CONSUMER FRAUD PAST PAPERS WITH ANSWERS

QUESTION 1 : Real estate scams are easily recognized, as there is almost always an element of time pressure or “now-or-never” pitch from the perpetrator.

  1. True
  2. False

Real estate scams are easily recognized. There is almost always an element of time pressure, with the victims being convinced they are participating in a “once-in-a-lifetime, now-or-never” deal. Perpetrators mislead victims into thinking they will miss the opportunity to make a fortune if they do not act fast.

 

QUESTION 2 : Not every company that runs its business using a pyramid structure is operating an illegal pyramid scheme.

  1. True
  2. False

Not all organizations with a pyramid structure are engaging in illegal activity. Some legitimate merchandising companies use a pyramid structure to rank their employee-owners and to determine those people’s compensation. A pyramid structure becomes an illegal pyramid scheme when the recruitment of new members takes precedence over the product or service that the company is ostensibly promoting. The more members that are recruited, the higher the investor is purported to rise in the ranks of the enterprise, and the more money the investor is supposed to make.

 

QUESTION 3 : The type of fraud that targets groups of people who have some social connection, such as neighborhoods of racial minorities or immigrant groups, is known as:

  1. Consolation
  2. Affinity fraud
  3. Reloading
  4. None of the above Affinity fraud targets groups of individuals who have some social connection. Neighborhoods chiefly populated by racial minorities, especially immigrant groups, are often the site of affinity frauds, and the elderly and language minorities are frequent targets as well. In addition, religious and professional ties are often exploited.

 

QUESTION 4 : What is the primary difference between a Ponzi scheme and a pyramid scheme?

  1. A pyramid scheme promotes itself as a pyramid, whereas a Ponzi scheme promotes itself as an investment opportunity.
  2. In a pyramid scheme, old investors are paid with money from new investors.
  3. A Ponzi scheme is promoted by encouraging victim members to recruit new members.
  4. All pyramid schemes are legal, whereas all Ponzi schemes are illegal. The difference between a Ponzi scheme and an illegal pyramid lies in how the operation is promoted. Illegal pyramids are promoted as pyramids, whereas Ponzi schemes are promoted as investment opportunities. In an illegal pyramid, the pyramidal structure helps draw new players, each believing that they will rise through the ranks of the pyramid. A Ponzi scheme, on the other hand, masquerades as some type of investment.

 

QUESTION 5 : Which of the following is NOT considered to be a red flag of a Ponzi scheme?

  1. An investment that has a history of inconsistent returns coinciding with fluctuations in financial markets
  2. A financial manager who manages, administers, and retains custody of the investment funds
  3. A financial manager who puts an unusual amount of pressure on investors to act immediately
  4. An investment that promises extremely high or short-term returns with little risk involved

The following red flags can help investigators uncover Ponzi schemes: Sounds too good to be true : If an investment sounds too good to be true, it probably is. Promises of low risk or high rewards : Promoters of Ponzi schemes typically promise implausibly high or quick returns with little risk. As all legitimate investments include some degree of risk, any guarantee that an investment will perform in a certain way is a clear signal that it might be part of a Ponzi scheme. History of consistent returns : Any firm that generates remarkably consistent returns regardless of market conditions should raise suspicions. High-pressure sales tactics : Reputable investment firms and agents do not push potential investors to act immediately, and legitimate investment opportunities are rarely that time sensitive. Pressure to reinvest : Often, fraudsters keep Ponzi schemes alive by convincing investors to reinvest their profits rather than take a payout. Complex trading strategies : Legitimate agents should be able to provide clear explanations about their investment strategies. For obvious reasons, Ponzi-scheme boosters purposefully employ complicated strategies that confound Lack of transparency or access : Secrecy surrounding the operations of a financial company should be an immediate warning sign. Ponzi operators are often unlicensed and their supposed investments are typically unregistered. Additionally, a lack of access to regular statements or an online account should trigger alarm. Lack of segregation of duties : Investors should be wary of any financial manager who manages, administers, and retains custody of the fund in question.

 

QUESTION 6 : A financial fund operator who insists that investors continually reinvest their profits, rather than take payouts, is a red flag of a Ponzi scheme.

