perspective.

"The whole time .. he was putting a lot of pressure on me."

- Quick, or the deal will disappear -

Commonly a sense of urgency is added into the mix to force the target to make a quick (read: not well thought out) decision. The second last thing that a fraudster - or someone trying to talk a target into handing over money - wants is the target going away and having a long think about the transaction. The last thing that they want is the target getting some sensible advice and having time to do searches and ask questions.

There is nearly always some urgency and the 'deal may disappear' and 'you will lose this opportunity'. Whilst our victim in this case took a little time to think about the deal, he sought no advice.

Usual legal procedures not followed

- She'll be right -

When purchasing a property or lending money based on a security over a property, a few things should be done. In this case none of them were.

1. Conduct a title search of the property to see if the property exists in the stated form. This includes finding out who owns the property. In this case it was another company.
2. Make sure that there is a building on the property if you are told that there is one. Construction had hardly started and was delayed because the owner (the company) did not have any money to complete building work.
3. If lending, make sure that you have the first mortgage and that you are lending the money to the entity that owns the property – or that the party that does own the property can and will give you a first mortgage.
4. If bu|2010-05-03 20:17:24.887

Last Updated: 01.05.2010

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