Family offices are fat targets, but scams likely stay under the radar

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The wealthy and their family offices are obvious targets for scams and fraud. But if a family office fell victim, would we ever hear about it?

Fraud happens, but few Canadian cases of successful crimes make the news, say security experts, compliance officers and auditors.

“Discretion is paramount with a lot of wealthy families. If there was an event like this I don’t believe it would be publicized,” says Frédéric Béland, chief operating and compliance officer with PBY Capital in Montreal.

Dodgy investment schemes, pitched directly to wealthy families or to family office staff, can pose a fraud threat, says Mike Krygier, founder of Toronto-based Deep Cove Cybersecurity.

He cites digital currency schemes as one potential vehicle for scammers. Fraudsters pitch an initial offering of Bitcoin-like currency, and the coin rises in value. The perpetrator cashes out into legitimate currency and investors are out of luck when the scheme collapses, says Krygier.

In 2022, Canada saw the high-profile case of Aiden Pleterski, 23, who allegedly lost close to $45 million in investor money after soliciting funds to invest in cryptocurrency and foreign exchanges.

Creditors are in bankruptcy proceedings against Pleterski, who described himself as “Crypto King” and had promised some investors returns of 10 per cent to 20 per cent a week, according to court documents.

In another famous case in the U.S., Bill Hwang is facing criminal counts after his family-owned investment company, Archegos Capital Management, imploded in 2021, losing US$20 billion. Federal prosecutors filed charges against him and his CFO for alleged “manipulative trading” and “deceptive conduct” that caused billions in losses for banks, investors and their own employees.

Real estate transactions are another source of potential scams, says Krygier. Fraudsters pretend to be law firms representing some kind of real estate consortium. It can start with a spoof email pretending there’s a transaction happening and a family member needs to provide instructions or confirmations.

Béland says he thinks family offices are pretty good at spotting fraudulent investment schemes. For one, they have networks of investment managers to consult. “They’ll ask around and they’ll get some sort of a sense through informal reference,” he says.

Single-family offices may call on multifamily offices for advice, he says. “Multi-family offices are typically more formal in their approach. More of them are registered investment advisors,” says Béland.

Wealthy families can be targeted by impersonators seeking to gain access and unearned trust.

In some cases, Krygier says, fraudsters set up social media profiles of distant family members on Facebook and LinkedIn and then reach out with friend requests. If they are accepted, they can then collect information on the wealthy person’s network and continue reaching out to other targets.

Scammers may also impersonate members of the family’s entourage or service companies the family hires.

Educating the family on the dangers of these kinds of attacks and the wider issues of cybersecurity is key for family offices.

For instance, families should keep their business and personal email accounts and social media accounts separate, Krygier advises. Email accounts dedicated to family office business shouldn’t be used for anything like gym memberships or online grocers or signing up for mailing lists, says Krygier.

Béland says philanthropy is another area of risk for wealthy families and their family offices.

Once, while working for a bank, Béland says he thwarted an email hack fraud by recalling funds that had been intercepted between a client charitable foundation and a charity.

“My concern on the philanthropy front is that a lot of the beneficiaries of donations that the family might make will be relatively unsophisticated as far as security goes. … The risk management in those organizations won’t have the same level of focus just because of budgets,” Béland says. Private family foundations are typically run by small teams, he points out.

“It’s important to have that presence of mind to think, I’m going to be sending large amounts of money to different places,” he says. “I need to make sure I know the person I’m sending it to. I have the name of someone there; it’s been provided to me by someone I trust. I can phone the person and make sure everything is correct before I do these wires.”

Security consultants agree that with advances in artificial intelligence and the use of deep-fake voice and video, it’s wise to turn back the clock to face-to-face transactions and due diligence in all transactions.

“How do you verify a document is authentic? How do you verify an email, a voicemail, a video is truly what it purports to be?” asks Krygier.

“We’re going to go through a lot of turbulence perhaps for the next decade while we figure it out. I would encourage the family office or someone in the family office to be that researcher or that on-the-ground person.”

Keith Elliott, president and CEO of Reed Research Investigations in Toronto, is a licensed private investigator and Certified Fraud Investigator. His firm performs background investigations on people who approach families through social media or pitch investments, determining their identity, background and previous investments and looking for any record of bankruptcy or criminal charges.

Proper due diligence – audits, process compliance and investigation – can pick up a fraud problem early, says Elliott.

“They’re not going to go straight out the door and perpetrate a $5 million fraud. They’re going to test it incrementally with $5,000 first. And then they’ll test it to $25,000. … They’re fine-tuning their ability to do it as they perpetrate their fraud,” he says.

Family offices shouldn’t become complacent, and the trusting environment of the family office may prevent spotting possible issues.

“What you and I would think was a high ticket value — $10,000, $20,000, $30,000 — for most family offices this is not even the interest on the day. There may be lots that goes down that is not reported or simply looked at as a rounding error or accounting error. But it could be downright fraud,” says Elliott.

Frauds can go on for years until an audit or change in governance detects them.

Krygier also advises that process improvements can help prevent fraud, including adding requirements for four-eye or six-eye authorization on certain transactions. Involving more family or staff can enable a transaction to be looked at differently or an email to be questioned, he says.

And if the worst has happened and a family has been defrauded?

More from Canadian Family Offices:

• In this age of litigation, are you (and your assets) creditor-proofed?
• Three key factors to impact family offices in the next decade
• Single-family offices can easily become ‘financial black holes’

Elliott says a family office seeking help from police may not get the response they hoped for.

“There’s no violence involved. Nobody’s dying. Unfortunately, our police forces are inundated with things along those lines that are much more serious than a dollar amount through fraud,” he says.

“A big part of what I advise to my clients is you can find the accounting anomalies, but at the end of the day you need to put somebody in front of that action to actually get restitution or criminal charges. If you don’t identify the perpetrator it’s all for nought.”

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