Author: Gerald Mwandiambira, acting CEO of the South African Savings Institute

Investment Scams: What they are, and how to spot them

In recent times, there has been an increase in fraudulent investment companies known as Pyramid Schemes or Ponzi Schemes. These schemes have fleeced many unsuspecting investors of thousands of rands and continue to pop up across South Africa. It is important that we all are able to spot these schemes from afar.

 Pyramid Schemes

Pyramid schemes are illegal scams in which large numbers of people at the bottom of the pyramid pay money to a few people at the top. Each new member recruited joins at the bottom and works their way to the top. In order to join, you might have to pay anything from a few Rands to many thousands of Rands. Pyramid schemes are usually designed for fraud and the founders disappear without a trace soon after the scheme collapses. These founders often pop up in another part of the country with the same plan, scamming people from that area.

Ponzi Scheme

Identical to a pyramid scheme in most aspects and as such the terms often confused. A Ponzi scheme is a another illegal operation whereby the operator, an individual or company, pays money to investors from new money paid in by investors, rather than from profit earned from investments made.  Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Ponzi schemes do not force investors to bring on new investors but rather rely on their extremely attractive returns to lure new investors.

Ponzi schemes occasionally begin as legitimate businesses, until the business fails to achieve the returns expected. The business becomes a Ponzi scheme if it then continues under fraudulent terms. Whatever the initial situation, the perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme. Ponzi schemes often have legitimate business registration, professional staff with accreditation and pass scrutiny of most investors; which makes the scam hard to spot.

Example of Pyramid/Ponzi Operation

R1,000 may enter you at the bottom level of the  pyramid. R500 of your money goes to the person directly above you who recruited you, and the other R500 goes to the person at the top of the pyramid, the promoter. As more and more people join the pyramid, the top of the pyramid gets more money with the bottom losing money. When the persons at the top are paid, the next level becomes the top.

Each time a level rises to the top, a new level must be added to the bottom, each one twice as large as the one before. When the number of new members slows down, the pyramid collapses with all the bottom levels losing money.

Identifying pyramid schemes

  1. You are urged to join fast before you lose the opportunity.
  2. You are promised double or more than double your “investment” in a short period of time.
  3. Expensive fancy brochures, presentations and websites that show how easy it will be to be rich.
  4. There is a large fee payable before you receive anything in return.
  5. The founders of the pyramid show off their easy money and are usually known members of the community, this attracts other members.

 

Questions to ask any investment

  1. Are you registered with the Financial Services Board (FSB), and request proof?
  2. What are your qualifications?
  3. How long have you been in business?
  4. Do you have to find new members/investors in order to join?
  5. Will you allow my financial planner to study your investment and how it works?

Do not be ashamed to report the culprits

One of the reasons that most pyramid scheme owners get away with the crime is that victims are often too afraid to report the loss due to embarrassment. Also, often when the scheme collapses, the original founders are long gone with huge profits leaving what used to be the middle and bottom in operation.

Participants in the operation also prefer to keep quiet to avoid losing any monies they profited from. This then means that law enforcement officers lack evidence.

Report your loss

When a pyramid or ponzi scheme fails, it damages the image and reputation of all good and honest investments in South Africa. Report any suspected schemes for immediate investigation to the FSB. You can opt to remain anonymous and help put away dangerous criminals as ponzi schemes often fund other criminal activities like money laundering, illegal drugs, prostitution and human trafficking.

Contact Details: Call 0800 313 626 for the Fraud and Ethics hotline or  www.fsb.co.za 

Always consult a financial planning professional when you are about to invest in any investment with returns that are” too good to be true”. Here, trust your instincts and rather be safe than sorry.


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