Keeping Your Money Safe: 5 Ways To Spot An Investment Scam

As opposed to popular trading platforms like the stock market and forex, which require a fair amount of knowledge but can afford impressive long-term profits, some people can so easily get sucked into fraudulent schemes with the promise of immediate returns.

For example, Barry Tannenbaum and his lawyer sidekick Dean Rees managed to trick some of South Africa’s top executives and most astute individuals out of more than R12.5 billion back in 2009.

Although this should serve as a lesson to most, you may not recognise an investment scam if it suddenly presents itself.

So, with this in mind, here are some common swindles and how to spot them.

Ponzi scheme

Investopedia defines a Ponzi scheme as a “a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors.”

As long as new investors keep signing up, a Ponzi scheme will deliver yields to early adopters. However, it invariably collapses on itself when new investments stop coming in.

It was named after Carlo “Charles” Ponzi, who in 1920 said his products could yield up to 100 per cent profit on just a 90-day investment.

Pyramid scheme

Although Pyramid schemes are similar to Ponzi schemes, as both are based on using new investor funds to pay early backers, there is one distinct difference between the two.

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Whereas the Ponzi mastermind collects all funds from new investors and then distributes them, Pyramid schemes allow each investor to directly benefit depending on how many recruits they can find.

As a result, the person at the top of the pyramid never has access to all money in the system.

Stokvel scam

In addition to SMS messages that claim you have won a competition you didn’t enter, Stokvel scams have become increasingly popular in South Africa recently.

Fraudsters behind Skotvel scams will claim to be ‘investment clubs’ or ‘connectors’ who aren’t interested in taking a deposit but still ask you to transfer money into their account.

They also want you to recruit people in order to be paid a profit on your investment.

How to spot and avoid an investment scam 

  1. Member recruitment – Several investment scams ask you to recruit other members in order to receive a profit. You appear to be doing all the legwork, but money is simply channelled straight to the top of the scheme.
  2. Exclusive events – If you are invited to an ‘exclusive’ event to sign investment documents, divulge personal information, or even part with your money, think twice about attending.
  3. Get rich quick – If it sounds too good to be true, it usually is. Exercise extreme caution when you are presented with the promise of high returns in a short period of time.
  4. No mention of risk – Even the most renowned financial trading firms will tell you that their investment opportunities involve risk. Therefore, be suspicious of guaranteed high returns with no risk.
  5. No sign of accreditation – You should only ever trust your money with a company accredited by or registered with the Financial Services Board (FSB). If you suspect otherwise, let the South African Reserve Bank know or visit its website for help.

By: Jessica Foreman