We all know that the road to riches is paved with hard work and diligent savings, not with “get rich quick” schemes. There is no easy way to make a fortune, otherwise everyone would be doing it, right? That doesn’t stop people from hoping, however, and that’s why Ponzi or pyramid schemes manage to scam people, regardless of the outrageous promises they make.
Ponzi schemes have been in the news lately because The Consumer Commission has launched a probe into nine companies that may be providing fraudulent financial services with the intention of scamming South African investors out of their money. To understand how to avoid being scammed, you have to understand how a Ponzi scheme works.
What exactly is a Ponzi scheme? A Ponzi scheme is an investment scam that promises high returns to investors. These investors pay a joining fee and are then usually required to find other investors. As the scheme grows, it uses the money paid in by new investors to pay returns to the older investors. Then, when people running the scheme believe that they’ve earned enough money, they disappear with all the spoils – leaving behind many devastated investors who have put in more and more money with the hope of realising massive returns.
How can I recognise a Ponzi scheme? According to Trevor Hattingh, spokesperson of the National Consumer Commission (NCC), which is investigating the nine alleged Ponzi schemes, these are the red flags you should look out for:
- Be wary of investment opportunities that require you as an investor to recruit other participants in order to generate an income or grow your investment. Pyramid schemes rely on the recruitment of new members all the time to ensure their survival.
- Be wary of schemes that offer returns that are unrealistically higher than those offered by authorised financial services providers such as reputable banks.
- Be wary of schemes that are not registered as authorised financial service providers. Ask for their financial services provider (FSP) number and verify the number with the Financial Services Board.
- Be wary of schemes with offers that sound too good to be true.
- Be wary of any investment or business opportunity or special offer that asks you for a joining fee. But also be aware that many schemes disguise this fee as an “upfront payment or investment”.
- Be wary of companies that aren’t willing to explain exactly where your money is invested and share proof of investment in the form of an investment policy document with you.
It is important to be aware that an average investment will earn an investor 10% per year, while an exceptional return would be 30% per year. This means that an investment of R1 000 would earn the investor an extra R100 to R300 by the end of the year. Even at the high end, this is significantly less than the monthly returns being offered by some Ponzi schemes.
It is also important to understand that there is no secret way to make easy money fast. If there were, financial service providers would be selling it and everyone would be investing! Therefore, if someone is offering you better returns than we’ve mentioned, chances are that it’s a scam. If you invest, you will probably be left with nothing, and if you try to secure other investors, you are helping to spread the scam and ultimately engaging in an illegal activity, for which you could be prosecuted.
Finally, remember that Ponzi schemes are often run as a part of other “front” businesses. So you might find that a travel agent or other company offers you a ‘special business opportunity’. Just because a company seems like a legitimate business doesn’t mean you shouldn’t question its activities.
What should I do if I suspect someone is running a Ponzi scheme? The best place to start if you are approached by a Ponzi scheme, or if you think you may have already participated in one, is to speak to the NCC. They can be reached on 012 761 3400.
Where should I invest my money instead? Speak to a bank manager or financial advisor (remember, advice is free) about the best investment products for your needs. The returns might not be as high as those offered by Ponzi schemes, but remember that these schemes are illegal scams and while investors might get some money back initially, they are setting themselves up for a big loss and possible prosecution further down the line.
The bottom lineInvestment opportunities that sound too good to be true probably are. Always remember the list of Ponzi red flags. If you want to invest your money and realise reasonable returns, speak to a reputable financial advisor or bank, and be patient.