  1. True
  2. False

The following red flags can help investigators uncover Ponzi schemes: Sounds too good to be true : If an investment sounds too good to be true, it probably is. Promises of low risk or high rewards : Promoters of Ponzi schemes typically promise implausibly high or quick returns with little risk. As all legitimate investments include some degree of risk, any guarantee that an investment will perform in a certain way is a clear signal that it might be part of a Ponzi scheme. History of consistent returns : Any firm that generates remarkably consistent returns regardless of market conditions should raise suspicions. High-pressure sales tactics : Reputable investment firms and agents do not push potential investors to act immediately, and legitimate investment opportunities are rarely that time sensitive. Pressure to reinvest : Often, fraudsters keep Ponzi schemes alive by convincing investors to reinvest their profits rather than take a payout. Complex trading strategies : Legitimate agents should be able to provide clear explanations about their investment strategies. For obvious reasons, Ponzi-scheme boosters purposefully employ complicated strategies that confound Lack of transparency or access : Secrecy surrounding the operations of a financial company should be an immediate warning sign. Ponzi operators are often unlicensed and their supposed investments are typically unregistered. Additionally, a lack of access to regular statements or an online account should trigger alarm. Lack of segregation of duties : Investors should be wary of any financial manager who manages, administers, and retains custody of the fund in question

 

QUESTION 7 : In a take-the-money-and-run scheme, fraudsters lure potential victims using fake vacation rental listings or websites advertising properties that do not actually exist.

  1. True
  2. False

A take-the-money-and-run scheme is a variation of an advance-fee scheme that occurs when a fraudster creates a fake vacation rental listing or website. The fraudster takes photos of properties directly off the Internet and uses random interior photos from other rental sites to make the properties appear to be lived in. In reality, the advertised property does not exist or is not at the address provided. As part of the scam, the fraudster usually asks the victim to wire funds for the first and last night’s stay or even requires the victim to pay in full. After receiving the funds and passing off fake information about the short-term rental to the victim, the fraudster disappears and is no longer reachable.

 

QUESTION 8 : Telemarketing schemes target individuals, not businesses.

  1. True
  2. False Telemarketing offenses are classified as consumer fraud, yet many businesses are affected by office supply and marketing services scams. The nature of phone rooms, the geographical distances between the perpetrators and their victims, and the resources and priorities of law enforcement agencies all make enforcement efforts difficult.

 

QUESTION 9 : In credit repair scams, the fraudster promises to “erase” or “doctor” an applicant’s credit history, but in reality there is no way to erase bad credit.

  1. True
  2. False Similar to loan scams are those that promise to repair credit. Pitch men like to say that they can “wipe away,” “doctor,” or “cosmeticize” negative items on credit, insinuating they have ways of changing or disguising a person’s credit history. Despite the fact that there is really no way to erase bad credit, many people fall for this scam, paying large sums of money to expunge their records.

 

QUESTION 10 : Victims of consumer fraud are more likely to be organizations or businesses rather than individuals.

  1. True
  2. False

Consumer fraud schemes involve a range of fraudulent conduct, usually committed by professional scammers, against unsuspecting victims. Scammers are skilled fraudsters who develop strategies, select targets, and use an appropriate method of delivery to lure their victims. Scammers usually act alone, but they might group together for a The victims can be organizations but more commonly are individuals. Victims can be old or young, male or female, or wealthy or poor, and they are usually dispersed geographically. Many victims who become the targets of consumer fraud are considered to be in the naïve segments of the population, such as the elderly. It is important to note, however, that even the savviest consumers can become targets if they are not aware of the schemes involving

 

QUESTION 11 : Maria, a successful restaurateur, has been informed of an unusually attractive investment opportunity by a recent acquaintance and decides to invest in it. Several months and a couple of underwhelming payments later, Maria grows frustrated with the diminishing disbursements and attempts to withdraw her money. After several weeks of delay, she realizes that the promoter seems to have vanished, along with her investment. Maria is the victim of which

  1. A fly and buy scheme
  2. A Ponzi scheme
  3. A dog and pony scam
  4. An illegal pyramid

A Ponzi scheme is generally defined as an illegal business practice in which new investors’ money is used to make payments to earlier investors. The investment opportunity is typically presented with the promise of uncommonly high returns. While the scam is presented as a legitimate investment, there is little or no actual commerce involved. When an enterprise promotes an investment opportunity that invests little or none of the participants’ money and uses new investments to make dividend payments, the enterprise is running a Ponzi scheme.

