Growing threats from fraudulent online entities raise concerns for a concerted global awareness and regulation. Deputy Group Business Editor, Taofik Salako, reports on global efforts to protect investors from scams and frauds
Increasing adoption of technologies as major drivers for investment operations has significantly opened up the capital market to higher tempo of activities and new generations of investors. In Nigeria, most stockbroking firms have self-serviced trading portals that allow individual investors to trade on the stock market at their convenience.
Other financial institutions including insurance firms, investment management firms, banks and finance houses among others also have various online investment products and portals that provide convenience to customers.
But the convenience and boom of online finance and investment products also come with greater risks to unsuspecting investors and customers.
The International Organisation of Securities Commissions (IOSCO) has warned against growing threats of online harm to retail investors, calling on national regulators to enhance protection for investors.
IOSCO is the global body of securities regulators and its members regulate more than 95 per cent of the world’s securities markets in more than 115 jurisdictions. Nigeria is a board member of IOSCO.
In a warning circulated to securities regulators, IOSCO explained that online harm can take many forms, encompassing, for example, the inappropriate online promotion of risky investments, misleading statements made in advertisements or social media content, and fraudulent and illegal online activity or other investment scams, including those involving digital assets.
Online harm means financial fraud perpetrated on the internet, primarily targeting retail investors in the securities and derivatives markets, orchestrated using deceptive acts and misleading or fraudulent content, including user-generated content, where the author is unauthorised, or makes false or misleading claims or impressions, to induce the purchase of financial products and or services. This may take the form of advertisements, videos, impersonator websites, social media posts, as well as comments or reviews.
Blacklist of illegal online firms
Nigeria’s apex capital market regulator, Securities and Exchange Commission (SEC) recently blacklisted six online trading platforms in its latest crackdown on illegal and unregistered firms purporting to offer investment and finance services and products.
SEC said the blacklisted e-commerce companies and their websites offering online trading platforms to the investing public were not registered in Nigeria and the financial services offered by them were also not authorised.
The blacklisted firms include Prime Invest and “Primeinv.co, FXBoxed, New Finance LLC and New Fx Limited, Axi24, Evolve Consulting LCC and Trust Fund- Mining Global Pty Ltd.
“Members of the public are advised to adopt the greatest diligence in making investment choices. In view of the above, the general public is hereby warned that any person dealing with the above mentioned e-commerce websites is doing so at his or her own risk,” SEC stated.
SEC had earlier in 2023 warned the investing public against patronizing a set of firms blacklisted by Italy’s securities regulator, Commissione Nazionale per le Soecieta’ e la Borsa (CONSOB).
CONSOB had blacklisted five additional e-commerce websites for offering unauthorized and fraudulent financial services. The blacklisted websites included CMS or capmarketstrategy.io, Bitsterzio, Invest Atlas, Ether-Arena Ltd and Ether-Arena Ltd operating under veneab.co.
CONSOB had ordered Internet Service Providers (ISP) operating in Italy to block public access to the blacklisted websites and called on prospective investors to adopt the greatest diligence in making investment choices.
CONSOB advised investors that common sense behaviors are essential to safeguarding one’s savings, including checking the registration status or otherwise of such e-commerce websites.
A growing pattern of uneasiness
According to IOSCO, while the misconduct patterns might be familiar, the ease of such online misconduct and the borderless nature of the online environment present new and growing challenges as novel forms of crypto-asset or technology-based fraud are increasing.
The global regulator noted that the growing sophistication in the application of Artificial Intelligence (AI) to all facets of society has the dual potential of magnifying the scale and impact of harmful online activities and providing new and powerful ways for regulators to detect, deter and disrupt such activities.
The body pointed out that it issued the warning circular to alert retail investors about the serious perils of online harm and call to action to regulators to respond holistically and innovatively to online harm, including by working with players in the broader online harm ecosystem.
IOSCO also called on other relevant stakeholders, including legislators, law enforcement agencies, search engine operators, social media platforms and other intermediaries and facilitators to support global efforts to reduce online harm.
Chairman, IOSCO, Jean-Paul Servais said while buying investment products and services online can bring significant benefits for retail investors such as convenience and reduced costs, the easy availability of investment products and services online brings an increased risk of fraud.
“Retail investors are at risk of falling victim to ‘bad actors’, who take advantage of them through online scams, which can lead to significant losses of money. We will continue our work to combat online fraud through rigorous enforcement efforts and by informing retail investors so they are vigilant to the risks and can take precautions to avoid frauds and scams. We urge retail investors to only use reliable sources of information; to not invest too much money in one single product; and to never invest more money than you can afford to lose,” Servais said.
