With many investors falling victim to pyramid and Ponzi schemes, Roshan Jelal notes some of the possible red flags to look out for.
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The key to helping investors to better protectthemselves from falling victim to investment fraud is to stay alert and beaware of the key characteristics and red flags associated with Ponzi andPyramid schemes.
Ponzi schemes have existed for over one hundredyears and range in shape, complexity, and size. Investors are often promisedextraordinarily high returns within a short period of time, with little or norisk. The money obtained from new investors is either used to pay returnspromised to earlier investors or returns are paid from the initial investment,thereby creating an illusion of a very lucrative business.
In the absence of any legitimate underlying business,this unsustainable scheme eventually collapses as it becomes impossible toattract new investors enabling the scheme operators to pay on promises made,particularly to earlier investors. These schemes rely solely on the steadystream of new investor (victims) funds.
Whilst the scam often relies on word-of-mouth, socialmedia has given it further momentum.
If you are wondering whether an investment opportunitymay be a Ponzi scheme in disguise, there are a few red flags and tips toconsider in order to protect yourself:
1. Be cautious of opportunities promising high ratesof returns with little or no risk attached. It is noteworthy that allinvestments carry some risk, particularly short-term investments with highrates of return.
2. Look out for investment schemes that are notregistered and licensed with the relevant regulatory authority. All financialservices providers (FSPs) must be registered with the Financial Sector ConductAuthority (FSCA) to operate in the financial services industry. Therefore,it is prudent that you conduct your due diligence before investing.
3. All investments must be sold by licensedprofessionals who you can and should validate through the Financial SectorConduct Authority (FSCA), if not you may be dealing with a con.
4. Beware of investment opportunities that lacktransparency, a clear business model, or are exceedingly difficult tounderstand. You must always be able to understand how and where yourhard-earned money is being invested.
5. Never rush into investment opportunities, it iswise to take as much time as required to authenticate the entity and relatedparties.
Pyramid schemes are justas unsafe as Ponzi schemes. These pyramid schemes require that participantsrecruit new people to join the scheme.
The initial participant often pays an upfront fee tosell the products or services. Post joining, the participant is enticed torecruit new participants and at each new tier or level, he/she will receiverecruitment-based commissions which is usually paid from the fees received fromeach new recruit.
Pyramid schemes inevitably collapse when participantsare unable to recruit more people.
These schemes often mimic multi-level marketingconcepts as both offer recruitment-based commissions. The difference is thatwith pyramid schemes the earlier participants take money from lower-tieredrecruits whilst with multi-level marketing the commission and revenue aregenerated through product sales.
Here are some tips to protect yourself:
1. Pyramid schemes focus on the large sums ofcommissions you can earn through recruiting others.
2. Often there is no actual product or service that issold. If products and services are being punted, these may be vague, andbenefits are unclear.
3. Beware of fast, easy money, and passive income thatrequires little or no effort.
People need to taketime to understand the red flags, validate and verify investment opportunities,as this time and effort could save you a lifetime of pain and financial loss.
Roshan Jelal is Head of Fraud RiskManagement at FNB Commercial.
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