Family offices particularly vulnerable as fake deals and scams multiply

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As international conflict and economic pressures build across the world, family offices and their families are facing increased levels of risk.

Fraud, in particular, is on the increase, says Tobias Jaeger, founder and CEO of Falcone International, which specializes in risk management and helping high-net-worth families and businesses avoid scams and bad investments. Falcone operates in Washington, D.C., London, Frankfurt, New York and Singapore.

In an interview, Jaeger described a few kinds of fraud and the circumstances that are giving birth to them.

Scams from hotspots

Jaeger says he is seeing a rise in fake deals and transactions driven by the turmoil in global hotspots.

“When there are conflicts like you have with Ukraine or Israel and Palestine, there’s a great number of people who are under a new type of pressure — the pressure to survive,” he says. “It ups the ante for people to make money quickly, and quite often the only way to do that is through some sort of illicit activities.”

The scams, from unsophisticated to very sophisticated, that are coming out of those regions have spiked, he says. They are similar in structure to other scams but specific to the conflict situation or area.

“It’s particularly relevant for family offices or family-owned businesses. A regular Fortune 500 business or investment firm is less likely to fall into any of these scams because they have a robust governance structure and a deal committee or some sort of committee made up of insiders and outsiders of the organization that supervise what the organization is doing.”

Family offices may be very principal-driven, Jaeger says, so sometimes a senior member of the family, or some informal mechanisms, can override advisors.

How these scams work

“The mechanism is always the same — there’s an opportunity to invest in something, maybe related to the conflict, or that’s a proxy that feeds into the conflict. Usually, like any con, it’s time-sensitive. Decisions need to be made quickly. Because of the situation, the payout is very, very interesting.”

If someone wants to make an investment there it’s usually because of a personal connection, says Jaeger. The client will usually have been exposed to the market before, perhaps through family heritage, and they want to do something to help.

“If someone is set on investing in Israel or Ukraine or any other place of conflict that they feel strongly about, the motives are not just commercial,” he says. “It makes more sense in terms of risk management not to prevent something but to provide the best possible support. My operating assumption is that [a client] is looking for a ‘how’ and not a ‘whether-or-not’ in that situation.”

Look out for spin

As economic pressures spread in North America and Western Europe, and global supply chains are disrupted, another kind of fraud appears: people who falsify business records and projections, “trying to keep up appearances that things are going well that, at the core, might not be anymore.”

Even businesses that have established relationships with family offices might be putting overly positive spins on investments. “It’s a risk that any investor faces but especially family offices,” Jaeger says.

“A lot of these companies are private. There isn’t the same kind of independent regulatory oversight, and so family offices that are not as vigilant as they should be are surprised despite regular interactions with the management of a company.”

Family offices also may not have the personnel resources to interact with the portfolio as much as they should, says Jaeger.

‘America First’ could return

Jaeger warns that if Donald Trump wins the U.S. presidential election later this year, there might be a resurgence of America First policies. “We’ve seen this in the past, when individuals from China were sanctioned. Any sanction is reciprocal.”

If you are a prominent family in Canada or North America, and “you are outspoken one way or another, you might become subject to restrictions that may not make sense, but they have a real implication for your business because the ‘other side’ has deemed you an enemy of their system,” Jaeger says.

Cryptocurrency wallet theft

Theft of a cryptocurrency wallet can happen to anyone. But if you have a family office or are someone who is well known, “you’re an easier target because information about you can be obtained that is required for such a heist to work.”

This kind of theft has a dark undercurrent to it, Jaeger says, because the thieves can be state-sponsored. “It’s a huge problem in Japan, where North Korean hackers steal crypto wallets to raise money for the state.”

Cyber activity: just one component of a crime

There’s a cyber component to pretty much everything these days, Jaeger says. “Cyber is seen as a single topic. To me, it’s a layer that’s on top of everything.”

While the web can enable an attacker, it also can enable the prosecution of a scam, he adds.

“White-collar crimes are not as interesting to the authorities as something violent. But thinking about cyber activity as a layer of the crime might be a factor that gets support from the authorities. Any developed nation that wants to be a serious marketplace must provide safety there,” says Jaeger.

“It’s the 2024 equivalent of the early ‘60s, when the conviction would be for mail fraud or wire fraud … because that’s the thing that leaves the trace.”

The case for reputation management

For many family offices or investors, whether to pursue a fraud case in court comes down to a cost-benefit analysis. “They see little upside and potentially a huge downside. A legal case involves certain disclosures.”

But Jaeger says it could be important to involve the authorities for a broader reason.

“It’s unlikely you’re the only one, and it could make a stronger case to put a real dent in the operation. The case you’re not bringing forward could be the building block that the authorities, a public prosecutor or a general lawyer might need to build a case,” he says.

“I would always encourage everyone, with the help of a company that knows what it’s doing, to approach the authorities, because more often than not, they have tools even the most sophisticated private company does not have access to.”

Advice for family offices regarding scams and international investments

Run proper due diligence on proposed deals, Jaeger advises. “Even sophisticated investors neglect this stage because of certain routines or false confidence. Because there’s usually a time component that works in favour of the seller, due diligence is reduced to a minimum.”

Jaeger recommends a boots-on-the-ground approach. “The time you take to check something out and talk to people on the ground, or to deploy someone to investigate, the better the result will be.”

Holding a professional interview with the person proposing the transaction could determine if the person is showing signs of deception.

Jaeger says his firm maintains partnerships all over the globe.

“Let’s say a Canadian family office invested in a firm in Europe that’s run by a non-European national, originally from southeast Asia, with complicated holdings there. You just need to cross two borders and for a public prosecutor to assist you becomes almost impossible unless it’s something huge.”

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