Promissory Fraud: How to Spot and Avoid Fake Promises

For investors, promissory fraud can seem like a perfect opportunity, offering high returns with little to no risk. However, behind these attractive promises often lies deception. As an example, The United States Attorney’s Office revealed a case where a man persuaded 700 investors to put money into the “Oasis” Forex Ponzi scheme, resulting in losses of over $80 million.

In this post, we’ll explore promissory fraud, how it uses false promises to take advantage of trust and share tips to recognize and avoid these tricky tactics. We’ll go over the key warning signs, discuss what happens to those involved in such schemes, and offer useful advice to keep your investments safe.

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What is Promissory Fraud?

Promissory fraud is when someone makes a promise, either verbally or through documents like promissory notes, knowing they won’t fulfill it, knowing they won’t fulfill it. This happens when a person or company makes commitments without any real intention of keeping them, deceiving others by pretending to have intentions that will never be acted upon.

Example of Promissory Fraud in a Business Context

• A startup company promises investors high returns within six months to secure funding. However, the owners know the business is not profitable and have no realistic plan to deliver those returns. They take the investment money without intending to meet their commitments.

Example of Promissory Fraud by an Individual

• An individual convinces friends to invest in a business scheme, claiming they will share profits after the first year. In reality, they know the business doesn’t exist and plan to use the money for personal expenses, never intending to return the investments.

What are the Warning Signs of Promissory Fraud?

Promissory fraud can be challenging to identify, as it often seems like a genuine promise or commitment. However, certain signs can alert you to this fraud. Here are some warning signs of promissory fraud: 

1. High Returns with Low Risk

One common warning sign is the promise of high returns with low risk. Fraudsters typically attract investors with the prospect of high financial returns that are supposedly guaranteed or involve minimal risk, this is particularly suspicious if the investment is not widely known or available to the public​.

2. Lack of Proper Licensing

Another sign of potential fraud is the participation of people or companies not properly licensed by relevant authorities. For financial products like promissory notes, sellers, or advisors must be certified by regulatory bodies such as the Financial Industry Regulatory Authority (FINRA)​.

3. Pressure to Invest Quickly

Fraudsters may also pressure potential investors to make quick decisions, frequently urging them to invest before a supposed opportunity expires. This tactic is designed to prevent investors from doing due research and recognizing the fraudulent nature of the offer​.

4. Ambiguity or Complexity in Investment Details

If the details of an investment are overly complex, vague, or difficult to understand, it could be a sign of promissory fraud. Scammers typically use complicated financial definitions or vague details to confuse investors and obscure the risks involved​.

5. Unregistered Investments

Investments that are not registered with regulatory bodies such as the Securities and Exchange Commission (SEC) should inspire suspicions. Registration helps make sure transparency and offers investors very important information about the company’s finances, the risks associated with the investment, and the legitimacy of the offer​.

What are the Legal Consequences of Promissory Fraud?

The legal consequences of promissory fraud are serious and can affect both individuals and businesses. These consequences help confirm that legal and ethical standards are met, protecting victims and maintaining trust in the financial system. 

Here’s how the law responds to promissory fraud:

1. Criminal Penalties

Promissory fraud can result in various criminal charges, depending on the scope of the scheme and the laws violated. In some cases, when the fraud involves the use of mail or electronic communications, offenders can also face additional charges under 18 U.S. Code Sections 1341 and 1343, which cover mail and wire fraud.

Key criminal penalties include:

• High fines: If the fraud involves a financial institution or a substantial amount of money, fines can reach up to $1,000,000, according to 18 U.S. Code § 1344.
• Prison sentences: Offenders may face up to 30 years in prison when financial institutions are affected.

2. Civil Penalties

In addition to criminal charges, those found guilty of promissory fraud may face civil liabilities designed to compensate victims and discourage other financial fraud. Civil penalties include:

• Fines: Offenders can be required to pay substantial fines based on the extent of the fraud.
• Compensatory damages: Courts may order reimbursement for victims’ financial losses.
• Punitive damages: Additional penalties may be applied to punish the offender and prevent similar behaviors.

