Most investment opportunities involving the oil and gas industry are legitimate, but in today’s business environment of globalization and intense international competition, fraudulent actors from around the world are constantly looking for unsuspecting investors who wish to benefit from rapidly rising fuel and energy prices.
Oil and gas are industries in which financial crime such as investment fraud can lead to major losses for both individuals and corporations, and the U.S. Securities and Exchange Commission (SEC) advises the public that scams are still a serious area of concern in this sector.
In fact, since 2006, the number of fraud cases associated with private investment in oil and gas ventures has risen consistently, and on average, there are currently more than 20 per year.
When examining the various types of fraud that are possible and the many areas of risk that exist within the oil and gas sector, how does an investor prepare for the possibility of being victimized by a fraudulent actor?
Warning Signs of Oil and Gas Investment Scams
Oil and gas investment fraud involves a wide range of risks and is executed through a variety of techniques, but wary investors can prepare themselves for attempted fraud by being alert to some common warning signs, such as the following.
- The Use of Headlines News Reports
- Unsolicited Phone Calls, Emails, and Mailers
- No-Risk Propositions
- The Opportunity Is Too Good to Pass Up
- Sales Reps Hesitant to Discuss Their Backgrounds
- The Salesperson Has Insider Information
- Previously Untapped Oil and Gas Field
- Exclusive Availability of the Offer
- The Proposal Has a Limited Timeline
The Use of Headline News Reports
Perpetrators of oil and gas scams often make use of widely disseminated news stories in their promotions to try to entice prospective investors and make an oil and gas investment opportunity appear more legitimate than it really is.
For example, when a widely reported economic crisis creates opportunities for money to be earned through oil and gas investments, unscrupulous promoters employ news items about the crisis to prey on naive investors seeking to make a quick fortune.
Unsolicited Phone Calls, Emails, and Mailers
Be wary if you receive unsolicited phone calls, email messages, or mailers about an oil and gas investment. Such communications often have a professional tone and content to reinforce the trustworthy nature of the investment.
However, knowledgeable investors would never invest their money into a company based solely on a phone call, promotional email, or glossy brochure, no matter how professional these communications may sound or appear on the surface. Politely ending the phone calls, deleting the emails, and recycling the mailers are the best responses in these cases.
Knowing the kinds of features that appeal to people who are new to investing, fraudsters often guarantee that the investments they offer have no chance of failing. However, the risk-reward tradeoff principle asserts the higher the risk, the higher the returns. Based on this principle, low amounts of uncertainty or risk are linked with low prospective returns.
The Opportunity Is Too Good to Pass Up
A common theme in fraudulent schemes involving oil and gas investment is that investors are soon going to strike it rich or that the returns on the investment will be too great to pass up. When you receive this type of sales pitch, be highly skeptical about high returns with little to no risk.
Sales Reps Hesitant to Discuss Their Backgrounds
Be sure to research the background of the investment representative and the oil and gas company offering the investment deal. You can contact your state securities commission to find out whether any claims have been filed against the company.
The Salesperson Has Insider Information
Scam artists often claim to have closely guarded information obtained from an insider in the organization, such as a geologist or another expert related to oil and gas exploration. When you hear this type of claim, be wary of its authenticity and ask for details about who these people are.
Previously Untapped Oil and Gas Field
Be guarded about enthusiastic claims regarding access to an oil and gas field in close proximity to a big new discovery. Again, it’s wise to ask for more details if the representative is willing to provide more information.
Exclusive Availability of the Offer
Fraudulent oil and gas salespeople frequently maintain that a deal is only being made available to you or to an exclusive group including you and other particular investors.
The Proposal has a Limited Timeline
Illegitimate salespeople often claim that the deal they’re offering is only available for a short time period before the opportunity ends. This is a fairly telltale sign that you are experiencing a fraudulent investment offer.
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Proactive Strategies to Protect against Oil and Gas Investment Fraud
Aside from detecting these warning signs of fraudulent activity, individuals interested in oil and gas investment should take decisive proactive steps to guard themselves against becoming victims of fraudulent deals. Some practical actions to take before considering investing your money in the oil and gas sector include the following.
- Thoroughly Question Any Sales Representatives
- Confirm the Authenticity of Materials
- Research the Salesperson’s Background
- Look Into the Investment Company’s History
- Inquire About the Lease
- Obtain Relevant Legal Documents
- Reach Out to a Knowledgeable Intermediary
Thoroughly Question Any Sales Representatives
If contacted by phone, ask pointed questions of the salesperson who calls you. If a legitimate deal is being proposed, the salesperson will not hesitate to answer your questions or provide written explanations.
Inquire about the name of the representative offering you the deal, where they are calling from, and their background, especially in regard to other oil or gas investment ventures. Also, ask about what sales commission and/or other types of payment the salesperson will receive if the deal is finalized.
Confirm the Authenticity of Materials
Confirm the authenticity of the materials related to the investment offer with the securities commission of your state or of the state in which the representative is operating.
Research the Salesperson’s Background
Inquire about whether the salesperson has ever been sanctioned for prior securities violations and confirm their replies by checking the free online database provided by the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Look Into the Investment Company’s History
Check into the investment company’s history along with the name, experience, and history of the drilling company involved in the deal.
Inquire About the Lease
Ask for the name of the individual selling the lease, the cost of the lease, and the connection between the person providing the lease and the operator.
Obtain Relevant Legal Documents
Obtain all the relevant legal documents that explain the investment and the site on which the drilling will occur.
Reach Out to a Knowledgeable Intermediary
If any doubts linger in your mind after you have completed your research, don’t hesitate to contact a knowledgeable intermediary, such as a lawyer who is well informed about issues related to the oil and gas industry, to assist you before making any decisions on the investment.
Become a member of COPAS!
COPAS is the Council of Petroleum Accountants Societies. Members of COPAS are at the forefront of driving change and innovations that shape accounting in the petroleum industry.
By becoming members of COPAS, petroleum accountants societies gain leverage in the industry, increased knowledge and insight, and a platform to collaborate with like-minded professionals. By joining COPAS, you can outpace the rest and learn more about our industry’s best accounting practices, standards, and guidelines.
In addition, our Accredited Petroleum Accountant® (APA®) program was established in 1996 to certify accountants within the oil and gas industry. It ensures that petroleum accountants are proficient in the basic elements of knowledge that are essential to oil and gas accounting.