How to spot fake investments and Ponzi schemes in South Africa

The South African Banking Risk Information Centre (Sabric) urges consumers to be skeptical of any investment that seems too good to be true, to prevent being deceived by so-called investments that promise quick, high and guaranteed returns.

In South Africa, these schemes generally meet the criteria of either a traditional Ponzi or Pyramid scheme.

Both schemes see returns generated for earlier investors through revenue paid by new investors, rather than from legitimate investments or business activities. At the point where there are more existing investors than new investors, the scheme collapses and all monies invested, are lost.

People who were expecting to make a good return on their investment, not only get nothing, but also stand to lose most, if not all the money they initially invested.

Sabric CEO, Kalyani Pillay warned consumers about these illegal schemes: “Scamsters will go to great lengths to get victims to invest in these schemes through the use of social engineering tactics. They will even come up with convincing, fabricated statistics to make their offer look attractive, so always treat these kinds of schemes with suspicion”.

Sabric provided the following tips to ensure that consumers are able to recognise these schemes, and protect themselves:

Get rich quick scams

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.

Ponzi schemes

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.

Pyramid schemes

Tips to spot a Pyramid scheme:

  • Promoter promises high returns over a short period and your returns increase with 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 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 like Bitcoin to side step the formal banking sector where they could be detected.
  • A tiered investment structure to incentivise larger investments into the scheme (e.g. silver, gold and platinum membership).
  • Investor complaints (usually on social media) that returns have dried up. The scheme operator typically responds with (1) promises that payments are imminent and (2) blame shifting to the banks where accounts have been frozen or closed.
  • General secrecy – e.g. no details are made available regarding where the funds will be invested or in what. Very general terms will be used to describe the scheme.
  • Schemes offering investment in “commodity trading”, “forex trading” or “virtual currencies”/“virtual currency mining”.
  • Short investment periods – sometimes as little as 10 days – with very high rates of return and strong encouragement to reinvest automatically.
  • Requests to invest pension funds or similar savings/capital.
  • People should be aware of the fact that these schemes operate on trust – and an invitation to invest can therefore often come from someone close to you, such as a family member, community leader or religious figure.
  • Closed user groups with an increasing trend towards messaging across WhatsApp, presumably due to the belief that the app offers end to end encryption and therefore anonymity.

Read: Hawks investigating multi-million rand Bitcoin scam in South Africa: report

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How to spot fake investments and Ponzi schemes in South Africa