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FRAUD

5. Often, multilevel marketing (MLM) a. Participants earn commissions on the sales made
businesses are automatically categorized as by the people they recruit.
pyramid schemes because of their similar b. Participants primarily earn money on recruiting
organizational structures. In fact, some more and more members to the organization.
MLM businesses are legitimate operations c. Participants are promised high returns
while others are not. Which of the following and rewards.
is an indicator that an MLM might be a d. Consumer demand and market research drive
pyramid scheme? the development of new products.

ANSWERS
1. (d) Investment schemes — and Ponzi schemes Additionally, exchanges between different coins
in particular — have been known to be affinity- should be possible, and one that is traded only on
focused, seeking to exploit a shared kinship such its own exchange should be viewed suspiciously. If
as nationality, ethnicity, or religion. Community the cryptocurrency does not work anywhere else, it
leaders openly endorsing and exerting influence has limited its efficiency.
might be receiving a kickback from the scam as
well for recruiting victims. Also, ties to relatives and 3. (c) A pump-and-dump scheme is an illegal practice
close family friends alone do not ensure that an in which the perpetrator “pumps” or inflates the
individual is a legal or ethical partner with whom to price of a commodity through fake recommenda-
do business. tions and then “dumps” the investment by selling
Investment fraud schemes usually promise large at the inflated price and cashing out on the excess
returns with low risk and are often called “too good profit. The opposite scam is called a short-and-
to be true.” In contrast, real investments cannot distort, in which someone short sells a stock and
guarantee the exact percentage of returns and then proceeds to spread negative information to
naturally come with risk. Investment professionals drop the price of the stock. To avoid becoming a
and firms would not use words such as “no-risk” or victim of these types of scams, investors must be
“guaranteed” to describe legitimate investments. savvy to the risks involved when relying on celebrity
These professionals are also required to register endorsements. Any endorsement should be viewed
with the appropriate authorities, such as the SEC with questions, such as “What does this person
and state regulators. Registration and licensing are have to gain or lose from other people investing?”
important for paperwork and paper trails in the Consequently, investors must consider the source
investment industry. Additionally, private investment and view all endorsements, testimonials, and
opportunities often require an investor to be accred- statistics with an appropriate amount of skepticism.
ited and of a particular financial status, so divulging Another investment scheme involves a broker
one’s salary or net worth should be expected. Rolling “churning” fees for themselves in the excessive
over profits or reinvesting is also common, but pres- trading of assets in a client’s account without
sure to do so should be met with skepticism. meeting any objective. In a bait-and-switch scheme,
a customer is lured to invest in one certain product
2. (a) Much like any other opportunity, an investor or service, only to be offered another one entirely
should do their due diligence and research any ICO during the actual transaction. Investment coaching
prospects thoroughly. Simply trusting friends, relatives, schemes involve scammers offering to teach people
or celebrities is not enough to protect one’s wallet. how to invest and make a giant return on their
Most importantly, understanding the nature, risk, and money, only to take their money and leave them
volatility (especially when it comes to digital invest- with little to no real investing advice.
ments such as cryptocurrency) of an investment is vital
to investing wisely. Fake cryptocurrency can be dif- 4. (c) Betty should report the scheme to law
ficult to distinguish from legitimate coins and tokens, enforcement so that they can take action to stop
so fully comprehending the development strategy and the fraud, prevent further victimization, and
team of a new undertaking is critical. Every cryptocur- possibly recover any lost funds. Betty can choose
rency should have a white paper that explains the to either contact her nephew personally or wait
company’s purpose and technology information, and for the next statement to confirm her suspicions,
this should be readily available to investors. but doing so will likely only give the fraudster

14 | Journal of Accountancy May 2022