Easy Money Scams, Pyramid Schemes and Ponzi Schemes
Five Clues to Thwart them
Consumers are under great financial pressure. The World Economic Forum reports that the cost-of-living crisis is affecting people around the world. With rising food and fuel prices, it is becoming increasingly difficult to stay afloat financially. Also, wages do not keep up with inflation, making it more difficult to save and build wealth.
It is in these times of economic hardship and uncertainty that fraudsters lure unsuspecting consumers into “get-rich-quick” schemes, offering them an opportunity to make easy money by investing in a “lucrative” financial opportunity.”
Nothing beats the prospect of making easy money, and from time to time, one can find easy money scams circulating on WhatsApp that may seem plausible.
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Our research focuses on financial systems in emerging economies, and we advocate for financial inclusion and empowerment of marginalized communities through financial education and financial planning. We use our academic platform to share our finance expertise, including the most common financial pitfalls people should avoid.
“The get-rich-quick schemes are one of those traps. They are also sometimes called ponzi schemes or pyramid schemes. This is a form of financial fraud. The people who run them take money by resorting to subterfuge, that is, false information and false identities. They promise financial benefits that do not exist.
You should avoid them because more often than not they are bogus and fraudulent companies.
There have been massive frauds over the past 30 years. In the early 1990s, MMM Global – one of the biggest and most famous Ponzi schemes in the world – defrauded up to 40 million people, who lost around $10 billion. Since then, Ponzi schemes have resurfaced in different forms in South Africa, Nigeria, Zimbabwe, Kenya , Ghana and several other countries in Africa.
There are five telltale signs of a get-rich-quick scheme. Here’s how to beware.
The five telltale signs
First, they offer exaggerated, above-market returns in a short period of time, with the promise of little to no risk.
There are two golden rules when it comes to investing. The first is that it takes time to make money. Amassing a small fortune in a short period of time should raise questions about the system.
The second rule is: the higher the risk, the greater the return. In other words, no investment is without risk or can guarantee a significant return. There is always an element of risk. An investment that promises large returns tends to be quite risky, which puts off most people with a low appetite for risk.
Second, new members are constantly recruited to join the system.
Typically, these schemes are kept in place by relying on investments from new members to pay existing members. When the number of existing members is greater than the number of new members, the system is bankrupt. At best, you lose the returns you were promised. At worst, you lose all the money you invested.
When the system goes down, it’s almost impossible to get back the money you lost because you technically gave it to a stranger (remember that the definition of financial fraud includes misrepresentation of identity).
Third, it is urgent to join the program, but it is not clear how it works.
This is a classic feature of get-rich-quick schemes. There is usually no clear answer about what the program is, what it invests in, how it generates its income, or the organization’s credentials.
Legitimate investments are transparent and can provide investors with all the information they need to decide whether or not to invest. It is not surprising that proper verification of get-rich-quick schemes can reveal their fraudulent nature. This is why there is always an urgency and coercion to make an immediate financial commitment on the pretext of missing a unique opportunity to get rich.
Fourth, the program is neither registered nor regulated by any recognized authority.
Regulators are important because they monitor the conduct of financial service providers and protect consumers with their best interests in mind. The protection provided by financial regulators also inspires confidence in financial systems.
“Get-rich-quick schemes are unregistered and operate outside the framework of regulators, so investors are more vulnerable to loss, and it is more difficult to seek legal redress in the event of a loss.
In South Africa, legitimate investments are offered by financial service providers licensed and regulated by the Financial Sector Conduct Authority. You can search for any licensed financial service provider on the authority’s website.
Fifth, they use testimonials from existing members who have earned a lot of money to promote the program.
In the beginning, the system tends to pay those who invested early, and these members are encouraged to share the news of their wealth which is spreading fast and far to promote the system.
But this is a tactic used to give the impression that you too can achieve double-digit returns. These systems are both unsustainable and unethical because one person gets rich through someone else’s deception.
Too good to be true
It bears repeating that if it sounds too good to be true, it probably is.
Wealth is the result of a good investment strategy and decisions made over time. Any “get rich quick” promise should be treated with the cynicism it deserves. Eventually it will reveal its fraudulent nature. Recognizing the signs of a scam can save you unnecessary financial distress.
Bomikazi Zeka
Assistant Prof in Finance and Financial Planning,
University of Canberra
Abdul Latif Alhassan
Associate Prof in Development Finance & Insurance,
University of Cape Town
Mauritius Times ePaper Friday 2 June 2023
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