IOSCO, recognised as the global standard setter for the securities sector, welcomed the growing online retail investor participation and subsequent increase in volume of retail trading online facilitated by technology.
It noted that while such activity greatly contributes to financial inclusion and development of capital markets, there has been a parallel rise of ‘bad actors’ using sophisticated but fraudulent tactics to build trust and exploit vulnerabilities and opportunities.
“Therefore, we would like to warn retail investors of the serious risks of, and potential for, widespread investor losses caused by illegal acts and schemes conducted by fraudulent companies online which have global reach,” IOSCO stated.
Critical threats
The global regulator outlined that it had particularly identified several critical threats that it wanted to draw the attention of the retail investor community, including that online harm reaches countless investors around the globe, including those who are most vulnerable such as the elderly or those who lack financial education.
The body noted that the rapid expansion of online harm continues at an unprecedented pace, likely aided by the ease by which such harm is conducted while regulators continue to receive numerous complaints about the online promotion and distribution of illegal products and services, and the widespread losses that retail investors are suffering around the world.
“Online harm poses distinct challenges to enforcement. It is widespread, borderless and it is difficult to physically locate perpetrators. The use of payment mechanisms via new technologies can make it extraordinarily difficult to prevent, detect and prosecute violations of financial services laws; and
“Those who perpetrate online harm are increasingly sophisticated, evasive and are layering their activity through multiple jurisdictions to hide the identity of underlying actors,” IOSCO stated.
The group stated that a joint and collaborative approach at the global level is urgently needed to raise the awareness of the investing public to these threats.
According to IOSCO, online harm is not tied to particular products or services. It may be perpetrated through offerings of complex and leveraged products, some of which might be akin to gambling products, or other popular products, such as crypto currencies. Such products may not always be suitable for retail investors.
“Any product can be dangerous for retail investors when offered by bad actors who may scam inexperienced investors into trading more frequently than they would like to or take risks outside their comfort zone and beyond their financial capacity.
“In an environment where retail investors may incur substantial losses, in certain cases their life savings, combatting online fraud and harm has become one of the biggest priorities for IOSCO who want to promote enforcement in order to protect retail investors. Therefore, we urge the retail investor community to be vigilant and to always perform due diligence when engaging in online activities in financial markets.
“We also invite retail investors to review the online resources available on the IOSCO website to better understand the relevant risks and to become familiar with “red flags” of potentially harmful online solicitations and activities, such as ‘risk free’ investment opportunities or offers that sound too good to be true,” IOSCO stated.
Need for collaboration
IOSCO called upon regulators to respond vigorously to online harm by various measures including onboarding innovative prevention and enforcement activities, such as domestic and international disruption, to rapidly and decisively curb online misconduct as well as taking a purposive approach to rendering the fullest assistance as is legally permissible in each jurisdiction to fellow MMOU and EMMoU signatories, including in matters involving new products, and adopting a bold and robust approach to assisting other regulators proactively and in response to specific requests.
IOSCO added that regulators should press for changes to jurisdictional perimeters and powers to ensure they continue to provide an appropriately high degree of investor protection within the increasingly complex online environment while also ensuring that robust and effective investor online harm awareness and education preventative initiatives, such as the World Investor Week, are consistently undertaken and remain fit for purpose to address new and emerging online harm typologies.
The global body urged regulators to deploying sufficient resources, including funding, staff and technology, to undertake effective enforcement and cross-border cooperation programmes to protect investors from the rapidly expanding danger and to minimize consequent impact.
“IOSCO strongly encourages all regulators to respond vigorously, collectively and collaboratively to this growing threat, and to ensure that they continue to onboard effective powers and resources to deploy a robust and just response to online harm.
“IOSCO also calls upon all relevant stakeholders in the broader online ecosystem to join forces and work closely with regulators and law enforcement agencies in the fight against online harm. This is a crucial step towards supporting IOSCO’s global endeavours to safeguard retail investors from fraudulent and other malicious online activities. It is vital for all parties to come together and proactively collaborate to identify and tackle these issues at their root. This will enhance the protection of investors in the digital age, leading to confidence in the financial markets, which is key to thriving economies,” IOSCO stated.