 

QUESTION 12 : Which of the following are signs that a multilevel marketing organization’s activities might be illegal?

  1. The organization offers participants large payments for each new recruit
  2. The organization recruits distributors into a pyramid-style compensation plan
  3. The organization spends more time promoting its distributor levels than its product lines
  4. All of the above

As a general rule, any organization that recruits distributors into a pyramid-style compensation plan, offers big payoffs for recruiting, and spends more time extolling its distributor levels than its product lines is probably illegal.

 

QUESTION 13 : A Ponzi scheme can best be described as an illegal business structure that might offer merchandise or services but generates almost all of its revenues from the relentless recruitment of new members.

  1. True
  2. False

A Ponzi scheme is generally defined as an illegal business practice in which new investors’ money is used to make payments to earlier investors. The investment opportunity is typically presented with the promise of uncommonly high returns. While the scam is presented as a legitimate investment, there is little or no actual commerce involved. In contrast, an illegal pyramid scheme is unique in that the more members that are recruited, the higher the investor is purported to rise in the ranks of the enterprise, and the more money the investor is supposed to make.

 

QUESTION 14 : In a/an _____________ scheme, the company that initially conned a consumer contacts that consumer and offers to help retrieve the lost money. However, the investigation requires an upfront fee and the consumer is swindled again.

  1. Retrieval
  2. Scavenger
  3. Double-hustle
  4. Advance-fee

The scavenger or revenge scheme involves the company that initially conned the consumer. Using a different company’s name, the outfit contacts the consumer again and asks if he would like to help put the unethical company out of business and get his money back. Naturally, an upfront fee is required to finance the investigation.

 

QUESTION 15 : In a grandparent scheme targeting the elderly, which of the following is a way to confirm if a caller is the grandparent’s actual grandchild?

  1. Ask relatives if they know of any issues with the grandchild
  2. Hang up the phone and contact the grandchild directly
  3. Ask the caller questions only the grandchild would know
  4. All of the above

There are ways the elderly can protect themselves against grandparent schemes. If they receive a call from someone claiming to be their grandchild, they should confirm the person’s identity before sending any money. Several ways to confirm the legitimacy of the caller would be to: Ask questions an imposter would not know, such as the birth date of the grandchild’s father or a pet’s name. Hang up the phone and contact the grandchild directly. Contact friends or relatives and ask if they are aware of any issues with the grandchild.

 

QUESTION 16 :  A pyramid scheme is promoted by encouraging victim investors to recruit new members. The more members recruited, the higher the investor rises in the ranks of the enterprise, and the more money the investor is supposed to

  1. True
  2. False

In an illegal pyramid scheme, the more members that are recruited, the higher the investor is purported to rise in the ranks of the enterprise, and the more money the investor is supposed to make. The difference between a Ponzi scheme and an illegal pyramid lies in how the operation is promoted. Illegal pyramids are promoted as pyramids, whereas Ponzi schemes are promoted as investment opportunities. In an illegal pyramid, the pyramidal structure helps draw new players, each believing that they will rise through the ranks of the pyramid. A Ponzi scheme, on the other hand, masquerades as some type of investment.

 

QUESTION 17 : Automatic debit program schemes occur when fraudsters obtain a consumer’s bank account information and then use this information to draft money from the consumer’s bank account without that person’s consent.

  1. True
  2. False

Automatic debit programs are a convenient way to pay bills, such as recurring charges for mortgages and car loans. Fraudsters exploit these programs by obtaining consumers’ bank account information through telemarketing schemes. Fraudsters then use this information to draft money from consumers’ bank accounts without their consent.

 

QUESTION 18 : A favored device of phony charities is to send school-age children door to door to say that they are raising money for antidrug programs or for a group that takes underprivileged kids on trips.

