Financial Crimes
Training
The Typical Criminal
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Professional persuader, takes control of the
conversation, and builds relationships
with the intended victim.
Appeals to the dreamer in us
Brings out the worst traits in
humans, particularly feeds greed.
Makes people feel inadequate or
stupid if they do not believe him/her.
Very friendly, yet controlling.
Central Registration
Depository
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In most cases, any person who sells securities
must be registered to do so.
Financial professionals can be checked out on
the Central Registration Depository (CRD)
CRD is a computerized database that holds
qualification, employment and disclosure
histories of registered securities employees.
Go to InvestSmart.org for link to the CRD
database.
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Every year Montanans lose millions with a
high number of victims being cheated out of
their life savings and retirements.
Nationally billions are lost every year to
investment fraud and scams. These scams
touch both the rich and poor; the
sophisticated and the unsophisticated; the
timid, the greedy and the elderly.
What is it?
A “pyramid scheme” is an
illegal multi-level marketing
program where the product
(if there is a product) is only
of secondary importance
Definition - § 30-10-324(6)(a)
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Pyramid schemes promise big returns in a
short amount of time for doing nothing but
handing over money and recruiting others to
do the same.
How does it work?
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Victims make an initial investment, which
gives them the right to
recruit others
For each person that they
recruit, they receive money,
gifts, or bonuses.
The new recruit then makes
an initial investment to get
their right to recruit
Money coming in from new recruits is used
to pay off early investors
The End Result
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A pyramid scheme is impossible to maintain
and eventually the pyramid will collapse.
The scheme gets too big and
the promoter cannot raise
enough money to pay earlier
investors
A vast majority of participants
in a pyramid scheme lose all
or a high percentage of their money.
The promoter of a pyramid scheme can get
fines up to $100,000 and 10 years in jail.
§ 30-10-325(2)
Impossible to Sustain
16
2 36
3 216
4 1,296
5 7,776
6 46,656
7 279,936
8 1,679,616 More than Montana’s Population
9 10,077,696
10 60,466,176
11 362,797,056 More than the U.S. Population
12 2,176,782,336
13 13,060,694,016 More than the World Population
What is it?
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“Ponzi Scheme” is named for Charles
Ponzi, an Italian immigrant who
made millions in the 1920’s.
“Rob Peter to pay Paul” is the
principle of the scheme.
Definition §30-10-324(6)(b)
Ponzi schemes generally involve
a promoter who makes false
claims about how the money is
being made.
Ponzi schemes differ from
Pyramid schemes in that they
involve a single promoter/company, unlike the
Pyramids hierarchical structure.
How does it work?
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Victims make an investment,
with the promise of a high
interest return on their money
Promoter pays big returns to
early investors using the money
from later investors to help
make scam seem legitimate.
Statements are sent out,
showing how well the company
is doing. Early investors also
spread the word.
Promoter sits back and allows investors to find
other victims. Greed feeds the scam.
The End Result
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Eventually, the promoter runs
out of investors. The scheme
collapses as investors demand
their money and there aren't new
investments to pay them with.
Early investors will make big
gains but later investors will
lose everything. Most of the
time, the promoter will have
already disappeared with a lot
of the investments before the
scam collapses.
The promoter of a Ponzi scheme can get
fines up to $100,000 and 10 years in jail.
What is it?
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A variation of the “pyramid scheme”
Also known by names such as: The
Original Dinner Party, Friends
Helping Friends, Airplane Club,
the Ya-Ya Girls, Circle of
Friends, Women empowering
Women and Chain Letter
Variations of the Gifting club offer a
product to incoming recruits in exchange
for money and then the new recruit has the
right to sell the products to someone else and
thereby recruit another person into the
scheme.
How does it work?
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Victims are told that the cash they invest is a
gift, not taxable, and that this makes the
scheme legal. Some clubs require members
to sign a form stating the money
is an unconditional gift.
Investors recruit new people
into the “club.” As new recruits
are enrolled, the person at the
top of the pyramid receives their
“gift” and leaves the scam, so everyone
moves up the pyramid and “closer to their gift”
A variation has members selling a product and
they turn over the profit of their first sale to
the person that recruited them.
