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Common Types of Fraud to Watch Out For


Fraud occurs in all areas of society. With the increase of online shopping, email phishing and telephone marketing, Americans are more vulnerable now than ever. Follow these tips to avoid falling victim to some of the most common types of fraud.

Telemarketing Fraud

Americans lose millions of dollars to phone schemes every year. Although telemarketing calls often come from legitimate companies trying to sell a product or service, these calls also can be scams. Telemarketing frauds can be disguised as a business or charity — and because the call can move quickly, it is vital for you to pay close attention to the sales pitch.

There are several red flags to be aware of when listening to a telemarketing pitch. First, it is illegal for telemarketers to ask for a fee upfront — if the caller asks you for payment information, such as a credit card number or bank account, it likely is a scam.

It also is illegal for a company to ask you to pay a fee to win a prize or to claim that payment will increase your chances of winning a prize.

Some less obvious signs of a telemarketing fraud include pressure to act immediately, the implementation of scare tactics, demands for payment by courier or claims that you are guaranteed to “get rich quick.”

Other common types of frauds, according to the FBI, include:

  • Identity Theft. Identity theft occurs when someone assumes your identity for fraud or other criminal purposes. This can include financial fraud, such as opening credit card accounts in your name or accessing your bank account to make purchases without your approval. Check your credit report often for inaccuracies and signs that a thief has opened or used financial accounts in your name.
  • Nigerian Letter or “419” Fraud. This fraud occurs through a letter mailed offering you an opportunity to share in money that is transferred illegally out of another country. It is nicknamed “Nigerian Letter Fraud” because such schemes have commonly occurred out of Nigeria, and 419 is the article of the Nigerian criminal code addressing fraud. The letter asks for payment in addition to bank account numbers and other identifying information. Once the thieves receive your personal information, they use it to commit identity theft. Despite the obvious warning signs, the FBI estimates that Americans lose millions of dollars to these types of scams every year.
  • Ponzi Schemes. Named for Charles Ponzi, a con artist who operated in the U.S. and Canada in the 1920s, Ponzi schemes vary in approach and structure. In general, these schemes promise you high financial returns on a nonexistent investment. The perpetrator of the Ponzi scheme takes a portion of your investment to pay other investors while pocketing the majority of the money for him or herself. In 2009, financier Bernie Madoff was sentenced to 150 years in prison for perpetrating the largest Ponzi scheme in U.S. history. Madoff took $65 billion from thousands of investors, promising consistently large returns. Rather than investing the money as he was supposed to, Madoff used new investors’ money to appease other investors with token payouts. Madoff’s Ponzi scheme fell apart when investors demanded $7 billion in returns that Madoff did not have the money to pay.
  • Advance Fee Schemes. In this type of fraud, you are asked to pay an upfront fee for a product or service — sometimes called a membership fee, administrative fee or tax. One possible scenario is that you are invited to participate in an “exclusive special offer” to receive something of greater value than the amount you pay, but you receive nothing or something of little value in return. Many work-from-home offers are, in fact, advance fee schemes. You are enlisted to sell a product or line of products such as cleaning supplies, kitchen gear or weight loss or personal care products, but before you can begin selling you are required to pay a start-up fee for initial inventory and training materials. However when the materials arrive they are either worthless or very hard to sell, and your money is gone.
  • Health Care and Health Insurance Fraud. One common health care fraud occurs when you, as a patient, receive a free piece of medical equipment or product in exchange for your health insurance number. Your insurance provider then is billed, even though the equipment or product was not ordered by your physician. Older Americans are especially vulnerable to this type of scheme.

How to Protect Yourself

To avoid most common types of fraud, never exchange money or personal information with someone over the phone or through email. Do not feel pressured to act immediately — take down the caller’s contact information and do an Internet search on the company. If it still seems suspicious, contact the Better Business Bureau or your local police department to find out if there have been previous complaints. If the offer is too good to be true, it probably is.

[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by the National Endowment for Financial Education.]