Investment and internet scams in Taiwan

Nowadays it seems that not a day goes by without hearing about investment or internet scams, both old and new. It’s a global phenomenon and Taiwan has not been spared from the scourge.

By Paul Shelton
 

Looking even briefly at the events currently being played out in the US, with the collapse of FTX and the long-running criminal investigation into the cryptocurrency exchange, Binance, it is tempting to name and shame cryptocurrency (and perhaps NFTs as well) as an investment scam. But that would be a little too reductionist. These are not simple investment products, but rather highly complex and high-risk products. Certainly, there are ‘bad actors’ in the crypto world of investment but crypto is not flying solo here.

It is however interesting that the Financial Services Commission (FSC) (Taiwan’s principal financial regulator) has recently announced plans to regulate crypto in Taiwan, with the details are still being finalized.

Like all international financial regulators, Taiwan’s respected and highly professional FSC seeks to ensure safe and sound financial institutions, maintain financial stability, and promote the development of Taiwan’s financial markets and the FSC sees its mandate extending to educating the public about financial scams. But it seems, at least at present, that these efforts are falling on deaf ears on the part of investors or customers.

It would be easy to blame the omnipresent social media (and many people do). Social media-based scams are given to using well recognized but naively innocent social celebrities to give credence to their scams. But it seems that investment and internet scams seem almost unstoppable. All too often, people continue to fall victim to these scams.

An investment fraud or scam happens when people try to trick someone into investing money. These fraudsters may dangle opportunities to invest money in stocks, bonds, notes, commodities, currency, or even real estate. A scammer may simply lie outright to the intended victim or give false and misleading information about a real investment. Or the fraudsters may make up a fake investment opportunity. Admittedly, this takes extra work on the fraudster’s part, but ingenuity seems part of the fraudster’s DNA.

Internet scams are a different variation of fraud, facilitated by cybercriminals on the Internet. Scams can happen in a myriad of ways, via phishing emails, social media, SMS messages on your mobile phone, fake tech support phone calls, scareware and more.

Why are investment and internet scams so successful? Why do people fall for these investment scams or fraudulent investments? It may actually not be for what appear to be the obvious reasons, and the stereotype of people most susceptible to scams and fraud is often wrong. Apparently, according to many studies, self-confidence is one factor that causes people to fall for scams. People of any age who believe they are too smart or well-informed to be tricked are very likely to become victims, especially today when technology is used in many scams.

It is a common perception and stereotype that older people with reduced cognitive abilities are the most susceptible to be scammed. They do get scammed, and the social consequences of those scams are heart-rending. But well-educated people with their cognitive abilities fully intact are also frequently victims of scams, partly because they were confident, they didn’t fit the profile of fraud victims and believed that they couldn’t fall for one. It is precisely this misplaced confidence that led them to carelessness.

Most scams depend on a psychological technique called social engineering. People make bad decisions when an emotion becomes so strong that the higher-level thinking parts of the brain essentially shut down. Strong feelings of fear, anger, and greed can cause people to make decisions that they wouldn’t make at other times. The fraudsters, scammers, or con artists (call them what you like) excel in using social engineering to stimulate strong emotions.

We also cannot dismiss plain greed. A well-educated individual who believes they are impervious to being scammed may simply be lured by the possibility of high investment returns and this greed then feeds into the social engineering mentioned above. But, as the old adage holds, if something looks too good to be true, it probably is. It is a sad fact, but we should all acknowledge that our personal data has probably been hacked at least once and is available for sale to criminals on the ‘dark web’.

Not infrequently we hear those affected by investment fraud demanding action by the government and or regulators or even financial institutions (FIs). But would that be effective, and is it even possible to provide protection in all instances? Governments, regulators and even FIs do listen and FIs, if they are at fault in the scam, usually do offer up compensation or reinstatement of funds (sometimes simply to avoid bad publicity).

Taiwan does not lack in terms of personal data protection legislation and other related legislation against fraudulent crime. For example, the Personal Data Protection Act was enacted to regulate the collection, processing, and use of personal data so as to prevent harm on personality rights, and to facilitate the proper use of personal data. But any piece of legislation or regulation is only as good as its adherence and enforcement levels. Consider for a moment the number of times, in Taiwan, we are asked for our IDs, phone numbers, NHI cards and other data. The information contained just in those items alone are a fraudster’s pot of gold.

