Schemes, Scams, Frauds.

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IRA and RRSP Based Fraudulent Investments

How do "Retirement Account Approved" Schemes Work?

IRAs, RRSPs and the other retirement savings vehicles are intended to provide the ability to make deductible contributions that grow and compound without taxation until they are withdrawn in your retirement years. Complex rules govern the tax deductibility, transfers, rollovers and withdrawals of these vehicles.

The major shift in recent years away from employer-controlled pensions in favor of self-directed retirement savings has created a major opening for the unscrupulous promoters of illicit investment schemes. These individuals realize that billions of dollars in investment capital is now in the hands of individuals who are extremely ill-equipped to make decisions about how to save wisely for their retirement years.

In addition, people leaving one job, who are forced to make a decision about where to rollover their retirement savings within sixty days without penalty, are also prime targets for investment schemers. As a result, a growing number of these schemes include with all solicitation materials the paperwork needed to establish or transfer existing retirement savings.

Eligible Investments

Under federal tax law, it is legal to put almost any type of investment in a retirement savings plan. Only a few categories of investments are prohibited, including art objects, antiques, stamps, and other collectibles. However, this does not mean that all other investments are good ideas for retirement savings accounts.

Role of a Custodian

Self-directed retirement funds must be handled by a custodian or trustee, such as a bank, trust department or mutual fund. Custodians have to follow many rules in handling these funds, but they are not obligated to check out the investments to which savers direct funds.

In one case, a promoter put members of an investment club into "notes", the proceeds of which he then turned around and "loaned" to himself. When the club members contacted the bank serving as custodian for the IRA accounts, they were not only told that the bank was not responsible for the investment but that it would continue to collect custodial fees on their worthless IRA accounts.

Never transfer or roll-over your retirement funds directly to any investment promoter. Your funds first have to go through a pension fund administrator or trust department. If your money is sent directly to the promoter it is not going into a recognized plan. In addition to being fully taxed as income for that year, it may be gone for good.

Role of the IRS and Revenue Canada

Fraudulent retirement plan promoters also take advantage of investors who may be confused about the role of the taxman when it comes to IRAs. The IRS does issue letters to IRA sponsors, trustees and custodians certifying that they are complying with requirements concerning investor rights, account administration, and standards that allow contributions to be deductible. But they do not review or approve investments; advise people on how to invest; or issue statements that an investment is protected because they have approved a particular trustee or custodian.

An investigation of one radio airwave scheme found that its' salespeople were saying:

"I've been encouraged to call you by the IRS because you have some form of self-contributory, self-directed retirement program like an IRA."  

"The problem is that you may be like the millions of Americans who are merely using their retirement fund as an income shelter only and not as an equity growth vehicle directed for comfortable retirement living. … The IRS feels that's not saving for retirement."

"You can use your IRA for this investment by filling out the forms in the attached information package. Our agent will take care of the rest."

"This has been reviewed by the IRS and is deemed so safe you can use it for your IRA. Only certain investments are approved."

"You can remove money from your IRA account and put it into this IRA without any penalties or taxation whatsoever, so that certainly lets you know that it must be solid because the government would not allow anything like that to happen if it was not something for you to get into."

"That means you can replace any of your low-yield IRAs with a more profitable, but still relatively safe, wireless cable investment. Many of our current customers took substantial positions with us after comparing their actual IRA return of 3 to 5% to our 400% projected return. They simply did their homework, looked at all the facts and decided that the investment was as safe as any around. It just happens to have a higher return!"

God Acted Up

The Indiana Securities Division took action against a firm purporting to be raising money for the construction of a wireless cable television facility in Southern Florida. Claiming to already have been involved in 3,040 successful wireless cable television projects, the promoters promised 500% in short-term profits for those who invested through IRAs.

Investors were told that there were few risks, and little or no chance of failure outside of an "act of God" or "invasion by Cuba." Investors were also told that one of the principals in the scheme was a member of the National Society of Certified Fraud Examiners (NSCFE).

As one salesperson described him: "He's a licensed fiduciary who prevents, you know, the company from ripping off funds."

The promoters also said that as the offering was a "general partnership" it was not required to register under federal and state securities laws.

It was discovered that the firm held no FCC licenses whatsoever for wireless cable in south Florida and had no track record of success. Additionally, the principal touted as a "fraud examiner" had dropped out of NSCFE membership and yet another promoter was the subject of a FTC injunction involving more than $100,000 in restitution and penalties for deceptive activities in conjunction with an earlier wireless cable television lottery application mill.

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