Investor compensation is an award of damages provided to people who experienced losses in an investment scheme where fraud and other ethically questionable activities were involved. This compensation is usually provided by a government official who oversees a compensation fund, distributing monies on the basis of the losses individual investors are able to provide information about. While it is usually not possible to recover all funds lost, investors can offset their losses somewhat with investor compensation. These monies may need to be handled specially for tax purposes, and people should consult accountants if they are not sure about how to treat them in tax declarations.
Fraudulent investment schemes can take a number of forms. In all cases, investors entrust an agent with their money on the understanding that it will be invested in a way designed to generate returns. The agent may simply take the money without investing it, invest it in a risky fashion, or fail to caretake the investments as required by law. When the fraud is uncovered, people involved in the investment can be entitled to investor compensation if they show they were innocent of the fraudulent activity, and they can provide documentation of their losses.
A court will appoint a person to act as a representative of an investor compensation fund. The fund includes any monies left in the fraudulent scheme, as well as assets seized from people convicted of criminal activity related to the scheme. The administrator is responsible for accounting for the total amount of money in the fund, and processing claims from individual investors. These claims must be filed within a certain time period, and should include detailed information about how much money was submitted to the scheme, accompanied with receipts and other forms of proof.
It can take months and sometimes years for investor compensation to come through for an investor, and there are no guarantees about how much money will be made available. While every effort is usually made to return as much as possible to every investor, this is usually not possible. The more investors who claim, the less likely people will be to see all of their money again, as the fund will not be able to cover all of the claims, only a fractional value.
People who fraudulently claim investor compensation can be subject to legal penalties, including repayment of administrative costs related to their claims. Likewise, people who collect money and fail to account for it on tax declarations can also be penalized, especially if tax authorities believe they understood their tax responsibilities and failed to comply with them.