The End Result
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Gifting Clubs are pyramid schemes. They
must continually recruit ever-increasing
numbers of new members to survive.
When the club fails to recruit, it
collapses. Or law enforcement
ends the illegal activity
A vast majority of participants
in a gifting circle never see their
big payoff , instead they lose all the
money that they paid into the club to
enrich a few members
The promoter of a Gifting scheme can get
fines up to $100,000 and 10 years in jail.
What is it?
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No specific definition for this crime but falls
under § 30-10-301(1)
A scam that targets a specific
group. Often the targets are
religious, ethnic, or
professional groups.
The swindler takes advantage
of the tight knit structure of the group.
The criminal often makes comments that
convey the basic message of “you can trust
me, I’m like you.”
How does it work?
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Affinity fraud often works with a pyramid
scam, a gifting circle is especially prevalent.
The scam may be based on dire
predictions of the future and
the need to prepare for an
emergency or disaster.
Group leaders are the most
often targeted. Criminals will ensure that
the leader receives a big payoff from the scam
because the leader will begin to spread the
word and entice group members to become
involved in the scam.
The End Result
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Victims of affinity fraud rarely recoup their
financial damages.
Emotional damage is often
more excruciating as victims
have been scammed by a
person that they trusted.
Many groups lose membership
and even become defunct after
a case of affinity fraud in the group.
The perpetrator of Affinity fraud can get a fine
of $5,000, 10 years or both - § 30-10-306(1)
What is it?
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Mining/Precious Metals
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Oil and Gas
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Offshore Investments
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Promissory Notes
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Definition - § 30-10-202
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Penalty - § 30-10-306(1)
Spot the Scam
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Terms like “investment of a lifetime” and “high
return with low risk” are used.
Swindlers will often use
emotion instead of facts to sway
investors.
The criminal avoids providing
any written materials about the
investment.
People who sell investments must be licensed
in the state of Montana to do so. Check their
license
Mining/Precious Metals
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The lure of Gold, silver, precious metals,
and gems is the age-old ally of a criminal
trying to persuade investors.
People perceive an investment in
“tangible” things, like gold and
silver as safer investing.
Usually involves a claim of finding
an “old mine,” a untapped oil/gas
resource,” or a “stockpile of gems,” Investors
are warned that secrecy is key to the profits.
 Huge returns on the investment
Short period
of turnaround and a “sure thing” investment
are promised.
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Offshore Investment
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Chronic in the internet era
Swindlers will normally employ a
shell company off shore but the
investments rarely stay within
the shell company for very long.
 Investors are told that they can
avoid taxes and their money will
grow faster and have a higher return.
 Frequently comes with some type of credit
card or ATM card.
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Definition falls under § 30-10-301(1)
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Penalty - § 30-10-306 (1)
Promissory Notes
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Sounds Simple and Safe.
Investors are promised very
high, even double digit returns.
Criminals will try to persuade a
legitimately licensed/registered
producer or other professional to
sell the notes for them.
The notes are backed up by an insurance
company that is offshore.
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Definition - § 30-10-202
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Penalty- § 30-10-306 (1)
Suspicious Activities
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Statement shows unauthorized activity
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Excessive trading and/or Churning
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No action is taken after talking to a
manager or compliance department
Broker tells investor to make checks
out to a different entity or firm
Investor is put into products not associated
with broker or firm
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Reporting § 30-10-310(1)
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Penalty § 30-10-306(1)
Law Enforcement Action
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Interview the victim
Keep in mind that often times they will not see
themselves as a victim
If the victim has not sent in or transferred
money attempt to talk them out of sending the
money
Take a detailed report and gather all
documentation.
If needed try to locate a family member to sit
in while you talk with the victim
Contact the State Auditor’s Office Securities
Department 1- 800-332-6148 or 406-444-2040
Financial Crimes
Training
For more information or assistance, please call
(406) 444-2040 or toll-free (800) 332 - 6148
State Auditor John Morrison