Thursday, 02 April 2015 10:47

How not to fall for Ponzi scams

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Cape Town - There are no shortcuts to getting rich quick and anyone who says otherwise is almost certainly out to cheat you, according to Marius Alberts, regional leader of Deloitte Western Cape.

 

“Pyramid and Ponzi schemes do not create true wealth. Don’t be the next victim,” he said.

Alberts’ warning follows recent reports of a Cape Town couple facing possible charges over an alleged Ponzi scheme that left investors in the lurch.

“Anyone promising huge amounts of money for very little work should be treated with scepticism until all the checks and balances have been completed,” advised Alberts.

Over the last 14 years he has been closely involved with the investigation and management of the repayment process of more than 50 investment schemes in South Africa and abroad. In one of these cases more than $1bn was taken from the public.

“Despite there being numerous variations, these schemes are mostly all based on the same fraudulent concept. Pyramid and Ponzi schemes produce no goods or services of any significance," said Alberts.

"They create no wealth. All they do is move existing wealth. Every rand one person gains through such a scheme is one that someone else has lost.”

Pyramid vs Ponzi

Alberts explained that a pyramid scheme is named as such because of its resemblance to the shape of a pyramid. It operates on the principle that each member of the scheme will receive a reward for recruiting others to join the scheme.

The hallmark of illegal pyramid schemes is that participants receive payment primarily for recruiting new members, rather than for selling products.

“The inherent problem with pyramid schemes is mathematical in nature. There are simply not enough participants in the world to keep pyramids growing steadily for even a few months. Mathematically every pyramid must eventually fail,” said Alberts.

Ponzi schemes, on the other hand, are a type of pyramid scheme that operates on a rob-Peter-to-pay-Paul principle. They are operated by a central company or person, who may or may not be making other false claims about how the money is being invested, and where the returns are coming from.

“Ponzi schemes do not necessarily involve a hierarchical structure, as in a pyramid scheme. There is merely one person or company that is collecting money from new participants and using this money to pay promised returns to earlier participants," said Alberts.

"The scheme collapses when the number of previous investors seeking a return exceeds the number of new investors bringing in additional money.”

Pyramid and Ponzi schemes normally attract unsuspecting investors with the promise of unusually high rates of return in "risk free" investments, said Alberts. However, experience has demonstrated that as a general rule, the higher the promise of extremely high returns, the riskier the investment.

Spotting a fraudster

Alberts warned that investment con artists are clever and creative. Perpetrators of this type of scam often base their moves on the latest political and scientific developments in the news and offer pitches tailor-made to the needs and concerns of the audiences.

Presentations to potential investors are "hard sell", well-rehearsed and seemingly very professional.

“Schemes like these are popular because people are always looking to make a quick buck. For a person desiring to make a lot of money from a small investment in a short amount of time, wishful thinking often takes over where critical thinking should step in," said Alberts.

"Wishes become facts. Sceptics develop a fear of missing out and asking questions becomes rude and unfriendly. Scam artists know how greed works and exploit human weakness.”

One should not be fooled by people's success stories. Payments are normally made to early investors to prove that the investment is working.

These fortunate few are known as songbirds, since they sing the praises of the scam to others and help bring in new victims eager to get the same kind of generous returns.

Alberts cautioned that fraudulent schemes have certain hallmarks investors should be wary of.

Signs to watch out for

- Investments emphasising that they are legal and not pyramid or Ponzi schemes;
 
- Investments that promise unrealistically high returns, compared to other legitimate high risk investments;

- Quick returns – for example, "double your money in 60-90 days";
 
- A "can't lose" scheme for making money that others have overlooked;
 
- No risk involved or your investment is guaranteed;
 
- Tax-free returns;

- Payment of a membership fee to participate;
 
- Products that have a high price compared to similar products available elsewhere;
 
- Unrealistic claims about product quality;
 
- Recruitment of new persons to earn money; and
 
- Unusually hard sell tactics.

Alberts urged potential investors to question these get-rich-quick investments and seek proof before parting with their money.

“Always check if you are dealing with an entity, broker and investment registered with the Financial Services Board," warned Alberts.

"You should demand proof before investing. It is your right, and a reputable entity will be more than happy to provide it to you.”

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