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Ponzi & Pyramid Schemes

MODUS OPERANDI

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. This type of fraud is perpetrated when an ‘investor’ lures their victim by guaranteeing high profits that promise little or no financial risk. In most instances the investor will be vague about the nature of the investment but will stress the rate of return. These investors hype their high-level financial connections; the fact that they’re privy to inside information through social engineering techniques and that they’ll guarantee the investment. To close the deal, they often come up with phony statistics, misrepresenting and stressing the uniqueness of their offer.

TIPS

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.
  • If it sounds too good to be true, its 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.

HOW 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.

HOW TO SPOT A Pyramid SCHEME

  • The 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).
  • The 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.
  • There is general secrecy and. 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”.
  • There are short investment periods, sometimes as little as ten days promising very high rates of return and strong encouragement to reinvest automatically.
  • These could be requests to invest pension funds or similar savings/capital.
  • People should know 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. 
  • They make use of 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.