Financial advisors should be aware that inventive scam artists are targeting investors with registered accounts such as RRSPs, RRIFs and LIRAs, encouraging them to “unlock” the registered money on a tax-free basis.

The B.C. Securities Commission and the Manitoba Securities Commission recently flagged schemes encouraging people to use such funds to buy securities, which promise rapid appreciation or immediate cash payments but turn out to be fraudulent.

“A lot of people are being targeted through newspapers or online advertising or through seminars,” says Jason Roy, senior investigator with the MSC. “The lure is that investors can ‘unlock’ funds within a registered account without incurring any tax consequences. The result is that these people are losing all or a good percentage of their money. They end up in worse financial shape, and eventually the [Canada Revenue Agency] catches up with them and they have to pay taxes on any funds withdrawn.”

Typically, these schemes involve investing in shares of private companies and offshore entities, or in debt instruments such as bonds, promissory notes or mortgages. Once the promoters have found their target investors, the first step is getting them to move their retirement funds into a self-directed plan at a financial services institution at which they do not have a relationship with an advisor. Victims are then told what to buy. The company may refund some of the money paid by the victim as a special incentive or dividend.

“The goal is to separate people from all or part of their money,” Roy says. “Sometimes, the people who get caught up in it are unsophisticated; sometimes, they are just desperate for immediate cash.”

These schemes are happening across the country and are gaining traction on online social networking sites. The methodology is to “isolate” the victim at a discount brokerage, at which no advice is given on the suitability of investments.

“Once the victim has opened a new account, they can more easily be influenced,” says Langley Evans, director of enforcement with the BCSC, “as they won’t be communicating with an advisor offering financial advice, questioning the validity of the position or raising red flags about the risks.”

These scams offer the double hook of high returns combined with tax savings. Normally, money withdrawn from a registered plan is taxable, but the scams’ promoters promise that taxes can be avoided by investing the money offshore or in private companies. In reality, the victim is left holding worthless securities, while scammers take the cash and disappear.

“Retirement savings are particularly appealing [to scammers],” says Evans, “as they provide ready pools of capital that can be accessed.”

He says there has been an increase in these scams because of tough economic times and mounting job losses. Geographical areas in which manufacturing plants have closed are particularly vulnerable, as a large percentage of the population may be out of work and also not financially experienced.

If someone is in a tight spot economically and is promised fast tax-free cash by unlocking savings held in a retirement plan, notes Evans, the proposal can be tempting. IE