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Be street smart: How to spot a Ponzi scheme

Experts say 'if something seems too good to be true, it usually is' and have advised to rather opt for a reputable investment house.

Picture: EWN.

JOHANNESBURG – With the high cost of living, a deal that promises great financial returns is one most South Africans are likely to fall victim to.

South Africa has had its fair share of schemes that promise quick returns to the first investor from money invested by later investors such as in Kipi and MMM.

But how can you actually tell if it is a good investment or if it’s just another gold-coated Ponzi scheme?

Head of Strategic Markets at Allan Gray Thandi Ngwane says: “If something seems too good to be true, it usually is.”

And Sabric's Kalyani Pillay agrees.

"There's been things that include world benches, [such as the] one called Kipi. We should be wary of that."

According to 2015 international reports, at least 61 Ponzi schemes were uncovered globally that year, with a total of more than R10 billion in potential losses.

If it’s a Ponzi scheme, it will most likely have:

  • Promises of high returns within a short period.

  • ‘Success’ stories of how much money existing members have made.

  • Statements such as ‘an opportunity of a lifetime’.

  • Lack of clarity around underlying investments.

  • Very high initial returns and encouragement to invest more.

  • Unregistered products.

Retirees, young people heading families and the unemployed are often the ones most likely to fall victim to such schemes.

Ngwane says the problem also comes in when retirees realise that they may not have enough money to last throughout their retirement and are therefore more susceptible to promises of high investment returns.

Regardless of your age or the current situation in your life, it is important to take a cautious approach and not to be lured by false promises.

“Protect yourself by being wary of people or groups who guarantee a financial return,” says Ngwane.

Wouter Fourie from the Financial Planning Institute says these schemes will ‘hook’ a person first before it all turns sour.

“It works the first time, and the second time and then suddenly we take it as that this is the norm. It then becomes easy to sell it to friends and family.”

Ngwane explains that if you invest with a reputable investment house they should be transparent about the amount of risk you are agreeing to take on and the return you can typically expect.

“Ponzi schemes, however, promise to make you quick wins, not on your own money, but rather on money put in by investors who join the scheme at a later stage. As it is very difficult to recoup losses for victims from Ponzi schemes, it is important to be able to identify suspicious activity that could be linked to a fraudulent scheme, prior to it happening.”

She says: “The best way to protect yourself is to make sure that you only invest with a reputable firm or an experienced investment manager. Financial services firms are regulated by the Financial Services Board (FSB) and they can assist if you want to assess the authenticity of an offer or check if a provider is licensed. If you need any other assistance, you may wish to speak to an independent financial adviser.”

LISTEN: MMM Scheme: Risks of Ponzi and pyramid schemes

MMM Scheme: Risks of Ponzi and pyramid schemes

Wouter Fourie from the Financial Planning Institute says investors might feel the brunt of the pyramid scheme in the next 2-3 months. He chats to Bruce Whitfield about his prediction.

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