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Compliance & Risk

Pandemic isolation can make some “serial victim” investors more vulnerable, says FINRA

Richard Satran  Financial Journalist, Thomson Reuters Regulatory Intelligence

· 6 minute read

Richard Satran  Financial Journalist, Thomson Reuters Regulatory Intelligence

· 6 minute read

As financial fraudsters increase their activity during this time of pandemic isolation, a new class of vulnerable individuals have emerged — "serial victims"

The search by financial fraudsters for vulnerable victims has been understood for ages. But two new studies have uncovered surprising behaviors amid the COVID-19 pandemic, including a little-known phenomenon of fraud targets having traits that make them “serial victims,” and another, more expected, indication that seniors and women face increased fraud risk due to pandemic “isolation.”

Concerned about pandemic-related fraud risk, the Financial Industry Regulatory Authority (FINRA) this month issued the two studies that can help firms understand the vulnerability of some clients, particularly seniors, in a remote world where everyone relies more on technology to connect with outsiders and social intimacy has broken down.

In the latest study, FINRA’s Investor Education Foundation stated that some investors, particularly seniors, experience more difficulty making complex financial decisions after quarantine isolation disrupted their normal social connections. The study points to ways that firms might update processes to protect senior clients from becoming prey to an unethical financial adviser or an outside fraudster.

“Once burned” offers no protection for some victims

The study showed that isolation in itself does not universally inhibit financial decision making, but rather it found variation in financial capabilities, particularly related to overall cognitive abilities. This points to a need for firms to tailor protections to specific client profiles.

“Although loneliness was detrimental to decision making among those older adults with low cognition, loneliness was not associated with decision making among older adults in general,” FINRA said in its summary of a new study based on a survey of 1,000 participants. In another study released earlier in the month the FINRA foundation found what it called a “counter-intuitive” findings that “in some ways, show that ‘once burned’ fraud victims may not learn much from their experience and instead are even more at-risk once they have been victimized.”

The study found “some people hit by fraudsters pull away from trustworthy sources and become even more once vulnerable to the next scam.”

Both survey results pointed to the importance of a compliance process for identifying a “trusted contact” for clients who are showing signs of diminished capacity, and for providing extra guidance and oversight in managing accounts of those lacking financial sophistication. The study issued this week, conducted by FINRA’s Investor Education Foundation, the Indiana University School of Medicine, and the Rush Alzheimer’s Disease Center at Chicago’s Rush University Medical School, posed a dozen questions on the basic concerns of personal finance and health decisions.

“Adults who had difficulty with routine cognitive functions — such as remembering, paying attention, and problem solving — tended to score lower on decision making, and loneliness further worsened decision making among individuals with low cognition,” FINRA said in a statement on the study.

Although many factors are beyond the scope of financial advisers, loneliness can be “modifiable,” says Gerri Walsh, president of the FINRA Foundation. Brokers can contact a client’s family or partner with community representatives such as clergy who can provide support. In cases where impairment has been noted, under FINRA rule 4512, brokers are required to make a reasonable effort to obtain the name of a trusted contact.

In preventing fraud, FINRA rule 2165, arms brokers with a safe harbor to hold up a disbursement in the presence of suspicious activity. The number of suspicious activity reports in senior accounts quadrupled between 2013 and 2019, the Financial Crimes Enforcement Network reported last year. And the Securities Industry and Financial Markets Association has estimated that only 1 in 44 cases of financial exploitation is reported to authorities, and seniors lose about $3 billion a year in fraud schemes.

The new FINRA study found “medical conditions, lower education, lower income, and fewer social contacts” lead to increased vulnerability, Walsh explains. While financial firms can do little to change those societal problems, firms can use the information generated by the study to guide intervention and account management to lessen exploitation.

Firms can take advantage of “novel findings”

Firms can apply “these novel findings” to help identify and act on cases in which isolation “contributes to poor decision making among cognitively vulnerable older adults.” The study noted that women generally scored lower than men in financial decision making.

The other study — released March 10 as a joint effort of FINRA and the AARP — showed a surprising tendency of fraud victims to fall for scams even after they had been previously victimized. The study looked into what triggers fraud and reached some of the same conclusions about the need for trusted contacts and financial education to prevent exploitation. The study found “some people hit by fraudsters pull away from trustworthy sources and become even more once vulnerable to the next scam.” FINRA said the finding should “bring more insight to firms that are under rising pressure to help their clients avoid exploitation and play a larger role as the gatekeepers who protect their assets.”

Chronic fraud victimization appears to be highly entrenched in the hope that the scam will ultimately work out in the victim’s favor, and if it does not, there remains the recurring hope that the next opportunity that presents itself will succeed. Common behaviors of these chronic victims include:

      • Many victims are in a situation where they trust the fraudster more than they do their own family.
      • The deeper into the scam a fraud target is, the more challenging it is for the target to escape before becoming a victim.
      • Chronic victims often are unaware they are involved in a fraud. This means that labeling a victim as such — much less a chronic victim — may not be consistent with how they have experienced the fraud or how they view themselves.
      • A victim’s refusal to admit or recognize they are involved in a scam can be a major barrier to successful intervention.
      • Chronic victims are unlikely to be aware of their behaviors and the outcomes of their behaviors; like people with addictive behaviors, some may be driven to fulfill outstanding needs as well as by dysfunctional situational factors.

Many financial advisory firms have launched programs to educate staff on managing risk among senior investors and to identify signs of impairment that puts them at risk. For example, Charles Schwab assembled a Senior & Vulnerable Investors Investigations team to resolve instances that “require in-depth research and case management” and to work with sales professionals on sensitive cases.

“This research provides a new lens through which to identify key intervention strategies that could disrupt the cycle of chronic fraud victimization at one or more points along the path to victimization,” notes FINRA’s Walsh in a press release.

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