Since the beginning of 2022, there's been plenty of news about an onslaught of investment scams – from popular shows on Netflix glorifying brazen stories of “crooks” to home game stories about opportunists dishonoring both individuals and companies.
According to the South African Banking Risk Information Center (SABRIC), South Africans lost more than R1.5 billion combined in 2020 to bank and card fraud alone. Add in more scams, along with victims who are too ashamed to report being attacked, and that number ought to be significantly higher.
The latest warning comes from the Financial Sector Conduct Authority (FSCA) about a South African man who has allegedly scammed over 600 investors, some of whom have lost more than 1 million Rand, after claims that investors were doubling their money in three months trading forex could.
And then the headline-grabbing news of a businesswoman who allegedly scammed hundreds of would-be vacationers. There is also a circulating scam in which scammers pose as South African tax authorities and claim to have “tax refunds” and/or subpoena letters encouraging recipients to give out their personal and bank account information.
Phiko Peter, Allan Gray's client relationship manager, said consumers have been hit hard financially, with shocking escalations in fuel prices and soaring food prices. Coupled with our need for quick results, this is fertile hunting ground for wily criminals.
“These factors make us even more vulnerable to fraudulent 'sales' and get-rich-quick schemes. In addition, technology has made instant investments more accessible. Unfortunately, scammers are giving old-fashioned scams a digital makeover and using online channels to fleece their victims.”
Below, Peter shares the popular investment scams and how to protect yourself from becoming a victim.
The New Age pyramid scheme
The rise of social media has merely made social media easier for scammers to access, but the scam is essentially the same: a charismatic scammer offers an amazing financial opportunity that promises incredible returns to a small group of investors.
Each investor is then encouraged to sign up and refer new investors (friends, family, acquaintances and colleagues). In turn, these new investors attract even more investors, and a multi-level pyramid structure is created with the scammer firmly at the top.
Initially, investors can get great returns and can confidently reassure new hires that the investment will pay off. However, these systems are not sustainable. Once the pool of new investors and additional investments dries up, the system can no longer provide returns to its investors and inevitably collapses, leaving investors with permanent capital losses.
In the digital age, these systems are managed on messaging platforms like WhatsApp, which has proven useful for scammers who can now communicate efficiently and promote recruitment relatively anonymously.
With the help of digital payments, these systems work efficiently. By the time the plan is blown and the truth comes out, it will be too late, he warns.
The Money Flipping Scam
Waste-of-money scams have ripped off many local investors via social networks like Facebook, Twitter, and Instagram.
Money flipping scam promises to double or triple your money in a very short period of time. Victims are tricked into sending money to a scammer who promises to earn excellent returns in exchange for a small commission. In South Africa these investment opportunities are often sold as forex trading, binary options or offshore real estate.
To pull off this social media scam, a scammer creates a legitimate-looking social media profile that showcases exotic travel destinations, expensive cars, and designer clothes. These opulent lifestyle images serve to position the scammer as a successful and trustworthy investor.
Some will even brag about working less than an hour a day to sell investors the dream and satisfy our need for instant gratification.
Once scammers have hooked a victim, they can even provide detailed investment reports to show investors how their money is growing and encourage larger investments. Once the investor requests a withdrawal, they will face a number of delays and may be required to spend even more money to free up the funds. This escalates until the scammer deletes their account and stops all contact.
It happens to the best of us
While many of us believe we could never get caught by these seemingly obvious scams, the reality is that it can happen to the best of us.
If a scammer has scammed you out of money in South Africa, you are not alone. Studies suggest that difficult circumstances can leave even financially savvy people vulnerable to being duped.
Make your investment approach fraud-proof
Here are Peter's top red flags to look out for when considering a new investment:
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One investment that requires you to attract new investors in order to get the return on your investment is a pyramid scheme. Be wary of tiered investments that classify investors or have multiple tiers (e.g., bronze, silver, gold, platinum, and diamond).
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If you do not understand how an investment product generates its return and there are no clear underlying assets, you should be cautious.
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Scammers want to create a sense of urgency to limit the time you spend researching and thinking about the potential investment. Anything sold as a “once-in-a-lifetime opportunity” should be avoided.
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Although past performance is no guarantee of future returns, you should consider financial service providers with decent track records. Most scams promise great returns without a solid track record to back them up.
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Unless the investment is registered with an established financial authority like the FSCA, it is unregulated. You should also contact financial institutions to verify the registration of financial institutions that are relatively new or not well established.
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The adage still applies: if it seems too good to be true, then it probably is. If someone manipulates your emotions to get some money, that is absolutely a scammer. Trust your gut feeling – it will help you to avoid permanent capital losses.