  1. True
  2. False A favored device of phony charities is to send school-age children door to door to say that they are raising money for antidrug programs or for a group that takes underprivileged kids on trips. Some of the children repeat what they are told in exchange for a few dollars.

 

QUESTION 19 : Unscrupulous debt consolidation schemes include each of the following EXCEPT:

  1. The debt consolidation company collects payments but does not appropriately forward them.
  2. The debt consolidation company charges an upfront processing fee and then disappears.
  3. The debt consolidation company writes a letter to the debtor’s creditors and arranges a payment plan.
  4. The debt consolidation company guarantees the debtor will receive a loan or credit card regardless of the debtor’s credit ratings.

Unscrupulous debt consolidation schemes often involve the agency collecting the money from the debtor but not forwarding it to the creditors. In some instances, considerable time can pass before the debtor finds out that his money has been misappropriated. Another variation of the debt consolidation scheme occurs when customers are guaranteed that they will receive a loan or a credit card regardless of their credit rating. Typically, the victims have been rejected by legitimate financial institutions because their credit ratings are poor. The victim must pay a processing fee for the application to be accepted. After the victim pays the fee, the con artist disappears.

 

QUESTION 20: A Ponzi scheme can be characterized as an ostensibly legitimate, yet ultimately fraudulent, investment opportunity wherein the promoter pays previous investors with money gained from new victims.

  1. True
  2. False

A Ponzi scheme is generally defined as an illegal business practice in which new investors’ money is used to make payments to earlier investors. The investment opportunity is typically presented with the promise of uncommonly high returns. While the scam is presented as a legitimate investment, there is little or no actual commerce involved. When an enterprise promotes an investment opportunity that invests little or none of the participants’ money and uses new investments to make dividend payments, the enterprise is running a Ponzi scheme.

 

QUESTION 21: Which of the following schemes are often used by fraudsters to take advantage of the elderly?

  1. Work-at-home schemes
  2. Sweepstake and prize schemes
  3. Homeownership schemes
  4. All of the above

Fraudsters often use homeownership to take advantage of the elderly. In a homeownership fraud scheme, the fraudster recommends a friend who can perform needed home repairs for the elderly individual at a reasonable price. This friend might require the homeowner to sign a document upon completion, confirming repairs were made. In some cases, the elderly victims later learn they signed the title of their house over to the repairperson. In other cases, not only is the elderly victim overcharged, but the work is also performed improperly. Another consumer fraud scheme targeting the elderly is related to sweepstakes and prizes. Fraudsters inform elderly individuals they won a prize but must pay a fee to receive it. The fraudsters then convince their victims that they can eventually win the grand prize if they send in another fee. This cycle continues until the victims catch onto the scheme or are no longer able to send fees because they have depleted their savings. Work-at-home business opportunities target elderly individuals who need extra income to supplement their retirement benefits. These business opportunities might include assembly crafts, chain letters, coupons, envelope stuffing, medical billings, and report writing.

 

QUESTION 22 : Which of the following statements is TRUE with regard to factoring companies?

  1. Factoring is illegal in all jurisdictions.
  2. Factoring companies approach banks on a telemarketer’s behalf in order to secure credit card processing services.
  3. Factoring groups buy credit card receipts from telemarketing operations at a discount.
  4. Factoring companies in Asian and European countries tend to charge more for their services than factoring companies in other countries.

Telemarketing operations commonly engage factoring companies. These groups buy credit card receipts from telemarketing operations at a discount, and then use their merchant bank accounts to convert the receipts into cash. Some factors charge as much as 30% of the receipts’ gross value to launder the slips. Factoring is illegal in some jurisdictions, though perpetrators find loopholes or ways to disguise their alliances. Factoring through Asian and European merchants is becoming increasingly common. Factoring companies in these countries tend to charge a lower price for their services than some other countries—between 9 and 10% of the gross.

