Avoiding Scams That Target the Military

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Military personnel are prime targets for shady sales practices of financial criminals who want a piece of the troops' regular paychecks and often take advantage of their frequent moves. "Whenever you have a major mobilization of the armed forces, there are opportunities for individuals to use very aggressive sales practices," says John Oxendine, Georgia's insurance commissioner, who led a multistate investigation into insurance-sales abuses targeting soldiers.

Crooks know when units return flush with extra cash from tax-free combat pay. "The sharks are circling the bases," says Kathy Graham, president and chief executive officer of the Better Business Bureau of Coastal Carolina. "Individually, our soldiers don't make a lot of money. Collectively, it's a big payroll."

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Five years ago, Kiplinger's Personal Finance magazine revealed that soldiers had often been pitched investments that included a whopping 50% sales charge in the first year. That's right, half the money went into the pocket of the investment firm and salesman, not toward the servicemember's nest egg. This was followed by reports that young service-members were being sold expensive life-insurance policies they didn't need -- and didn't even realize they were buying.

After a flurry of nationwide investigations and congressional hearings, several companies were ordered to pay multimillion-dollar fines and change their sales practices. And new laws and Department of Defense rules have been passed to help protect military personnel from the bad guys.

But you can't let down your guard: The problems haven't disappeared. Instead, abuses in the sale of insurance and investments -- not to mention outright fraud -- continue to surface. Con artists use military insignia to sell everything from bogus insurance to contaminated meat. And identity thieves are taking advantage of deployments and the military's ubiquitous use of Social Security numbers to find new victims.

Increasingly, though, state and federal regulators, local organizations and the military are on the alert. "We've seen the increasing costs of these personal-finance problems," says Holly Petraeus, director of BBB Military Line¨, which provides consumer education to military families. "People were even losing their security clearances." Here's how to protect yourself from inappropriate sales practices and outright scams that target military families -- and find far better deals on the products you need.

Affinity Fraud and Scams

Criminals have no qualms about fabricating an affiliation with the military to gain a family's trust. Often these are small-time operators who go door to door. In one case, a salesman was peddling phony life insurance just before deployment, preying on families' fears . . . and disappearing with hundreds of dollars in "premiums." In another case, a man claiming to be with the naval-base commissary in San Diego sold tainted meat to Navy families who lived on base.

Military spouses looking for a new job in a new town are susceptible to work-at-home scams, and they often shell out $50 to $200 or more for start-up kits and get nothing in return. And BBB recently uncovered a scam in which a con artist pretending to be a soldier about to deploy advertised a too-good-to-be-true price for a used car in an online ad. His touching story, combined with a promise to use an escrow account to protect the buyer, attracted immediate attention. But the escrow account was phony and there was no car.

Sometimes scams are on a larger scale, as when thieves target a tightly knit group by associating themselves with a respected member of the group. For instance, the Securities and Exchange Commission charged three promoters in 2008 with allegedly running a real estate Ponzi scheme that cost about 75 investors an estimated $10 million. Many of the victims were in the military and had been solicited by a member of the Air Force who had been sucked into the scheme.

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Military families are also magnets for identity thieves because their Social Security numbers are everywhere, including military ID cards, dog tags and medical cards (the Department of Defense is gradually phasing out the use of full Social Security numbers on ID cards over the next two years). Plus, servicemembers may be hard-pressed to monitor their credit records and bills when they're deployed.

In 2007, the Federal Trade Commission discovered a brazen ID-theft scam in which the thief, posing as a member of the red Cross, called a soldier's family members to tell them their relative had been injured in Iraq.

The caller then claimed that the family members would have to complete certain paperwork and provide personal information before they could get any more details, which would have been enough for the crook to open accounts in the servicemember's name.

What You Can Do

Check out the company or salesperson with the base community-service office. For example, Army Community Service at Fort Hood, Tex., has a database that cross-references complaints made to the community-service, legal-assistance and housing offices on base, as well as the local BBB. The base's legal-assistance office will also help you review contracts before you sign.

The Armed Forces Disciplinary Control Board at each base can blackball certain salespeople or companies and prohibit anyone on base from doing business with them. Just the threat of being put on the banned list can often help resolve complaints.

Contact the Better Business Bureau. You can check a business's complaint record and get help resolving problems through the local BBB. BBB Military Line focuses on information and resources specifically for service-members and their families.

Put an active-duty alert on your credit report. This free alert notifies creditors that you're on active military duty and asks them to take extra precautions to verify the identity of an applicant before extending credit. Include the phone number of a trusted friend or family member for creditors to call while you're deployed. To place the alert, contact Experian.com, Equifax.com or TransUnion.com.

Check your credit report. You can generally do this even while deployed by visiting annualcreditreport.com, where you can request a free copy of your report from each of the credit bureaus mentioned above once each year.

