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How to recognise a Ponzi scheme

And how not to fall victim to it.

A new year brings with it good financial intentions, but how can you tell the difference between a great potential investment and a great sales pitch?

Bold promises of lofty returns are made to unsuspecting victims, who then part with their hard-earned cash in the hope of one day getting out way more than what they put in. And while you think it would never happen to you, the reality is that even the most educated of investors fall for fraudulent schemes. 

If something seems too good to be true, it usually is.

According to 2015 international reports, at least 61 Ponzi schemes were uncovered globally that year, with a total of more than US$800 million in potential losses. 

Back home, the South African Reserve Bank (Sarb) and the South African Banking Risk Information Centre (Sabric) recently warned consumers against an increase in fraudulent schemes. The Sarb said that over 5 000 advance-fee scams (tricksters who ask for advanced deposits) were reported to the bank over the last five years, while Sabric noted that tricksters increase fraudulent activities over the holiday period with holiday home, credit card and phone scams.

Retirees are particularly vulnerable when it comes to fraudulent schemes as they have already, or are about to, invest their life savings.

The problem also comes in when retirees realise that they may not have enough money to last throughout their retirement, and are therefore more susceptible to promises of high investment returns. 

Only 6% of South Africans can afford to retire – 45% are dependent on their family, 32% are forced to continue working and 17% are dependent on the state pension. This is a sobering reality.

Bearing these figures in mind, it is a good idea to start saving for retirement as soon as you can – a little goes a long way if you start early, thanks to the wonders of compound interest. If you are nearing retirement and are uncertain if you have enough money to sustain yourself there are some practical steps you can take to improve your situation. These include delaying retirement so that you can save more and rethinking your priorities. 

Regardless of your age or lifestage, it is important to take a considered approach and not to be lured by false promises.

Protect yourself by being wary of people or groups who guarantee a financial return.

If you invest with a reputable investment house they should be transparent about the amount of risk you are agreeing to take on and the return you can typically expect.

Ponzi schemes, however, promise to make you quick wins, not on your own money, but rather on money put in by investors who join the scheme at a later stage. As it is very difficult to recoup losses for victims from Ponzi schemes, it is important to be able to identify suspicious activity that could be linked to a fraudulent scheme, prior to it happening.

To make sure you don’t become a victim, be wary of the following:

  • Promises of high returns, which could not be achieved through normal conventional investment opportunities, within a short period.
  • Promises of “guaranteed” returns – make sure you understand who is making the guarantee and whether they can or would pay up. Because of the risk that the person making the guarantee may not pay, no return is ever really guaranteed, all investments carry some risk.
  • Attractive stories from other existing members of how much money they have made through the scheme. Beware of taking others’ ‘success’ stories as truth.
  • Opaque business models.
  • Statements such as ‘an opportunity of a lifetime’.
  • Lack of clarity around underlying investments.
  • Very high initial returns and encouragement to invest more.
  • Unregistered products.

The best way to protect yourself is to make sure that you only invest with a reputable firm or an experienced investment manager. Financial services firms are regulated by the Financial Services Board (FSB) and they can assist if you want to assess the authenticity of an offer or check if a provider is licensed. If you need any other assistance, you may wish to speak to an independent financial adviser.

Thandi Ngwane is head of strategic markets at Allan Gray

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Just “Google” the opportunity – it will immediately supply you with details on the scheme or scam, do not even have to seek advice from “experienced investment manager”, just read, investigate and think before making financial decisions.

End of comments.



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