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Avoiding Financial Scams and Abuse

Last update on: Apr 21 2016

The world is rife with financial fraud and abuse, but many people don’t know enough about it, to their detriment. Even people who think they know the facts of financial fraud and abuse don’t, especially those most likely to suffer from it. You need to under-stand financial fraud and abuse, and then prepare and take precautions before it is a problem for you or those you care about.

Most people don’t even realize when they’ve been targeted for or subjected to fraud and abuse, according to a recent survey done for FINRA. The survey asked people if they’d ever been defrauded or targeted for fraud, and most answered in the negative. But the survey also asked people if they’d ever been approached with or participated in certain types of financial transactions, and 84% said they had. The financial transactions that were described in these questions were classic and widespread scams and frauds. That means most people, 84%, were targeted for fraud and didn’t realize it.

Several key factors make a person more likely to be a target of fraud and abuse.

Age, of course, makes one a target. That’s partly because as people age they tend to become more trusting and optimistic. They’re more likely to believe the best results will occur, and that makes them vulnerable to sales pitches.

In addition, cognitive skills diminish as we age. Our “executive thinking” skills peak as early as age 35 or 40 according to some research. After that, we’re less effective at critical thinking and cognitive reasoning. Having diminished cognitive skills doesn’t mean someone is suffering from dementia or other illnesses. It means they don’t analyze and reason as well as they once did, especially when they try to make decisions quickly.

That’s why it is important to take the time to carefully and thoroughly consider important financial and nonfinancial decisions and seek input and opinions from others. You should assume you might be missing something the first time and “sleep on it.” You also should encourage friends and relatives to make decisions more deliberately, so they aren’t defrauded.

As you might guess from the FINRA survey, most fraud victims don’t know what are known as “the badges of fraud.” Most people don’t know what are unrealistic rates of investment return and that very few investments are guaranteed. Those are just a couple of the badges of fraud most people can’t identify.

Other traits are common among fraud victims. They are likely to believe they can tolerate more risk than others (a trait more common among males and higher educated people). They also are less likely to seek advice from friends and family, because they’re afraid that will make them appear unable to make decisions and handle their finances. In fact, seeking advice from people who care about you is a sign of good decisionmaking.

Having some money also makes one a target, but you don’t have to be wealthy. Anyone who has a few thousand dollars or more in liquid assets is an attractive target to many crooks.

You need to understand financial abuse is different than fraud, and people are more likely to suffer financial abuse than fraud. Though a somewhat nebulous concept, financial abuse is when someone makes improper or illegal use of your property, money, or assets. It can include identity theft, using checks or credit cards without permission, and misusing or stealing property. It also can include inducing someone to sign a document or improperly using a power of attorney, guardianship, or conservatorship.

The key mistake many people make is not realizing perpetrators of financial abuse are highly likely to be people known to and trusted by the victim. When asked about financial abuse, most people say it is likely to be committed by strangers and the greatest threats are from Internet and mail scams or telephone solicitations. In fact, about 90% of cases of financial abuse are believed to be committed by family members or professional advisors of the victim.

Financial abuse is most likely to occur when two factors are present. One factor is disability or cognitive decline. The other factor is social isolation. This doesn’t mean someone is physically isolated. It means they have significant contact with fewer people and don’t spend as much time as they used to with family, neighbors, church members, or whoever else was in their social network for years. It also could mean they didn’t have much of a social network and have a smaller one now. The abusers tend to isolate people so that others can’t learn what  is happening to or influence the victims.

Of course, not everyone who is disabled or has cognitive decline is abused. But they are common factors in abuse cases.

Also, an abuser often has some kind of mental or emotional problem. It might be as simple as someone being overwhelmed at being a caregiver or who feels entitled to take advantage of the person. For example, a family member caregiver might conclude that performing the care entitles him or her to make personal use of the victim’s car or other possessions without asking or paying for them. After all, the victim can’t drive any more.

Often, the only help for a victim of abuse is someone else noticing a problem. That’s why it is important for all of us to know the factors that can lead to financial fraud or abuse and the signs abuse might be occurring.

You should keep track of friends, family members, and others you know for the warning signs of cognitive decline and social isolation. Social isolation is easy to identify and try to correct. When someone appears to drop out of the social network, try to call or visit the person. If a caregiver or other person acts as a gatekeeper and appears to be isolating the person, there could be a problem.

Also, be alert for changes in spending or investment patterns, erratic or unusual transactions (such as large cash withdrawals), lack of knowledge about personal financial matters or a reluctance to discuss them, and giving a power of attorney to a new person. Unusual fear of or submission to a caregiver also is a warning sign. You can find a checklist of these and other red flags of financial abuse at www.allianzlife.com/sos.

After seeing one or more warning signs, you don’t have to investigate or solve the problem. Instead, if you know one or more family members who have been close to the person, you can contact them and express your concerns. Even better, you can report a concern anonymously to local Adult Protective Services, or the long-term care ombudsman if the person is in a nursing home or assisted living. In most states, the report is anonymous by law. The state will look into the details and there won’t be consequences to you if it’s a false alarm. People are encouraged to report potential abuse if they have only a suspicion. There’s no downside to reporting a suspicion, and you could save someone from abuse.

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