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Do you know how to spot a Ponzi or pyramid scheme? Many other people thought they were sure that the scheme they were investing in was not one of these illegal ways of fleecing consumers of their hard-earned money, just to end up destitute, with not a cent to their name.
Just think of BHI Trust and Mirror Trading International and how it destroyed people’s lives when the schemes folded. Consumers have to be very careful when they invest their money to ensure that their funds are safe.
Roshan Jelal, head of fraud risk management at FNB Commercial, says the key to helping investors protect themselves better from falling victim to investment fraud is to stay alert and be aware of the key characteristics and red flags associated with Ponzi and pyramid schemes.
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“Ponzi schemes have existed for over 100 years and range in shape, complexity and size. Investors are often promised extraordinarily high returns within a short period of time, with little or no risk.
“However, the money ‘invested’ from new investors is either used to pay returns promised to earlier investors or returns are paid from the initial investment, creating an illusion of a very lucrative business.”
Jelal says in the absence of any legitimate underlying business, this unsustainable scheme eventually collapses as it becomes impossible to attract new investors that enables the scheme operators to pay as it promised, particularly to earlier investors. These schemes rely solely on the steady stream of new investor (victim) funds.
“While these scams often rely on word-of-mouth for marketing, social media gives it further momentum.”
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If you are wondering whether an investment opportunity may be a Ponzi scheme in disguise, consider these red flags and tips to protect yourself:
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Jelal warns that pyramid schemes are just as unsafe as Ponzi schemes. Pyramid schemes require that participants recruit new people to join the scheme. If you ever knew someone who wanted to come and see you to tell you about a wonderful new scheme with an opportunity that is too good to miss, that person was likely to have been trying to get you to join a pyramid scheme, especially if they were extremely insistent.
“The initial participant often pays an upfront fee to sell the products or services. After joining, the participant is enticed to recruit new participants and at each new tier or level, he/she receives recruitment-based commissions which are usually paid from the fees received from each new recruit.”
Jelal says pyramid schemes inevitably collapse when participants are unable to recruit more people. “These schemes often mimic multi-level marketing concepts as both offer recruitment-based commissions. The difference is that with pyramid schemes, the earlier participants take money from lower-tiered recruits while with multi-level marketing the commission and revenue are generated through product sales.”
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Watch out for these red flags to identity a pyramid scheme:
“Consumers must take time to understand the red flags and validate and verify investment opportunities, as this time and effort could save you a lifetime of pain and financial loss.”
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