Fraudsters target DIY super funds

A financial planner and two advisory groups operating in the self-managed superannuation market have been shut down in the past two weeks, raising concerns about the increasing level of risk trustees of do-it-yourself funds face.

This week a Sydney financial planner, Craig Dangar, pleaded guilty to obtaining a financial advantage by deception and making a false or misleading statement.

Dangar had sold $250,000 of shares he owned personally to self-managed fund clients.

A week earlier, the Australian Securities and Investments Commission obtained a court order against the operators of two Queensland self-managed superannuation advice companies, preventing them from carrying on some of their activities.

ASIC was concerned that the companies, Royale Capital and ActiveSuper, misled investors about their investments. Royale and ActiveSuper raised $4.75 million from 200 SMSF clients.

They were selling shares in companies based in the US and the British Virgin Islands and had not lodged appropriate disclosure documents with ASIC.

These companies were said to be purchasing distressed properties in the US.

ASIC says it was concerned Royale and ActiveSuper were operating an unlicensed financial services business, their disclosure to investors was inadequate and they provided misleading information. It was also concerned the companies conducted their marketing by making unsolicited calls. While ASIC did not say that either of the companies had committed fraud, the case fits the template for investment scams being committed with increasing frequency in Australia - and increasingly targeting self-managed funds.

Australia a target

Earlier this month the Australian Institute of Criminology issued a report, Serious and Organised Investment Fraud in Australia, which spelt out the common characteristics of a scam.

Australia is an attractive location for fraudsters because of the high level of household wealth and, in particular, the high level of superannuation and retirement savings. Organised investment frauds are usually launched from overseas, although, more recently, operations have been found in Australia. The fraud usually starts with a cold call.

Common types of investments promoted by fraudsters include green energy investments, new technology shares, real estate investments, options trading and foreign currency trading.

Sometimes the fraud involves investment in a legitimate business but the promoter misrepresents the high risk or illiquidity of the asset in other cases the business is a sham.

Investors need to recognise that frauds are likely to be the product of well-organised groups that go to a lot of trouble falsifying company details and sending out high-quality paperwork, such as bogus offer documents and account statements. Investors need to check with a number of sources, starting with the list of licensed providers on ASIC's MoneySmart website, to make doubly sure they are dealing with a legitimate operation. The profile of the typical victim is a big surprise. The Australian Institute of Criminology says victims are typically "educated, computer-literate and have undertaken preventative research that provides them with sense of assurance".

They are more likely to be middle-aged or older men who are self-funded retirees or small business owners. They are people who consider themselves financially literate. Investment fraud victims usually have above-average incomes and savings and are inclined to take more risks with their investments.

What can be done?

Following the collapse of Trio Capital, Australia's biggest superannuation fraud, in 2009, some of the superannuation funds that had invested with Trio were able to apply for government compensation, while others were not. Super funds that were regulated by the Australian Prudential Regulation Authority and had invested in Trio products, such as the Astarra Strategic Fund, were able to claim compensation under last-resort provisions of the Superannuation Industry (Supervision) Act.

The decision to award compensation is made by the Minister for Financial Services in consultation with the APRA. Compensation was paid on the basis that the value of the investment in Trio was destroyed by fraudulent conduct on the part of the provider.

Trustees of self-managed super funds (which are not regulated by APRA but by the Australian Taxation Office) were not eligible for that protection. A lot of self-managed fund trustees are unhappy about that, but it is not about to change.

The policy rationale for the exclusion of SMSF trustees from last-resort protection is that, as trustees of their own fund, they have direct control over their super savings and can protect their own interests.

A widely held view, which was reaffirmed in a report to government in April, is that self-managed funds are more like private investors than broad-based APRA-regulated funds.

The report on compensation arrangements for consumers of financial services, by academic Richard St John, conceded they have developed in a piecemeal way over the years and this structure was a cause of concern for a lot of people.

St John recommended against expanding the compensation scheme. He said reforms should be aimed at making existing standards more effective. SMSF trustees have the option of taking action against another party involved in the fraudulent transaction, such as a financial planner.

Keep your money safe

Checking several sources before investing is essential to ensure the legitimacy of the investment.

Check that any company you are discussing investments with has a valid Australian financial services licence. This can be done at ASIC's MoneySmart website. The site also has a list of unlicensed companies selling financial services and links to similar lists overseas, such as the International Organisation of Securities Commissions.

Diversify. Many investors who lost their money in Trio Capital were found to have put all their savings into that one investment.

Report the fraud. The Australian Institute of Criminology says there is under-reporting of investment fraud by victims and this makes it easier for scams to occur.

Protect your personal information. Do not give out personal, banking or credit card details to a cold caller. Check your bank and credit card statements every month for any fraudulent transactions.

Put your name on the Do Not Call Register. This will remove your name from telemarketing phone lists and reduce the number of calls. It won't stop fraudsters, however.