How to Know if it’s a Ponzi Scheme: An Infographic

Image of Ponzi scheme infographic for an article on the moneysmart community about Ponzi schemes

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The above infographic was created by Sanlam.

Recent economic crises have left many people in South Africa, particularly those in their retirement, struggling to make ends meet.

This situation has helped to allow cunning, opportunistic con artists to take advantage of trusting South Africans who fall for their fraudulent investment schemes. These deceitful schemes have commonly become known as Ponzi schemes.

Too many South Africans seem to trust their hard-earned money to Ponzi schemers, with the best case scenario being that they enjoy short-term rewards while at worst they are sold false promises and guarantees of return that can never be met.

Investors buy into the convincing word of Ponzi schemers, not understanding exactly how these operators accomplish their apparent returns.

Fidentia, Leaderguard, Sharemax and King Group are but some of the crooked schemes to have devastated unsuspecting South Africans over the past few years.

A commonality of all these schemes is the promise of a low-risk return far higher than the financial market. In retrospect, such claims were always far too good to be true.

This begs the question: why do people continue to fall for fraudulent schemes?

It’s actually relatively simple to detect a Ponzi scheme. Below are a couple of guidelines to help you protect yourself from falling prey to a Ponzi scheme.

1) Demand FSB license.

Ask for proof that the investment opportunity you’re looking into is licensed and registered with the Financial Services Board (FSB). If it’s not and you lose your money, there are no courses of action possible for you to recover your losses.

2) Compare interest rates.

Compare the rates offered to local and international rates.

If interest rates are at 5 to 6% and you’re offered a guaranteed return of 30%, chances are it’s a Ponzi scheme. Make sure to have realistic expectations of your return on investment.

3) Watch out for consistent returns.

Financial markets are by nature not static and fluctuate on a daily basis. If the investment vehicle you’re investigating provides consistently guaranteed returns and is not backed by a reputable insurer or banking institution, chances are the scheme is a questionable one that should be examined carefully before parting with any money.

4) Investigate the investment’s history.

Inspect the past performance of the individual or institution offering the investment opportunity. Whatever you do don’t just trust their word. Check with the FSB, ask reputable individuals in the industry and even go as far as getting in touch with personal finance journalists or editors.

5) Follow these points regardless of who introduced you to the investment vehicle.

Many people are brought to a Ponzi scheme by unsuspecting friends and family. Just because you feel comfortable with the advice given by these people, the investment opportunity may not necessarily be a safe one. They too might succumb to the deceit of Ponzi schemers. Always go through these steps to ensure you are protected.

6) Don’t be fooled by returns enjoyed by friends and family.

A classic aspect of Ponzi schemes is that in order to appear as legitimate enterprises they pay out for a certain period of time while word-of-mouth acts to market the duplicitous schemes. When there’s finally sufficient investment, those at the top run off with the funds.

7) Listen to your gut.

Common sense and intuition can go a long way in helping you steer clear of Ponzi schemes. Scrupulously question every investment opportunity that comes your way and trust your instincts. If it seems to good to be true, it probably is.

8) Watch out for investments requiring you to bring in further investors to reap rewards.

This is another classic attribute of a Ponzi scheme. Legitimate investment solutions do not function like this. If you encounter such a scheme, this is a warning sign that suspicious dealings are afoot.


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