Everyone loves to make a little extra money right? Unfortunately there are a lot of scammers out there who know this and will try anything to make you believe that you are in control of, and benefiting from your investments when in actual fact it is them who are on the winning end.

A common investment scam is referred to as a Ponzi scheme and our team has taken it upon themselves to point out the common pitfalls that lead lazy investors into the trap

What is a Ponzi scheme?

A Ponzi scheme is a type of illegal scam that promises investors abnormally high returns or profit with little or no risk. The scam is disguised as an investment opportunity masterminded by one or two. Investors are recruited into the scheme and earn returns from more recent members’ deposits. The scheme usually starts to come apart at the seams when new investors stop coming on board.

A big indicator that an organisation is running a Ponzi scheme, is that it is not licensed with the Financial Services Board. In order for a company to be taking your money, it needs to be governed by the Banks Act. Companies with no license are therefore illegal and fraudulent.

How do I spot a Ponzi scheme?

  1. They always promise high returns in a very short space of time i.e. “double your money in six months”
  2. The profit that you will gain from the scheme is unusually consistent and doesn’t fluctuate with market rates
  3. The people who are in charge of the scheme are very secretive about how the business model works
  4. They are “risk-free”
  5. It is very hard to withdraw your money

According to The Sunday Times, these are some of the current Ponzi schemes to watch out for:

  • The Instant Wealth Club
  • World Ventures
  • Kipi, also known as Mydeposit241
  • MMM South Africa

How is a Ponzi scheme different to a Pyramid scheme?

A Pyramid scheme is another type of financial scam where investors are promised high returns at low risk. Much like its name, how it works is that each person who invests in the scheme will only make their money back based on the amount of new people that they recruit, therefore, the more new investors you bring into the game, the more money you will make. Profit is generally only made once you recruit 10 or more people. These new people are then required to sign up more people before they make a profit, and so the process goes.

The difference in the two schemes lies in how returns are generated for investors. With a Ponzi scheme, the person in charge gathers all the money from the investors and distributes the funds as they deem fit while the amount of money that investors in a Pyramid scheme get back is wholly dependent on the amount of new investors they have recruited.

*Don’t forget that Ponzi and Pyramid schemes are just two of the many investment scams out there. The rule of thumb is, if it sounds too good to be true, it probably is.