AICPA report: Seniors increasingly targeted for investment fraud

The average American’s lifespan is increasing, and many retirees fear that they won’t have enough money in savings, investments, or Social Security benefits to cover their remaining years. As a result, they are vulnerable to fraudulent investment schemes that promise large returns, according to a new AICPA FVS Eye on Fraud report.  

“Investment Fraud Schemes Targeting Senior Citizens,” issued by the AICPA Forensic and Litigation Services (FLS) Fraud Task Force, outlines some of the key vehicles for investment fraud targeted at Baby Boomers entering their senior years. Collectively, seniors own $27 trillion in personal wealth, and scams can include reverse mortgages, inappropriate annuity sales, unregistered securities, and pyramid or Ponzi-type schemes.

The fastest-growing segment of the U.S. population consists of individuals aged 65 and older, and seniors with diminished cognitive capacity may be particularly targeted. Many find it exceedingly difficult, if not impossible, to recover their funds after being victimized.

“Most senior citizens aren’t wealthy; their biggest fear is that they’ll outlive their investments, so they want to increase their money,” said Randal Wolverton, CPA/CFF, the report’s lead author. “Sometimes they’ll want to play outside of regular market channels. They become incentivized to try higher-risk investments.”

CPAs are in an exceptional position to protect their clients from elder financial abuse. As a trusted adviser, they have a broad view of their client’s finances. In a recent interview, Wolverton explained a few of the significant investment fraud scams targeting seniors and what CPAs can do to help. 

Of particular concern is that self-directed individual retirement accounts (IRAs), which permit a broader set of investments than regular IRAs, have become a prime vehicle for fraud. Self-directed IRAs, which held almost $100 billion in 2011, according to the SEC, allow retirees to move funds out of a traditional IRA and put them into real estate, mortgages, tax liens, or other less-conventional investments. As such, they have become a key way for fraudulent brokers or dealers to access the vast sums represented by IRAs that have, until recently, been locked up.

As a result, Wolverton said, “Unscrupulous actors will encourage the development of self-directed IRAs. They might say, ‘I’ve got this investment thing going, it’s doing wonderfully, there’s a lot of money in it,’ but in reality, they’re just running off with the money. The losses are actually very significant. It’s not new, but is becoming more prevalent.”

The large amounts potentially available have attracted organized crime groups, corrupt investment advisers, and sometimes unethical family members and caregivers, according to the report. Techniques for reaching senior citizens have become more sophisticated; rather than relying on cold calls, scammers frequently form relationships — business, personal, or romantic — with retirees who may be lonely. Subsequently, the thieves use predatory techniques to defraud their victims. In the case of self-directed IRAs, they may have learned to mimic the language used in the tax code that legitimate IRA administrators employ.

But senior citizens, their families, and their CPAs are not defenseless. “We have to work together as a community to watch out for each other,” said Wolverton. “CPAs involved in the wealth management industry need to be more aware of signs of cognitive deterioration, or of suspicious interactions between their clients and others.”

Things to watch out for include a change to the client’s mailing address, bank account, or power-of-attorney information, or other signs of suspicious financial transactions having recently occurred. “That’s the time for some direct conversations to make sure the clients are protected,” said Wolverton.

Senior citizens themselves, and their families, can also take action. The report outlined some key steps:

• Watch out for aggressive sales tactics, misleading sales documents, or claims of high returns with little or no risk. Similarly, be wary of promises of quick profits, offers to share “inside” information, and pressure to invest quickly.
• Ask questions about dealers’ licensing and experience. For example, have they worked with retired people before? How are they paid for their services? Are they registered with the SEC or the Financial Industry Regulatory Authority? Try to independently confirm their answers.
• Verify their standing on the Investment Adviser Public Disclosure website for firms registered with the SEC, the Central Registration Depository for stockbrokers, or the Investment Adviser Registration Depository.
• Watch out for offshore scams and investment opportunities in other countries.
• Never pay in advance.

If you suspect any type of elder financial abuse, report it immediately.  

Additional resources:

Quarterly Eye on Fraud reports and related news can be found on the AICPA’s Forensic and Valuation Services (FVS) News & Publications webpage.

AICPA members can access the podcast series, featuring Martin Shenkman, James Sullivan, and Randal Wolverton, “Protecting Clients From Elder Fraud and Abuse.”

— Amanda Abrams is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Chris Baysden, a JofA associate director, at Chris.Baysden@aicpa-cima.com.