How not to fall for a Ponzi scheme. Here are 5 red flags
Watch out for warning signs to protect your savings rather than giving into greed for more.
There is the Unregulated Deposits Ordinance 2019 that prescribes stringent punishment for such frauds, but on your part, you need to keep an eye out for the danger signals. Read on to identify five red flags that should put you on alert while evaluating an investment proposal.
1. Out-of-the-ordinary returns
Any scheme that promises returns higher than 15% should trigger scepticism. “Abnormal returns or promises of doubling or tripling the invested amount in a short span of time constitute the key stereotypical features of a Ponzi scheme,” explains Amar Pandit, Founder, Happyness Factory, a financial planning firm. Ponzi schemes promise consistently high returns or payouts, and keep their word initially to trap the first set of victims, who are then persuaded to enroll friends and relatives, to keep the fund flow ticking. Once it dries up, the payouts stop due to lack of any intrinsic value in the business. It essentially entails fleecing Peter to pay the duped Paul till the cover is blown, and the cycle grinds to a halt.
2. The guarantee aspect
While equity as an asset class can generate 12-15% returns over the long-term, stocks and equity funds have their ups and downs in line with market cycles and volatility. Ponzi schemes are easily identifiable because of the ‘guarantee’ element they offer. Pointing to attractive historical returns to showcase strong performance is understandable, but to assure the returns in future is not possible. “If a scheme guarantees extraordinarily high returns, it should set alarm bells ringing. Fraudsters have also got smarter over the years – some might tell you that being genuine players, they cannot offer impossible returns in the range of 20-25%, but 12-15% can be guaranteed,” adds Pandit. Beware of such attempts to sound honest and hence, reliable.
3. No info on downsides
You will be told that not only are the returns high and guaranteed, there are no downsides either. “Well-regulated schemes always disclose potential downsides upfront. Any legitimate business carries its share of risks. But if the adviser tries to convince you otherwise, it is not an encouraging sign,” says Pandit. “Lack of transparency is a hallmark of such fraudulent plans,” notes financial planner Pankaj Mathpal, Founder, Optima Money Managers. The moment you are told the business is successful because of some ‘secret’ fail-proof recipe, give such schemes a wide berth.
4. Unregulated scheme/adviser
The companies, intermediaries and the schemes are not well-regulated. To eliminate the scope of being tricked, ask the agent if he is registered as an adviser with any of the financial regulators. “Typically, these companies are registered with the Registrar of Companies (RoC) and use this to mislead victims into believing that they run government-approved schemes,” points out Mathpal. You could also be asked to furnish KYC documents and fill up elaborate forms merely to make the process appear authentic. Do not be put off by the paperwork or taken in by the various letterheads, stamps and seals you see in the document docket. Enquire whether the agent and the investment scheme being peddled is registered under the RBI, Sebi, Irdai or PFRDA.
5. Anecdotal evidence
Lack of transparency means the ‘returns’ are not publicly available, so you cannot independently verify the claims. Therefore, the only ‘evidence’ such schemes tend to provide is testimonies of their existing victims – who, more often than not, happen to be your friends and acquaintances. Be wary of any scheme whose returns cannot be accessed on public platforms. Do note that the companies’ websites or those of their group companies will not qualify for the purpose. The information should be available through easily accessible, independent platforms.
Finally, however, knowing all these warning signs can come to naught if you cannot control your urge to make a quick buck. “The behavioural aspect is key. Not giving in to greed is the surest way to insulating yourselves against such frauds,” says Pandit.
The hall of shame
1. IMA JEWELS: Unravelled in: 2019
Modus operandi: Investors were deemed partners. The company claimed it was involved in bullion trading, apart from other businesses. The investors earned dividends that stopped in March.
Outcome: Thousands have alleged they were cheated. Protests by investors and investigations continue. The owner is absconding.
2. QNET: Unravelled in:2014
Modus operandi: An MLM scheme, it got individuals to shell out a membership fee, sell the company’s products and get others to enrol as members.
Outcome: Several offi cials have been arrested. Investigations, prosecution and court hearings continue.
3. EMU FARMS: Unravelled in: 2012
Modus operandi: Individuals were lured to buy emu birds, with a promise of doubling their money as soon as the birds could be monetised at adulthood. This, without any research about demand for emu meat and by products.
Outcome: Some of the dubious operators were arrested, price of emu meat fell and investors lost their shirts.
4. SPEAKASIA ONLINE: Unravelled in: 2011
Modus Operandi: Lakhs of investors fell prey to the scheme. They had to purchase web subscriptions for Rs 11,000 and were promised money for filling up surveys for various MNCs. They could also earn commission by getting others to enrol.
Outcome: The company folded up. The promoters fled the country, only to be arrested later.