Predatory Lending

Payday lenders, which make short-term loans against the borrower's next paycheck (sometimes at interest rates surpassing 400%), used to line the commercial strips around many bases. But a recent law caps payday-loan rates at 36% for members of the military on active duty and their dependents, and has caused some lenders to close up shop. A few states now ban payday loans entirely.

That hasn't stopped some criminals from targeting cash-strapped military personnel with so-called advance-fee loans. Borrowers are told that they are severe credit risks and must make the first several months' payments in a lump sum in advance before the loan can be finalized. Of course, the advance payment simply disappears. "BBB gets hundreds of inquiries about this every month," says Petraeus.

What You Can Do

Get a 0% loan through a military emergency-relief fund. Contact the community-service office at your base for details. At Fort Hood, for example, soldiers can borrow up to $1,000 interest-free as often as twice a year through the commander's referral program. Car repairs and other basic needs generally qualify, and hardship cases may be eligible for more money.

Join a credit union. Credit unions on base often offer short-term loans at competitive interest rates. Some even offer small loans to members of the military with little or no credit check.

Boost your emergency fund. It's even better to avoid having to take a loan for unexpected expenses. Build up an emergency fund with at least six months' worth of expenses in a safe and liquid account, such as a money-market or savings account, so you won't have to go into debt to cover unexpected expenses.

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Get credit counseling. If you have to take out loans to cover your expenses, you may be dealing with a bigger issue than a short-term emergency. Consider meeting with a financial-planning manager on base or a credit counselor who can help you set up a budget, pay down debt, and prioritize your spending. You can get budgeting and debt help through the community-service office on base or find a credit counselor through the National Foundation for Credit Counseling (www.nfcc.org). Also, credit unions and other financial institutions that are on base are required to offer counseling services at no charge.

Beware of firms that ask you to pay a large upfront fee to reduce what you owe creditors; in many cases, the "credit counselor" runs off with the fee, and your debt remains the same. The only thing that's reduced is your ability to pay it.

High-Fee Investments

Over the past few years, state and federal regulators have cracked down on companies that targeted members of the military with high-fee investments. The Department of Defense and several organizations have also made a big push to help military families identify scams and learn more about legitimate financial-planning strategies.

But there are still salespeople who push high-fee investments near base and pounce on members of the military who receive a substantial windfall, whether at retirement or from a reenlistment bonus or deployment pay. The good news is that you have plenty of better legitimate savings options.

What You Can Do

Max out your Thrift Savings Plan. You can invest up to $16,500 in this low-fee, tax-deferred account in 2009. You can even add all of your tax-exempt pay while serving in a combat zone, as long as your total contributions don't exceed $49,000 for the year.

Make the most of a Roth IRA. You can invest up to $5,000 in 2009 (plus an extra $1,000 if you're 50 or older) even if all of your income is tax-exempt pay from a combat zone. You can withdraw contributions at any time tax- and penalty-free, and all withdrawals after age 59 1/2 are tax-free, as long as you've had a Roth for at least five years.

Take advantage of the military's Savings Deposit Program. Troops deployed in designated combat zones -- such as Iraq, Afghanistan and most of the Persian Gulf region -- can deposit up to $10,000 into a special account that pays 10% per year. The interest, which is taxable when withdrawn, stops accruing 90 days after you leave the eligible region.

Check the broker's record. Before doing business with a broker, use FINRA's BrokerCheck tool to get information on a broker's licensing status and any disciplinary actions. Also look up the broker and company through your state securities regulator. State securities regulators offer programs to help military families, such as California's Troops Against Predatory Scams (TAP$) and Florida's Investor University on Base, in collaboration with the Investor Protection Trust.

Unsuitable Insurance

Regulators have levied multimillion-dollar fines against insurers that used high-pressure tactics to coerce servicemembers into buying expensive insurance they didn't need.

New rules now ban insurance agents from soliciting military personnel in barracks or at meetings at which attendance is not voluntary. In addition, agents aren't permitted to use superiors or officers to help sign up service members who are junior in rank or grade, and agents can't misrepresent insurance policies as investments.

The new laws are helping reduce inappropriate insurance sales on base. Now, however, "sales of inappropriate life-insurance products are occurring off base," says a report by the Inspector General's office at the Department of Defense.

What You Can Do

Max out your military life insurance first. Servicemembers' Group Life Insurance, or SGLI, costs only 6.5 cents per $1,000 of coverage per month, or $312 per year for the maximum $400,000, regardless of your age or health. You can also get $100,000 in coverage for your spouse. "SGLI is a phenomenal insurance product, and it's a great price," says Georgia's insurance chief Oxendine.

Check out insurers and agents with your state insurance department before you buy additional coverage. Ask about licensing, complaints and disciplinary actions. Make sure the policy you're being offered doesn't have a war exclusion. report problems to insurance regulators and to the community-service office at the base. Find links to your insurance department, and insurance advice for military personnel, at the National Association of Insurance Commissioners Web site. The NAIC's InsureUonline.org also offers insurance advice for members of the military.

MAIN: PERSONAL FINANCE GUIDE FOR MILITARY FAMILIES

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