How to handle investment fraud

Laws and regulations governing the financial industry has greatly enhanced their effectiveness worldwide, with a decisive acceleration after the Great Financial Crisis, and a lot of lessons have been learnt from frauds and misconducts that defrauded investors of their wealth and the savings of a lifetime.

“Still, no matter how advanced the regulation and how much efforts regulators and enforcing agencies pour out to defend investors from misconduct and fraud, without the active collaboration and efforts on the investor side the risk of getting caught in frauds is very high,” Roberto d’Ambrosio, CEO at Axiory Global, told Khaleej Times.

Excerprts from an interview:

What are your top recommendations for safeguarding funds from investment frauds in today's digital age?

First and foremost: education. Investors need to educate themselves and this is the first and most effective line of defence against frauds. They must learn and understand not only the basics, but as the portfolio grows in complexity, also more about the characteristics of each component of the portfolio and the associated risks.

Such knowledge will educate the investor in the concept of risk and in avoiding greed, helping in identifying the warning signs, such as “too-good-to-be-true” investments.

Before engaging in any investment, proper research must be made to understand the nature of the investment and on the intermediary proposing it. Engage with firms and advisors that have a proven track record, operating within a well-established regulatory jurisdiction, have a public profile and a clear background.

When the relationship with an intermediary has been established and the platform/advisory has been identified and chosen, there are few simple but incredibly effective rules to follow in order to avoid fraud and theft, such as following the rules for creating strong access credentials and regularly changing them, utilizing double verification techniques, observe a high grade of privacy when handling private data, both in terms of storage and distribution. One can be really surprised how many investors have underestimated such simple rules and the disproportionate amount of damage that resulted from such incautious behaviour.

How can financial advisers undertake specific measures to promote Web 3.0 and artificial intelligence as the focal points shift towards these areas?

New technologies such as Generative AI have, and will continue to have, a huge impact on the financial industry, with particular reference to the advisory and research sectors.

Such technologies are a decisive step forward not only on how data are researched and analysed, but also in how advisory and research products are created and distributed.

If properly handled, Generative AI is capable of crafting very precise analysis and even build effective and perfectly risk weighted investment portfolios, which can be demanded and distributed though the powerful Web 3.0 applications.

Advisors need to be aware of the potential of the new technologies, and look at them not as only as a threat but also as an opportunity. Generative AI can be crucial in sourcing and organizing the data needed to craft the advisory product, becoming a lethal weapon when it comes to accuracy and time to delivery, allowing time for what matters the most: be “near” the client, truly understand his needs and his true risk tolerance, which might be very far from his perceived risk appetite.

Of course, the advisor will need to embark in a continuous personal learning journey, to keep abreast of the newest developments in technology and use them appropriately, leveraging also the opportunity arising by the ever increasing use of blockchain and the related decentralized Finance environment and products.

How transformative has AI been for the finance industry as a whole in recent months?

As mentioned, Generative AI is truly disruptive to the traditional way of delivering financial products and services. For once, the term “disruptive” can be used appropriately and the innovation process continues to accelerate by the day. Even innovation like robo-advisors that have succeeded in cutting their relevant stake of the market look like prehistoric tools if compared to the capabilities of AI.

Looking ahead, how do you see AI further shaping the landscape of the finance industry, particularly in terms of investment strategies and fraud detection?

It will surely promote a consolidation within the “traditional” financial industry offer and supply chain. Those firms and advisors that will be quick in truly embracing the new technology, and not just coating their offer going little beyond the claim of being innovative, will be at the forefront of the competition and ultimately succeed.

Their efficiency in crafting tailored services will be greatly enhanced via the use of AI and advisors will see their time freed from recursive and time-consuming tasks so to dedicate more time to the relationship with their clients.

The flip of the coin is that such powerful technologies are in the hands of fraudsters as well, making the identification of misconduct and fraud attempt harder than ever before. If not countered with the same level of sophistication, technologies like AI which is capable, as an example, to produce deep fakes and hide document manipulation in a nearly undetectable way, or the extreme computational power provided by the upcoming quantum computing, which would be able to crack a strongly cryptographed password in matters of minutes while with the actual technology would take a hundred years and so forth, are capable to produce virtually inestimable damages.

Therefore, utilizing state of the art fraud prevention and detection technologies driven and managed by specifically trained individuals will be key to safety.