FSA Warns of Rare Earth Fraud

While the rare earth market is no stranger to controversy, investors were shocked when the Financial Services Authority (FSA) issued a warning related to questionable investments.

The rare earth element (REE) sector has experienced a roller-coaster ride of late. Coming off record highs, prices plunged in 2012, with many attributing the drop to the reintroduction of new sources of production outside of China.

However, it seems that price volatility is not the industry’s only concern — regulatory authorities have advised investors to act with caution when searching for investment opportunities.

“Strong possibility” of fraud

In a recent warning to consumers, the FSA, an independent, UK-based non-governmental body, notes that although “rare earth” metals investments are being marketed to consumers, it has “yet to see any convincing evidence” that there is a viable market for retail investors to make money and thus there is a “strong possibility of fraud.”

“Manufacturing companies that use the metals almost always buy in very large quantities, making it highly unlikely they will deal with small independent retail consumers,” the warning notes. “It has been reported to us that callers promoting investments in rare earth metals are using dubious, high-pressure sales tactics and targeting vulnerable consumers.”

It suggests that the parties responsible for promoting investments in rare earth metals have been involved in selling other high-risk and unregulated products, such as carbon credits, land without planning permission and overseas land and crops. Legitimate markets for these goods are of course open to investors; however, while most equities are sold honestly, that has not resulted in a decline in rip-off equity sales, and scammers continue to reference the real market to justify their own claims.

“There is a strong possibility of fraud with each of these products, including rare earth metals, because they are unregulated and it is difficult to confirm that the product or scheme exists, especially when it is said to be based abroad. It seems unscrupulous brokers attempt to take advantage of this uncertainty to get people to invest,” the FSA warning adds.

How does it happen?

The public warning goes on to explain how the scheme is being undertaken, noting that investors are often called randomly by salespeople promoting rare earth metals. Contact is also made through alternative channels, including email, word of mouth and even seminars and exhibitions.

Scamsters are playing on the use of REEs in expensive and often critical industrial and consumer goods, such as X-ray machines, smartphones and electric or hybrid vehicles. It seems that just as carbon credit scam artists make use of terms such as “Kyoto” and “combating global warming,” rare earth-focused criminals are using “green technology” as a key entry point to entice naive retail investors.

“The caller may claim rare earth metals are ‘the new big thing‘ in alternative investments and insist that high demand for the metals in the manufacture of many goods will lead to very attractive returns. You may be told the supply of rare earth metals is falling, especially in China where most of the production takes place, and that prices are set to soar as international demand grows,” according to the FSA.

The warning highlights that any dealings in rare earth products are likely to be high risk. The reasoning behind this assumption is that prices often prove difficult to track as most rare earth metals are sold on private markets rather than on an exchange.

Claims of FSA approval

The FSA is also being used to justify the scam. Sellers are increasingly referring to FSA involvement in sales in order to give their pitches credibility. Many have fallen victim to the ploy.

Scammers often refer to an “FSA-approved money handling and escrow account,” as it is easy to convince investors that this qualification is somehow the same as an FSA-approved investment, according to a Mindful Money article. However, all it actually means is that money will pass through some form of FSA-approved bank account — but almost all banking in the UK is regulated by the FSA, so this point is meaningless.

The truth is that any investment made towards a REE scheme will go directly from an investor’s account into the pockets of scammers via an FSA-approved bank or other facility.

Another term that is fast roping in those keen to invest in rare earth metals is “FSA Verification,” notes the Mindful Money article. The FSA has warned investors to ignore this phrase as assets such as metals and other commodities are not under FSA regulation.

In fact, the authority clearly states, “[t]he projects involved in extracting rare earth metals will almost always be based overseas, which means UK authorities can not monitor the quality of the products or verify that they exist.”

With over 90 percent of the world’s global supply of REEs originating in China, investors need to understand that FSA approval in the process of REE investment means absolutely nothing.

Due diligence is necessary

While the majority of investors are not likely to be duped by such tactics, the fact remains that the FSA felt the need to issue a warning and that there are individuals being conned. It has also provided a list of unauthorized firms and individuals to avoid doing business with, warning that the names of the firms listed are likely to change regularly.

This activity makes up a small percentage of actual investment, but it has managed to cast a negative light onto a sector that is desperate for positive exposure. As with all schemes of this nature, those behind it are likely to streamline and improve the manner in which they scam potential investors — something that will be of concern to producers, sales channels and the investment community as a whole. As with all investments across any commodity, due diligence is key.

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.