3. Additional Legal Actions

To prevent further fraudulent activities, the legal system may impose additional measures, including:

• Restricting business operations: Companies may be limited in their operations until they meet all legal requirements.
• Freezing assets: Authorities can freeze assets to prevent their transfer or concealment, securing funds available to compensate victims.
• Regular audits and reporting: Offenders might be required to undergo audits or submit regular reports to confirm compliance with regulations.
• Banning specific practices: Certain business practices may be prohibited to prevent future fraudulent behavior.

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Real Promissory Fraud Case: Chicago Appellate Court Decision

The Chicago Appellate Court recently adjudicated a case involving a business entity accused of making deceitful promises to another party. This case explains the nature of promissory fraud, where the defendant allegedly made commitments with no intention of fulfilling them, seeking financial gain at the plaintiff’s expense.

What Happened?

The plaintiff claimed the defendants requested payment extensions and placed extra purchase orders, knowing the company was insolvent and likely to be sold. The plaintiff sought six-figure compensatory damages, plus punitive damages and attorneys’ fees, for the alleged fraud.

What are the Implications for the Parties Involved?

The plaintiff faced substantial financial losses after relying on promises that were never fulfilled. They also had to reallocate resources and find new partnerships, which disrupted their business strategy. The defendants argued that the agreement required arbitration, making the plaintiff’s fraud claims invalid in court.

What Was the Legal Outcome?

The Illinois Appellate Court upheld the case’s dismissal. The court ruled that payment extension requests and additional orders weren’t true or false claims and didn’t prove a fraudulent scheme. Since the agreement required arbitration, the court confirmed the lower court’s dismissal in favor of the defendants.

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How to Protect Yourself from Promissory Fraud?

Considering that, according to Datavisor, 93% of financial institutions are concerned about the rise in fraud attacks involving artificial intelligence and generative AI, it’s helpful to know how to protect yourself from promissory fraud. You can do this by:

1. Verify Credentials and Registrations

A reliable way to stay protected is to thoroughly check the credentials and registration status of any person or company offering deals with promissory notes or similar financial instruments. Confirm that they are properly licensed by state authorities and the Financial Industry Regulatory Authority (FINRA).

2. Consult with Financial Experts

If you suspect something suspicious or feel unsure about the legitimacy of a promissory note or investment offer, speak with a financial advisor or attorney. They can provide guidance, explain the investment’s details, and help spot potential warning signs.

3. Research the Investment Company

Before investing in any offer involving promissory notes, take time to research the issuing company. Look into their financial background and reputation. Be cautious of investments promising unusually high returns with little or no risk, especially if the company is not well-known or has a poor track record.

Protecting Investments from Promissory Fraud with CDN

Now that you know promissory fraud is a threat that requires constant vigilance—especially considering that, according to Datavisor, global losses from scams exceed a trillion dollars, and only 4% of victims recover their funds—it’s important to take active actions to protect yourself from these false tactics.

If you believe verifying credentials before investing is helpful, it’s also wise to stay informed about common scam techniques. At the Cryptoscam Defense Network (CDN), we focus on educating users about the methods scammers use and providing advice on precautions to keep your investments safe.

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Frequently Asked Questions (FAQs) about Promissory Fraud

How Can I Differentiate a Legitimate Promise from a Fraudulent One in Investments?

To differentiate between legitimate and fraudulent investment promises, consider these steps:

• Verify the Company’s Legitimacy: Always check if the investment company is registered with financial authorities like the SEC or FINRA.

• Check Credentials: Secure the credentials of the sales personnel are valid and associated with the company.

• Assess Transparency: Legitimate companies are usually transparent about their business practices and regulatory compliance.

What Should I Do If I Have Already Been a Victim of Promissory Fraud?

If you believe you have been a victim of promissory fraud, here’s what you can do immediately, contact your financial institution or investment broker to report the fraud. This action can help stop further unauthorized transactions quickly.

How Can I Educate Myself more about the Risks and Prevention of Promissory Fraud?

Educating yourself about the risks and prevention of promissory fraud involves staying informed about the common types of investment fraud and the tactics used by fraudsters. Resources like books on notable fraud cases or in Cryptoscam Defense Network, offer valuable information and support to help you recognize and avoid these deceptive practices.