 

QUESTION 23: Glenn has just inherited a large amount of money from a deceased relative. Several weeks later, a colleague of Glenn’s suggests an investment in a security that is certain to generate returns of 20% every six months. Glenn is intrigued, but also worried that it might be a Ponzi scheme. Which of the following actions should Glenn take before

  1. Find out if the financial manager is licensed and if the security is registered
  2. Determine if the investment’s returns have been abnormally consistent
  3. Ensure that he can comprehend the details and strategy of the investment
  4. All of the above

The following red flags can help investigators uncover Ponzi schemes: Sounds too good to be true : If an investment sounds too good to be true, it probably is. Promises of low risk or high rewards : Promoters of Ponzi schemes typically promise implausibly high or quick returns with little risk. As all legitimate investments include some degree of risk, any guarantee that an investment will perform in a certain way is a clear signal that it might be part of a Ponzi scheme. History of consistent returns : Any firm that generates remarkably consistent returns regardless of market conditions should raise suspicions. High-pressure sales tactics : Reputable investment firms and agents do not push potential investors to act immediately, and legitimate investment opportunities are rarely that time sensitive. Pressure to reinvest : Often, fraudsters keep Ponzi schemes alive by convincing investors to reinvest their profits rather than take a payout. Complex trading strategies : Legitimate agents should be able to provide clear explanations about their investment strategies. For obvious reasons, Ponzi-scheme boosters purposefully employ complicated strategies that confound Lack of transparency or access : Secrecy surrounding the operations of a financial company should be an immediate warning sign. Ponzi operators are often unlicensed and their supposed investments are typically unregistered. Additionally, a lack of access to regular statements or an online account should trigger alarm. Lack of segregation of duties : Investors should be wary of any financial manager who manages, administers, and retains custody of the fund in question

 

QUESTION 24: A confidence scheme designed to part victims from their money by falsely promising the future delivery of a product or service in exchange for an upfront payment is called a(n):

  1. Scavenger scheme
  2. Bait and switch
  3. Home-based business scheme
  4. Advance-fee swindle

Advance-fee swindles are structured to obtain an illegal gain by falsely promising the delivery of a product or service. In some schemes, the product is marketed to a large number of customers, and then the operation is shut down prior to the delivery stage. Common scenarios used to commit advance-fee scams include the following: A home improvement contractor requires pre-payment for materials. Notice of a supposed inheritance from an unknown relative is received. Various exorbitant fees are required prior to securing financial assistance or advice

 

QUESTION 25: Advance-fee swindles, debt consolidation schemes, and diploma mills are all examples of consumer fraud schemes.

  1. True
  2. False

Consumer fraud schemes involve a range of fraudulent conduct, usually committed by professional scammers, against unsuspecting victims. Scammers are skilled fraudsters who develop strategies, select targets, and use an appropriate method of delivery to lure their victims. Scammers usually act alone, but they might group together for a Some examples of consumer fraud schemes include advance-fee swindles, debt consolidation schemes, and diploma mills

 

QUESTION 26 : The most common giveaway scheme, in which a postcard arrives in the mail telling the recipient he has already won a prize such as a luxurious vacation or cash, is known as:

  1. The “Fly and Buy”
  2. The “Bait and Switch”
  3. The “1-in-5”
  4. None of the above

The most common giveaway scheme is known as the “1-in-5.” In this scheme, a consumer receives a letter or postcard in the mail informing that individual that he has already won a prize. The prizes usually include luxurious vacations, new cars, or cash. Unfortunately, the odds of winning any of the prizes are extremely low. Victims might receive items of minimal or no value or coupons redeemable only for the company’s substandard merchandise.

 

QUESTION 27 : A pyramid scheme is designed to pay off its earliest investors.

  1. True
  2. False

Pyramid schemes are designed to pay off their earliest investors but not later investors. Probability studies have shown that 93 to 95% of the participants in a pyramid scheme (all but those who join at the earliest stage) will lose most of their money. Half can expect to lose all the money they invest.

 

QUESTION 28 : All organizations with a pyramid structure are illegal.

  1. True
  2. False

Not all organizations with a pyramid structure are engaging in illegal activity. Some legitimate merchandising companies use a pyramid structure to rank their employee-owners and to determine those people’s compensation. A pyramid structure becomes an illegal pyramid scheme when the recruitment of new members takes precedence over the product or service that the company is ostensibly promoting. The more members that are recruited, the higher the investor is purported to rise in the ranks of the enterprise, and the more money the investor is supposed to make.

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