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How to spot investment scams

Take your time before making an investment decision and research what is being offered.

Recently I was contacted by a family member who asked if I could assist in getting money out of an investment product for a friend of theirs. I responded that I could assist if they sent me the details.

A day or two later I received an e-mail with the details of the friend’s investment and I went cold. The document in front of me referenced a now well-known Ponzi scheme!

Now the friend in question is well known to me, I have fielded calls from this individual about this quick yielding investment scheme or this other share which is a sure thing. Every time this happens my response remains the same, let Global & Local manage your investments, yes, our approach will not shoot the lights out in terms of returns BUT we will grow your capital over time at a market-related rate. And when you need to have access to the capital, we will be able to access the capital and have it paid to your account. Time and time again my advice is not adhered to.

Typically, investment scams tend to target people who have some investment capital but are in a way required to grow this capital quickly or those wealthy individuals who are looking for a quick buck. Now for the high net worth who lose capital in these scams, they will probably be able to recover if they do not invest in these scams again. It is those who cannot afford to lose their capital that I feel sorry for.

Recently I have even heard of some investors who invest in Ponzi schemes knowing that this is what they are, and they have done this a number of times successfully and understand the risk of what they are investing in. A kind of professional Ponzi investor if you like! This is madness!

I laughed when my wife and I were watching the series Downton Abbey when Lord Grantham, who has made some bad investments, is discussing the family’s financial affairs with his family members and mentions that a guy in the US is doing tremendously well for his investors, and the guy is called Charles Ponzi (the originator of the “Ponzi” scheme!).

So how do you spot a scam?

Before we get to that, let me add in here that when you are around a dinner table with friends or around a braai (we are South Africans after all!) and a friend tells you that he has just made an astronomical return on…..(add in here “forex-trading”; “cryptocurrencies” or trading shares in “X” company) be sceptical, very sceptical!

By all means, listen to what is being said but also listen to how it’s been said. Could this person be boasting? Is the person trying to promote something? Are they just plain lying to show off to their friends? Do not take what a person tells you as the truth. Yes, it sometimes does happen but very rarely are these kinds of stories of fortunes made on speculative investments true.

Investing is a discipline, that requires time, deep analysis and cool heads.

But back to spotting a scam, it is not always so easy, but there are a few telltale signs.

1. Understand and analyse the promise of returns.

Usually, the promised return is “guaranteed” and is based on an astronomical return completely unrelated to current financial market conditions. Often the numbers are quoted on a monthly basis, like 10% per month was one that was recently used.

Now, I know many experienced and successful investment portfolio managers who would be ecstatic if they could provide a consistent return to their investors of 1% per month.

Also, think about the implications of the return. At 10% per month, this equates to 120% per year. Or if you invest R100,000 on January 1, the promise is that by December 31 your capital will be worth R220,000. In current market conditions, this is completely impossible especially when the word “guaranteed” is used.

If you need to check the return promised, then contact an investment advisor who holds a Financial Services Provider’s licence with the Financial Sector Conduct Authority (FSCA). They would be able to give you an indication of what is possible under the current market conditions.

2. Understand the implications of the word “Guaranteed”.

There are guaranteed investments that deliver a pre-determined return out there, that are from licensed financial services providers.

However, the big difference here is the fact that a guarantee really means that you, the investor, are not taking the risk on this investment, but someone else is taking this risk on your behalf. If the “guarantor” is willing to take this risk for you, they will need to be compensated for this risk and thus the guarantee will always detract from the return on the investment.

3. Is the investment provider licensed with the FSCA?

Always look for this and never take them at their word if they tell you they are licensed. Check their licence number on the FSCA’s website.

Also, check if the person/entity selling you this investment has a website. They should somewhere on their website disclose their FSP number and always see if they tell you who the directors are. Then check this against the FSCA website.

Many investment scams do not even have their own website.

4. Who is your money going to be paid to?

In the case of many investment scams, the money is being paid to an individual or the company offering you this “opportunity”.

Well managed investment houses that are licensed to accept investor’s funds are compelled to keep capital from investors separate from the money of the company.

Enquire how your investment is kept separately from that of the entity offering you the investment product.

5. Are they asking for normal FICA documentation?

Licensed Financial Services Providers have to comply with the Financial Intelligence Centre Act. In this way they have to prove KYC (know your client) and that they have complied with international AML standards (anti-money laundering).

Typically, a licensed financial services provider will ask you for a copy of an identification document, proof of your home address and a copy of your bank statement for their file. The ID document and the proof of address proves your existence. In other words that the investment is not made by a fictitious individual simply to circumvent taxes.

The proof of banking proves a source of funds and the fact that you have a bank account proves that you have already been through some AML due diligence procedures. Proof of banking also provides the FSP with a double-check of your banking details for when you want to exit an investment product, to ensure that your money gets paid to your account and nobody else’s.

In closing

Always use the measure of logic and reality, for example never believe the guy who contacts you saying that he has money for you that was left to you in a will by an uncle you never knew you had. Yes, this can happen, but if I had inherited the amount of money promised to me in this way I would be living in the Caribbean on a superyacht!

Also, if you have someone contacting you saying you have won the UK Lottery and you do not remember entering it, simply do not respond, this is a scam!

Over the years I have come across many Ponzi schemes and investment scams. This subject can be written on again and again, furthermore what I have written about here could be expanded and more points could be added. In addition, one should understand that added financial industry regulation and compliance will never stop the occurrence of investment scams, they will in one way or another always exist.

The best advice I can offer on this subject is this, take your time before making an investment decision, research what is being offered and speak to your trusted and licensed investment advisor.

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Michael Haldane

Global & Local The Investment Experts


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