To illustrate, here’s a simple anecdote of buying supplies for our cat at the local pet store. We are regular customers but there was a new person behind the register. The exchange went something like this: Can I have your phone number? Why? It’s needed for company records.  We’re just buying basic supplies. Do we earn loyalty points or get a discount after spending a certain amount? No. Then why? Company records! The goods were purchased after adamant insistence that no personal data was going to be shared for cat supplies. Was it the prelude to the selling of personal data? I have no idea, but it is worth bearing in mind how often we are made to feel obliged to share personal information and many people often do so without giving it a second thought.

Taiwan’s Ministry of Justice website offers up a treasure trove of past investment scams in Taiwan. Just a few examples of the imaginative schemes and their names include:
 

• The first commercial bank taken over by the government: This was a fraudulent loan scandal in which a minority shareholder dubbed the “Southern King” was able to obtain massive loans (without guarantees) which in the words of the trial prosecutor damaged the rights of all other shareholders, caused a financial storm, and devastated social economic order. Prison sentences of up to 9 years were eventually imposed on the three main conspirators in this scam.
• A 3-billion-dollar lesson for a law firm: This involved a famous Taiwan law firm and a ‘trusted employee’. The law firm entrusted this employee with a major transaction on behalf of a major overseas company. The law firm however had no inkling that the employee had waited years for such an opportunity to commit a major fraud (his preparations involved studying gem identification, foreign exchange, and money laundering techniques). There were forged powers of attorney, stolen client stock and vast sums of money withdrawn from the client’s accounts. The trusted employee fled Taiwan, the money was never recovered, and the employee remains at large. The law firm was obliged to fully compensate the client.
• The first insurance company taken over by the government: At its peak, this insurance company had some NT$200 billion in assets, over 100 million insurance policies and was ranked the 8^th largest insurer in Taiwan. The company was never publicly listed, which ultimately allowed a single family to use the insurance company as their own private ‘vault’. There were bad loans, political scandals, fraudulent stock trading and illegal real estate trades. All in all, the controlling family embezzled NT$7 billion from the insurance company resulting in the eventual takeover of the insurance company by the FSC. As if to add a final series of insults to injury, no member of the family was ever brought to trial over the entire fiasco (with quite a few dying during an inexplicably delayed judicial investigation).
• The Financial Kublai Khan with no curtain call: This was a 100-year-old government owned Taiwanese bank with 107 domestic branches and 39 overseas business operations. In 2010 the then head of the bank was dubbed the “Financial Kublai Khan” for his meteoric rise in power and alleged business acumen and success. This modern day ‘Kublai Khan’ was active, aggressive and performance oriented but under his leadership corporate governance took a ‘back seat’. His management style ultimately led to a US$180 million fine from the NY State Department of Financial Services resulting from a lack of head office oversight, a lack of compliance expertise, conflicts of interest, poor internal controls, suspicious activities in the banks Panama branch and a failure to conduct adequate customer due diligence. Whilst all of this was unravelling, our Kublai Khan was using his position to attempt to engineer a new financial empire for his intended future. All of this was based on a fraudulent conspiracy which led to many ruined careers at the bank and even the FSC itself. Oddly it seems our Kublai Khan faced no prison time and thus no ‘curtain call’.

All these stories make for fascinating reading and quite frankly a lot of dismay at the greed and corruption that occurred. Nevertheless, the flood continues. It is estimated that investment scam victims in Taiwan lost NT$1.23 billion (US$40.18 million) to investment scammers in the fourth quarter of 2022 alone, according to Criminal Investigation Bureau (CIB) statistics.
 

The CIB statistics confirm that fraudsters have simply used their most common strategy to promote investments promising big pay-outs, quick money or guaranteed returns in social media groups and give people the illusion that they can make low-risk investments and be rewarded with high returns. Those incentives have proven too tempting for people to resist, only to eventually find that their investments have disappeared. Old, simple but effective appeals to greed and easy money.