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With many investors falling victim to pyramid and Ponzi schemes, Roshan Jelal notes some of the possible red flags to look out for.

The key to helping investors to better protect
themselves from falling victim to investment fraud is to stay alert and be
aware of the key characteristics and red flags associated with Ponzi and
Pyramid schemes.

Ponzi schemes have existed for over one hundred
years and range in shape, complexity, and size. Investors are often promised
extraordinarily high returns within a short period of time, with little or no
risk. The money obtained from new investors is either used to pay returns
promised to earlier investors or returns are paid from the initial investment,
thereby creating an illusion of a very lucrative business.

In the absence of any legitimate underlying business,
this unsustainable scheme eventually collapses as it becomes impossible to
attract new investors enabling the scheme operators to pay on promises made,
particularly to earlier investors. These schemes rely solely on the steady
stream of new investor (victims) funds.

Whilst the scam often relies on word-of-mouth, social
media has given it further momentum.

If you are wondering whether an investment opportunity
may be a Ponzi scheme in disguise, there are a few red flags and tips to
consider in order to protect yourself:

1. Be cautious of opportunities promising high rates
of returns with little or no risk attached. It is noteworthy that all
investments carry some risk, particularly short-term investments with high
rates of return.

2. Look out for investment schemes that are not
registered and licensed with the relevant regulatory authority. All financial
services providers (FSPs) must be registered with the Financial Sector Conduct
Authority (FSCA) to operate in the financial services industry. Therefore,
it is prudent that you conduct your due diligence before investing.

3. All investments must be sold by licensed
professionals who you can and should validate through the Financial Sector
Conduct Authority (FSCA), if not you may be dealing with a con.

4. Beware of investment opportunities that lack
transparency, a clear business model, or are exceedingly difficult to
understand. You must always be able to understand how and where your
hard-earned money is being invested.

5. Never rush into investment opportunities, it is
wise to take as much time as required to authenticate the entity and related
parties.

Pyramid schemes are just
as unsafe as Ponzi schemes. These pyramid schemes require that participants
recruit new people to join the scheme.

The initial participant often pays an upfront fee to
sell the products or services. Post joining, the participant is enticed to
recruit new participants and at each new tier or level, he/she will receive
recruitment-based commissions which is usually paid from the fees received from
each new recruit.

Pyramid schemes inevitably collapse when participants
are unable to recruit more people.

These schemes often mimic multi-level marketing
concepts as both offer recruitment-based commissions. The difference is that
with pyramid schemes the earlier participants take money from lower-tiered
recruits whilst with multi-level marketing the commission and revenue are
generated through product sales.

Here are some tips to protect yourself:

1. Pyramid schemes focus on the large sums of
commissions you can earn through recruiting others.

2. Often there is no actual product or service that is
sold. If products and services are being punted, these may be vague, and
benefits are unclear.

3. Beware of fast, easy money, and passive income that
requires little or no effort.

People need to take
time to understand the red flags, validate and verify investment opportunities,
as this time and effort could save you a lifetime of pain and financial loss.

Roshan Jelal is Head of Fraud Risk
Management at FNB Commercial.

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