MONEY
09/03/2018 16:27 SAST | Updated 09/03/2018 16:35 SAST

We're Still Falling For Ponzi And Pyramid Schemes

Until we educate ourselves fully about them, we'll keep losing our hard-earned money.

RapidEye via Getty Images

The South African Banking Risk Information Centre (Sabric) has urged South Africans to continue being sceptical of any investment that seems too good to be true, so as not to be deceived by "investments" that promise quick, high and guaranteed returns.

"Scamsters will go to great lengths to get victims to invest in these schemes through the use of social engineering tactics," said Sabric chief executive Kalyani Pillay. "They will even come up with convincing, fabricated statistics to make their offer look attractive, so always treat these kinds of schemes with suspicion," she added.

They will even come up with convincing, fabricated statistics to make their offer look attractive

In South Africa, these Ponzi or pyramid schemes crop up frequently – even though they are illegal.

Here are a few tips to recognise them and protect yourself:

A Ponzi scheme:

  • The promoter promises high returns, which cannot be achieved through conventional investment opportunities, within a short period of time.
  • In some cases, the promoter will use fake qualifications or references to entice investors, for example, an "attorney" with "many years experience in the stock market".
  • Often high returns are paid initially, and investors are lured into investing even more money.
  • They often promise guaranteed returns, whereas no return in reputable financial circles is ever guaranteed – because all investments carry some risk.
  • Promoters are usually quite secretive about the business model.
  • The promoter becomes unavailable, returns dry up and the scheme collapses soon thereafter.

A pyramid scheme:

  • A pyramid scheme is a Ponzi scheme in which the promoter turns you into a recruiter. The promoter promises high returns over a short period of time, and your returns do increase – depending on the number of people that you recruit to the scheme.
  • A "fee" or initial investment is required to participate in the scheme.
  • Participants are asked to recruit more investors, and then rewarded for bringing them into the scheme.
  • The scheme has multiple levels of members, all collecting commission on a single transaction.
  • There is no underpinning financial investment that generates growth.
  • Participants are sometimes taught how to circumvent detection methods.
  • They are often disguised as stokvels, and may even use virtual currencies such as Bitcoin to sidestep the formal banking sector, where they risk being found out.

How to avoid falling victim to "get rich quick" schemes:

  • If it sounds too good to be true, it's most likely a scam.
  • Be sceptical of any investment's insistence that you act "NOW".
  • Be careful of investments that guarantee you high profits with little or no financial risk.
  • Exercise due diligence in selecting investments and the people with whom you invest – DO YOUR HOMEWORK BEFORE INVESTING YOUR MONEY.
  • Consult an unbiased third party, such as an unconnected broker or licensed financial adviser, before investing.

Signs to look out for that it is a "Get Rich Quick scam":

  • It claims to pay out double-digit returns.
  • It claims to be an opportunity of a lifetime.
  • You can't understand how it generates money.
  • It is not a registered product or a product offered by an authorised financial services provider.
  • Returns or profits earned are dependent on recruiting more members to the scheme.

Awareness tips on how not to fall victim to "Get Rich Quick scams":

  • If it sounds too good to be true, it's most likely a scam.
  • Be sceptical of any investment's insistence that you act "NOW".
  • Be careful of investments that guarantee you high profits with little or no financial risk.
  • Exercise due diligence in selecting investments and the people with whom you invest- DO YOUR HOMEWORK BEFORE INVESTING YOUR MONEY.
  • Consult an unbiased third party- like an unconnected broker or licensed financial advisor before investing.

Tips to spot a Ponzi scheme:

  • The promoter promises high returns, which could not be achieved through normal conventional investment opportunities, within a short period.
  • In some cases the promoter will use fake qualifications or references to entice investors for example, an 'attorney' with 'many years' experience in the stock market'.
  • Often high returns are paid initially and then investors are lured into investing even more money.
  • They often promise guaranteed returns –no return is ever guaranteed, all investments carry some risk.
  • Promoters are usually quite secretive about the actual business model.
  • The promoter becomes unavailable and returns dry up.
  • Usually the scheme collapses soon thereafter.