Don’t get caught – fraud and SMSFs

Editorial director of Switzer
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Fraud headlines are everywhere, from Chinese espionage to big billion dollar security breaches at major banks, and it’s only a few months since the government handed down its report on Trio Capital. That report found that some SMSF trustees were unaware that they wouldn’t be entitled to compensation for their savings to the same degree as those in major superannuation funds.

The crimes

David Lacey was executive director, Australian Crime Commission when he gave a speech at the SMSF Professional Association of Australia (SPAA) conference on this topic in March this year and says that after that speech he was inundated with inquiries from SMSF trustees who had been affected by fraud.

“The number of victims who came forward after that conference sort of took things to a new level,” he says.

Lacey has since left the Commission but is still working on fraud solutions that could help all victims, including SMSF trustees.

“In some cases, SMSF accounts have run dry, leaving a devastating impact on those who have just lost their life savings,” he says.

There are many ways that SMSFs can become victims of fraud and they are not limited to investing in schemes like Trio. If an SMSF trustee becomes the victim of identity theft, then the investments of their SMSF and those of all other trustees in the fund, become vulnerable.

In fact, a report into serious and organised investment, released by the Crime Commission in July last year, found that the typical victims of fraud were:

  • Middle-aged to older persons (often over 35 years old but usually over 50 years old);
  • Male;
  • Small business owners;
  • Self funded retirees;
  • Individuals who have previously made investments in other companies and were considered ‘financially literate’;
  • Victims who are on share holder registers;
  • Socially isolated individuals – geographically or otherwise.

The Australian Bureau of Statistics also found in a survey last year that personal fraud cost Australians $1.4 billion in the 2010-2011 year.

What can you do to prevent it?

The first thing to do is you need to understand your vulnerabilities.

Switzer expert Paul Rickard stresses: “You are largely on your own – there is no compensation scheme available to trustees if an investment promoter does something illegal or fraudulent – other than your normal rights under common law.”

The table below, from the Review of the Trio Capital Fraud and Assessment of the Regulatory Framework released by Treasury earlier this year explains what you are covered for.

It is important to maintain the normal checks and balances that you would to prevent identity theft, such as the following:

  • Protect passwords and change them regularly;
  • Secure your physical mail i.e. lock your letterbox;
  • Destroy or shred important information;
  • Install virus protection;
  • Check your SMSF statements and relevant documents regularly for out of the ordinary transactions.

When it comes to investments, be inquiring and make sure you use accredited professionals like those with SPAA recognition. Always remember if something sounds too good to be true, it usually is.

“As an SMSF trustee, you have to be increasingly knowledgeable about the information being given,” SPAA chief executive officer Andrea Slattery stresses.

“If you’ve gone with someone who is competent and knows what they are doing, they are working towards best practice and those best practice processes will allow people to have information and knowledge and security around some of the compliance processes,” she says.

If you do get caught

For investment fraud, if the losses were a result of negligent advice from a licensed advisor, you can seek redress from the advisor’s Australian Financial Services Licence (AFSL) and be compensated via their public liability insurance. You can try the courts for basic fraud and theft but this can be an expensive and lengthy process as many Trio investors have found.

If you get caught up in an identity theft, you could be encouraged by a public and private initiative that David Lacey, in his new role as a research fellow at the University of Sydney and partner at Pario Solutions, is now involved in.

He is driving a feasibility study that will look at how organisations across both the public, private and not-for-profit sectors are orientated towards assisting victims and will look at establishing a trans-Tasman support network – called iDcare – that would be the first port of call for anyone, including SMSF trustees, who has become a victim of theft.

“It’s important that whatever iDcare becomes, it’s a partnership between industry and government to support the community. The feasibility study to be conducted needs to listen and learn from the experiences of Australian and New Zealanders, who have had to go it alone to recover from these criminal acts,” Lacey says.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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