Beware of investment scams
– a “high return” fund of an investment-linked insurance product

Swindlers are never short of tricks up their sleeves. Recently the Commercial Crime Bureau of the Hong Kong Police shut down a fraud syndicate that scammed investors with an investment-linked assurance scheme (ILAS) operating under an open platform structure, which is rare in the market. Syndicate members include a practicing solicitor and licensed insurance brokers. After establishing an overseas investment fund, they falsely claimed the fund belong to an insurance company. Touted to provide high returns and disguised within an insurance product, the fund was sold to mainland and Hong Kong victims.

The total HK$475 million involved in the case came from approximately 260 victims, mostly mainlanders. They were targeted because of their unfamiliarity with insurance investment products and the regulatory regime in Hong Kong. Investors should be vigilant when purchasing financial products, and pay attention to the following to avoid similar scams.

In the said investment scam, victims were lured by false claims that the fund offered a guaranteed return far beyond the market level. In reality, there is no such thing as a free lunch – and expecting one would only make you inherently vulnerable to deceptions. When it comes to investing, it is always wise to stay alert and sceptical.

The fund involved in this scam case was established overseas and is not authorized by the Securities and Futures Commission (SFC). Investing in unauthorized funds means that there may not be any investor protection. They could be of high risk as they are not subject to the regulation of the SFC, and their structure, operations and offering document may not be governed by any rules or regulations in Hong Kong. Investors should verify whether the investment products are authorized by the SFC before making investment decisions.

In general and according to the law, unauthorized funds cannot be marketed to the public but they can be placed privately and offered to professional investors, or offered with exemptions applied. An individual investor with a portfolio of not less than HK$8 million can be regarded as a professional investor. The scammers in this case have misled the victims to claim themselves as professional investors who can bear high risks, and thus make themselves eligible to purchase the unauthorised fund. If you claim to be a professional investor when you are not, you could be investing in products that are not suitable for you, or those which are not regulated, undermining the level of investor protection that you are entitled to. If an intermediary tries to talk you into falsely-claiming to be a professional investor, you should report the matter to the regulators. Click here to learn more about professional investors.

To gain the trust of the victims, the fraud syndicate disguised the fund as a product by an insurance company. They also convinced the victims to falsely-claim to be professional investors in order to invest in the said fund through an ILAS which operated under an open platform structure. Unlike typical ILAS products in the market, the said ILAS was mainly sold to professional investors and operated under an open platform structure which allowed professional investors to choose investment products or assets by themselves, including funds that are not authorized by the SFC. ILAS is an insurance policy with investment elements. Before buying an ILAS, you should understand its structure, mechanism, investment options, fees and charges, lock-up period and other terms and conditions. When choosing investment options, policyholders should check whether the fund has been authorized by the SFC, fully understand the fund’s features, risks, fees and charges, the fund company, as well as monitor the investment performance regularly. Click here to learn more about ILAS.

According to media reports, many of the victims only intended to purchase ordinary life insurance products in the beginning, but were later induced to purchase ILAS and invest in the fund involved. The scammers deceived the victims by rushing them into making hasty decisions, and submitted false policyholder information so that the insurance company could not contact the victims.

Whether making an investment or taking out an insurance policy, you should consider the advice of intermediaries with caution. Before making any decisions, be calm and alert, ensure that you have done your research to understand the features and risks of the product, and carefully consider whether the product is suitable to your needs and risk tolerance. When signing the application forms or subscription documents, be sure to read and understand all the content and terms, and verify all information. Never sign a blank document or clean sheet of paper. Be extra careful when purchasing overseas financial products. Seek independent professional advice if you are in doubt.