How to spot pyramid and Ponzi scheme red flags

Fraudsters have been swindling people out of their money using pyramid schemes for years.

They have refined their tactics along the way and expanded the tentacles of their criminal enterprises onto new platforms by using the latest technology.

However, you can fight back by keeping yourself informed because knowledge is power.

So, today we will shine our light on the pyramid scheme after we explored the Ponzi scheme last time.

How does a pyramid scheme differ from a Ponzi scheme?

One reason why people often confuse pyramid schemes and Ponzi schemes is both are presented as shortcuts to becoming wealthy, but how they run under the hood is what truly distinguishes them.

A Ponzi scheme lures investors to put their money into what, on the surface, appears to be a specific investment, investment portfolio or an investment company, but is, in reality, a smokescreen behind which fraudsters move the money around.

In a pyramid scheme, the criminal mastermind at the top lures investors in by having them pay a certain amount of money to enter the scheme.

The person at the top takes a cut and then encourages and rewards investors for recruiting new members.

The “investment” that the scheme offers is merely a smokescreen to move the money from the new investors to the older investors to keep up the appearance of high returns.

In order to ensure the scheme continues to grow, more and more members will have to join until the organisational chart ends up looking like a pyramid.

The wheels of a pyramid scheme will come off eventually because earnings might decrease, the big boss runs off with the money, or there are no new investors joining the scheme.

This means the earlier you join, the bigger your “earnings” will be, and those at the bottom of the pyramid suffer the biggest losses.

Earnings dry up and these schemes disintegrate because to sustain itself its membership has to increase exponentially, which is difficult for any business.

People are quick to call scams Ponzi schemes or pyramid schemes, but for a scam to be one of these two, there has to be the promise of a fake fund or something that victims are “investing” into.

The major difference between a Ponzi and a pyramid scheme is that a pyramid scheme incentivises and actively asks members to recruit new investors.

The high returns of Ponzi schemes often spark hype and members join through marketing or word-of-mouth.

How can you avoid Ponzi schemes and pyramid schemes?

Here are some tips on how to spot these schemes and what questions to ask if you are unsure:

● How long has the scheme been running?

● What are the qualifications of the people running it? Are they registered with the correct oversight bodies? Can they show you the proof so that you can check for yourself?

● Do they ask you to introduce other investors to the scheme?

● If you have to pay to join or invest, consider it a red flag.

● Be wary when it has continued to grow and generate disproportionately good returns despite market conditions.

● Watch out if it is promising double-digit returns.

● If you don’t understand how it works, or someone can’t explain it to you in terms that you understand, rather stay away.

● Remember the proverb: If it is too good to be true, it probably is.

What to do if you are a victim of such a scheme?

● Check if your broker is registered with the Financial Sector Conduct Authority (FSCA) at https://www.fsca.co.za or call 0800 203 722.

● Report the scheme to the National Consumer Commission on https://www.thencc.gov.za/ or call 012 428 7000.

● Call the South African Reserve Bank at 0861 127 272.