Tackling the menace
IOSCO however acknowledged that regulators in many jurisdictions have proactively taken preventative steps to engage in domestic and international disruption, including by issuing public warnings about or promptly blocking access to fraudulent websites, working with other authorities, criminal law enforcement and other partners, promoting investor education and collaborating with Internet intermediaries.
“Significant reforms are underway in a number of jurisdictions to engineer a safer and more accountable online environment for investors, including in the area of digital assets. Recently, a number of IOSCO regulators launched an initiative to make intermediaries aware of the crucial importance of this issue and the stake they have in actively participating to limit online harm.
“IOSCO members are responding proactively to harmful online activity through case-specific, cross-border cooperation within the framework of the IOSCO Multilateral Memorandum of Understanding and the IOSCO Enhanced Multilateral Memorandum of Understanding (MMoUs). In addition, IOSCO takes the view that members are required to discharge their obligations under the MMoUs, including through rendering the fullest assistance permissible under the MMoUs in response to requests for assistance in securities and derivatives investigations involving new products and services or firms that provide new products and services,” IOSCO stated.
In Nigeria, the Investment and Securities Bill (ISB), currently undergoing law-making process, stipulates a minimum jail sentence of 10 years for operators of Ponzi schemes and other illegal, unapproved investment schemes. The Bill contains a categorical prohibition of Ponzi schemes, illegal investment schemes and other bogus offerings aimed at luring people into unapproved fund or investment management.
The categorical prohibition clause and the stipulation of specific punishment, which are newly included in the body of capital market law, provide the proposed law with a stronger enforcement basis to tackle Ponzi schemes and other bogus offerings.
The ISB, upon enactment, is expected to replace the Investment and Securities Act (ISA) and become the main body of law for the Nigerian capital market. It will be the operative legal framework for the SEC.
Director-General, Securities and Exchange Commission (SEC), Mr. Lamido Yuguda, said the apex capital market regulator has stepped up awareness campaign and enforcement activities against online investment frauds and scams.
SEC had in the past three years closed down and took enforcement actions against not less than 30 ‘ponzi’ and fraudulent online scams.
According to Yuguda, identifying bogus investment schemes and illegal operators would be easy once prospective investors look out for telltale signs that indicate the scheme or operator may be a Ponzi.
He said it was not very difficult to identify a Ponzi scheme as they usually promise unreasonably high returns just to lure people.
He noted that SEC has been fighting a serious war against Ponzi schemes, and been engaging and alerting Nigerians on the need to only deal with operators that are registered with the Commission.
He assured that the Commission would continue to collaborate and engage relevant agencies to eliminate Ponzi schemes in the capital market.
“Unfortunately, a lot of people continue to patronise these Ponzi schemes, we have had cases that have been reported to us, our enforcement department and the police unit have been on many of these cases that have been reported to us trying to resolve them.
“I will like to use this opportunity to say that it is not very difficult to recognize a Ponzi scheme and the people that go to Ponzi scheme many of them are probably aware that there is a type of risk that they are taking, because when somebody tells you that I will pay you a 10 per cent per month on your investments, that means if you invest N1 million, every month you get 10 per cent of that which is N100,000. If you see something like this, it is probably too good to be true. Because when you compound the annual rate of return, you find out that it is way higher than any decent investments can give you,’’ he said.
“There are people who think they can be amongst the first people to go in and probably go out before it collapses but you may be taking a huge risk because you do not know if you are the first, may be the 1000th and could be that it is your own money that could get trapped. It is important for investors to understand the tale-tell signs of a Ponzi scheme and to alert the commission if they need some clarity,” Yuguda said.
On a global scale, IOSCO’s Committee 4 (C4) and the Screening Group (SG) are engaged in broader policy work in this space. For example, C4 in conjunction with Committee 3, have developed a toolkit of policy measures: the Report on Retail Distribution and Digitalisation and the Report of the Retail Market Conduct Task Force published by IOSCO. IOSCO, itself, is proactively taking steps to combat online harm. For example, the recent Report of the Retail Market Conduct Task Force identifies best practices by IOSCO members, which include the use of advanced technologies, such as AI and web-scraping applications to proactively identify scams. Similarly, IOSCO’s recent reports on Retail OTC Leveraged Products and Retail Distribution and Digitalisation analyze nascent trends and developments in “online marketing and distribution to retail investors (including cross-border aspects)” and detail policy, enforcement and investor education measures with guidance for IOSCO members. Members are also engaged in investor education initiatives. Each year IOSCO promotes World Investor Week, an awareness campaign for retail investors held during the first week of October which delivers key messages on online engagement and related fraud prevention.
