Frauds – The biggest reason for a personal financial crisis


In the age of information over load, it is surprising to see the number of financial scams and frauds. Most of the time they occur due to ignorance, negligence or incomplete information.   Time and again we come across a lot of people who are suffering a financial set –back due to bad choice of investments, scams and frauds or mis-selling. The type and scale of these financial crisis may be different but this is the result of ignoring a few common but utterly critical financial disciplines.

Haste makes waste: Shailesh and Nilanjana who lived in Electronic City, Bangalore were both software developers with a combined annual income of INR 24 lacs.  The couple in their mid-thirties were seeking to make an investment in a second home or property in and around Bangalore city.  They were approached by a broker who showed them a property in the outskirts of Bangalore and said it was available on a discount because the property was hypothecated by the bank and auctioned to repay the loan amount of the owner. He insisted on a token advance payment of 1 .5 lacs to show the bank that Shailesh and Nilanjana were interested in the property. After payment, the couple asked the broker for the documents to which he kept fumbling and giving them vague excuses. He then demanded an additional 1 lakh. This made Nilanjana and Shailesh get suspicious.

On checking they found that the broker had sold the same property to several others for a token advance. After catching hold of him they managed to get a cheque which subsequently bounced. Nilanjana and Shailesh lost their token advance for good. Basic background checks and enquiry about the sale of hypothecated property would have revealed that brokers cannot accept payments. They only perform a marketing role. They also cannot charge a rupee as commission or brokerage from the customer. The brokers are paid a flat fee for asset reconstruction by the bank.

An ignorant investor is the most vulnerable: Fraudsters and scammers look for ignorance, and senior citizens or newbie investors fall prey to them. The huge level of illiteracy in India has spawned off many fraudsters. Mrs. &  Mr. Nellamada were sold ULIP’s and Life Insurance plans by an insurance agent at the age 65. He sold them close to 10 policies with a total premium of INR 8 lakhs per annum. There is no need to buy life insurance when one has stopped earning or after retirement. After paying for three years the Nellamada’s decided to surrender the policies. Archana Singh who lost her husband at the age of 63 was cheated by her relationship manager, who used cheques signed by her to invest in his own name. Archana’s son who came from the US found that the fund receipts issued by him were false and forged. This happened before SEBI disallowed the use of third party cheques for investing in funds.

The promise of quick and easy money: Many new investors who get bowled over by a stock broker’s talk about making money in minutes or the profits they booked in a week’s time have seen all of their money go in the drain. Anish’s brother-in-law introduced him to a friend who was a stock broker and into active trading. While Anish was all excited about what he heard, the stock broker spoke to him about a promising media company. He said the stock is all set to soar and become double over the next 2 months. Anish invested INR 1 lakh on this scrip. The stock had a brief rally and then had a bottom- less fall.  The company went into liquidation after 2 years and Anish lost all his money. 

Most of the time it is the promise of quick and easy money or more returns which plays on the judgement of the investor. Trusting too much without going for a second opinion or doing background checks about the person or the process gives a lot of leeway for fraudsters to swindle your money. Remember there no such thing as ‘too complicated to learn or understand’!

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